A large part of successful investing is having a sustainable surplus to be able to invest in a consistent manner. I’ve written here about how it is a large part of my investment strategy. Unfortunately, substantial sustainable surpluses are not achievable for many of us.

Many Australians are struggling with the cost of living and focusing on present expenses, putting their future financial outcomes on the backburner.

Being able to continually invest over long time periods allows your savings to compound and grow. However, it is difficult to be able to afford the minimum investments for many investment products in the market.

There are some managed funds that require $500,000 initial investments. When you’re investing in listed equities (stocks and ETFs), there isn’t a minimum investment to do so, but brokerage is prohibitive for making small, additional investments. It wouldn’t make much sense for an investor to invest $50 in a share and pay a $5 brokerage fee. You’ve already lost 10% of your investment before the market has even moved.

Let’s look at an example. If you invest $1,000, with another $100 per week for 10 years and pay $5 brokerage, you pay over $3,600 in brokerage that could be avoided by using products with no additional investment fees.

Result impact of fees

Investing is important for many of us to create a better life for ourselves. Traditionally, investment products were prohibitive – these high minimum investments and the complexity of the products turned off many investors.

Now, there are products that allow investors to gain exposure to various asset classes including equities, with low or no additional investments. These are some of the providers in the market that have lowered the barriers. It allows investors to improve their future financial outcomes without having to part with lump sums.

Managed Fund Platforms

For those who are unfamiliar with managed funds, here is an explainer with comparisons to Exchange-Traded Funds (ETFs). It’s important to understand whether they are right for you as an investor before deciding to invest.

Vanguard Personal Investor

Initial investment minimum: $200
Additional investment minimum: $1

Vanguard Personal Investor allows investors to invest with minimum initial investment amounts of $200, and additional investments at $1.

The platform allows you access to 40 Vanguard managed funds, ranging from multi-asset, Australian shares, international shares, property and fixed interest.

Vanguard is well-known for their ultra-low fees, specifically on their passive investments.
Once investors are ready to branch out, they’re able to also invest in ETFs and direct shares through the same platform if they wish. These investments may come at a cost if they are outside the Vanguard suite of products.

Colonial First State

Initial investment minimum: $1,000
Additional investment minimum: $1

Colonial First State is unlike Vanguard in that it offers investors access to their managed funds, as well as external managers’ funds. They have an initial investment of $1,000, and then no minimum investment.

With over 200 investment options, there are many funds to choose from for potential investors.

Although there’s no administration fee, it is important to look at all fees charged for the investment options you are considering. Investment options can have management cost or fee between 0.26% and 3.44%. There may also be performance fees or other on-going costs that will impact your total return over the long-term. The Product Disclosure Statement (PDS) is a useful document that will give you a breakdown of what the real cost of these fees may be for you.

Perpetual WealthFocus Investment Advantage

Initial investment minimum: $2,000
Additional investment minimum: $1

Perpetual’s Wealthfocus platform offers investors access to 30 investment options, with a minimum initial investment of $2,000, or $1,000 if you are establishing a savings plan. From there, there are no additional investment minimums, so you are able to invest whatever you have left from your budget.

It is important to mind the fees with these platforms. Many of the management fees on this platform sit above 1% p.a..

However, the platform does have some tax advantages.

You are able to switch investment options without triggering Capital Gains Tax (CGT). The platform operates on a ‘one unit’ structure, which allows you to move across options without CGT. This may be useful during transitions through life stages, where asset allocation mixes may be adjusted.

There’s also no CGT on partial withdrawals, until you exceed the cost base of your investment.

Micro-investing

Micro-investing means that you are able to invest with as little as $20. There are a few micro-investing apps out there, and their purpose is to make investing more accessible for those with lower balances that want a hands-off approach.

It is hard to paint all micro-investing apps with the same brush. They all differ in their options, their fees, and their added features.

One of the most important considerations with micro-investing apps is fees. Often, the model is that the micro-investing company is an issuer of investments, so there will be at least two levels of fees. There will be an investment fee – this is what you’re paying for the actual investments.

Then, there will be an administration or management fee. This is the fee that you’re paying to the micro-investing platform for the service of managing your investments and giving you the platform to invest. If there is a monthly or yearly flat fee involved in the investment, make sure that the amount you are investing makes sense for the flat fee involved. If an investment has a $4.50 administration fee every month and you invest $20, it’ll take just 6 months for the investment to come down to zero without capital appreciation.

Your initial investment will be gone before you have even gone through a full year.

This is also where it gets a bit tricky – these administration fees can be deducted from a bank account instead of the investment account. This means that you don’t notice the impact it has on the investment, especially smaller balances.

Micro-investing summary

Pros: Invest with smaller amounts without transaction costs, already diversified, user friendly

Cons: Fees, including flat fees, can be expensive especially on smaller balances

Here are some of the most popular Micro-investing platforms.

Raiz Invest

A mix of ready-made and customisable portfolios. For the ready-made portfolios underlying assets are a mix of ETFs. For example, their Moderately-Aggressive readymade portfolio:

Raiz Moderately Aggressive Portfolio

Figure: The underlying assets in Raiz’s Moderately-Aggressive readymade portfolio (at 12 August 2024).

Costs: A maintenance fee of at least $4.50 (balances under $20,000, no maintenance fee for balances over $20,000), plus the underlying issuer fees, plus the investment management fee ($0, or 0.275% for balances over $20,000).

Feature to note: Round ups – you are able to connect a bank account. Any transaction that you make on that account – say, you purchase a coffee for $4.60 – it will ‘round up’ to $5, and you will have 40 cents invested in the account.

Feature to note: It has connections to cashback services. This means that if you shop online using the affiliate links, you will get a rate of cashback that depends on the retailer. This is invested into your account automatically. 

Pearler

Pearler’s micro-investing function allows you to invest in a number of investment options that are mainly mixes of Vanguard, VanEck, eInvest and iShares ETFs. It also now allows direct share investments so you’re able to have shares and pre-mixed options in one place.

Costs: Any investment under $100 does not incur a fee, any investment over $100 is $1.70 for one investment option and $2.30 for more than one, per month. Pearler also has an offering of pre-mixed options. All investments will be charged underlying fees of the ETFs you are invested in.  For example, their ‘Aussie + Global’ investment option is a combination of two Vanguard ETFs - Vanguard Australian Shares Index ETF VAS & Vanguard MSCI Index International Shares ETF VGS. You will be charged Vanguard’s fees on the ETF, and Pearler’s fees for holding the investment option.       

Sharesies

Sharesies has a bit of a different offering. It offers fractional share and ETF investing. Instead of investing in a pre-mixed portfolio, it allows you to invest in Australian and US shares and Aussie ETFs.

There’s no investment or management fees, but you are charged based on trading. The fees are expensive – 1.9% transaction fee, plus 2% on linked bank transfers. You can remove these fees with their monthly plans. They range from $5-$20, and it removes the bank transfer costs, as well as trading fees up to a certain order amount (for example, for $5 a month, $500 worth of orders are covered).

Feature to note: Sharesies also has round-ups from your bank account.

ETFs (Exchange-Traded Funds)

ETFs are an easy way to diversify, and they present the opportunity to create a multi-asset portfolio in one trade.

Low-cost ETFs will ensure better like-for-like returns over the long term and cuts out the middleman that you experience with micro-investing apps.

Micro-investing apps for the most part offer fee-free additional investments, which may suit investors that are investing on a regular basis with small amounts throughout the year.

ETFs come with trading costs (although, there are low-cost brokers that charge a few dollars for a trade), so it may suit individuals who are investing less frequently, in larger amounts. Trading costs can eat into total returns over the long term. If trading costs are $10 and you are making a $200 investment, that holding is already on the back foot by 5%.

ETFs summary

Pros: Cut out the middleman (and the fees that the middleman charges)

Cons: Can incur brokerage on each trade, requiring larger balances to make brokerage make sense

Considerations before choosing

Fees

I’ve written an article on what share market returns are when all costs are considered. There are a few points to note with micro-investing and ETFs in general. For those that are investing frequently, in smaller amounts, it is important to focus on vehicles that have low or no transaction costs. Managed funds offer this option. Fees can make a significant dent in your total returns over the long-term. Consider the amount you are initially investing and the frequency of your additional investments when looking at investment providers and what will suit your circumstances.

Don’t jump in because you feel you need to

Many investors that are looking at micro-investing and ETFs may be at the beginning of their investing journey. They often are looking to invest to grow their money and create a better life for themselves. However, sometimes it is not worth jumping into products without doing research first.

I wrote about the consequences of transitioning to a ‘grown up’ portfolio. This was for people that had jumped into investments without thinking about what might be right for them, and that now need to transition to a portfolio that actually serves them.

Start with a financial checklist. Make sure you’ve got the right foundations before you invest. Then, work out the types of investments that may suit you and your circumstances. It may be investing directly in stocks. It may be investing through ETFs. It may be managed funds.
Being thoughtful about the process and understanding what you’re investing in and why will make you a more successful investor. It will do this by limiting poor behaviour – you are less likely to make poor decisions if you understand how your investments are connected to your financial goals. It will limit your tax paid – you won’t have to sell your initial investments and pay tax to transition to your new portfolio. You’ll save on transaction costs.

A little bit of work defining your goals and therefore the investments you should be in will be better for you in the long-run.

Risk tolerance vs risk capacity

If you do go down the route of a micro-investing app, many are labelled as ‘robo-advisers’. This means that they can ask you questions that determine which investments may suit you the best. This is called a risk tolerance questionnaire.

A risk tolerance questionnaire is common practice in financial advice firms, in robo-advice and even self-help tools for new investors. These risk tolerance questionnaires do what they say on the box. It is a short questionnaire – usually between 8-10 questions, that measure how much risk you can tolerate, or the degree of volatility you can withstand when it comes to investing.

Based on your answers, you’ll be assigned an asset allocation (the mix of assets in your portfolio). For example, 30% in Australian shares, 30% in International shares, 20% in Cash, 20% in Fixed Income.

Compare this to risk capacity. Unlike risk tolerance, it is the amount of risk that an investor must take to reach their financial goals. That is the key difference – risk tolerance does not take into account what you actually need to get to your goals, and only considers your reaction if markets fall. Ultimately, if you are only taking risk tolerance into account, whether you reach your goals or not is entirely left up to chance.

At Morningstar we’re proponents of goals-based investing. We acknowledge that investments inherently carry risk. And that risk does need to be managed. But ultimately an investment is simply a vehicle to assist us in reaching our goals. That might mean taking on more risk than we might feel comfortable with if it means achieving our goals. That outweighs the uncomfortable feeling of market volatility.

I’ve written more on the difference, and how to understand your risk capacity here.

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