The barrier that used to exist between the average person and the stock market has all but disappeared.
Acorns is one of many new apps that helps you build your investment portfolio, but it does it through an interesting method: micro-deposits. Each time you make a purchase from your checking account, the change from that transaction is deposited into your Acorns account.
Anytime a new industry pops up, we’re curious to know if the latest innovations are really worth your time and money. In that spirit, we’ve downloaded the Acorns app and set up an account.
Over the next few minutes, we’ll couple our experience and our research to help you understand what Acorns does and whether or not it’s a good fit for you.
How does Acorns work?
Several years ago Bank of America started a program called Keep the Change. Every time you used your checking account to pay for something, B of A would round the purchase up to the next dollar and deposit the difference into your savings account. They framed it as the easy way to build up your savings.
Acorns has done exactly the same thing, but with a couple of wrinkles:
- The “change” is deposited to your Acorns account and invested
- They charge you $1 a month for their service for up to $5,000
- If your total is exactly on the dollar, they round up a whole dollar
- You can also connect credit cards to your Acorns account
For example, if you use your debit card to buy a case of bottled water for $8.50, Acorns “rounds up” and deposits $0.50 into your account. If you spend $13.00 on a bottle of wine, Acorns deposits $1.00 into your account.
If you get any dividends from your investments, they’re invested back into your account to keep things growing.
We like how Acorns makes it easy for you to deposit money into your account. While ease-of-use is a big deal, it’s not nearly as important as where your money is actually going.
So Where Does Acorns Put My Investment Money?
Acorns deposits your money into six different Exchange Traded Funds (ETFs), a collection of all kinds of different holdings that minimize your risk. The idea behind ETFs is that your money is spread out over a wide variety of relatively low-risk areas rather than in just one company’s stock. If the market stumbles, it’s believed that ETFs will tread water a little more easily while investors who have shares in one company will most likely feel a sharper sting.
Acorns says their ETFs are design to “maximize expected returns for a given amount of risk.” In layman’s terms, they want to make money for you whether you choose a low-risk portfolio or a high-risk portfolio.
In the meantime, their team of experts adjusts your portfolio as the market changes. So, if you’ve selected a low-risk strategy and one of your stocks is sliding into the high-risk category, Acorns automatically adjusts your investments to stay within the risk you want.
Based on our research, we believe that Acorns’ ETF strategy isn’t unique. Other startups like Betterment and LearnVest use the same philosophy. But on the other hand, the presence of multiple, reputable companies using the same investment model gives it a boost in credibility, especially since the ETF investment model is backed up with solid research done by renowned Nobel Laureate Dr. Harry Markowitz, Nobel winner Eugene Fama and finance professor Dr. Ken French.
Does the Acorns Change-Deposit Method Actually Build Wealth?
Acorns’ big draw is that you can connect multiple accounts to their app and automatically deposit change into your investment account. It’s a great concept because it doesn’t take much work. You put in “acorns” of change, and, over time, those acorns will grow into mighty investment oaks. But is that really how it will play out?
To answer this question, I took a look at my personal Acorns account. In the first 12 days my account was open, transactions from my checking account and one credit-card account totaled about $20. Played out over the course of a year, that’s about $608 in deposits. Not that much, really.
But let’s say you deposited even less than I do … $10 a month. According to Acorns’ moderate-risk estimator, 10 years from now you’ll have deposited $1200 and made about $400.
In our opinion, those numbers are pretty paltry. It’s hard to imagine that the average person would invest their spare change for 10 years in order to make about $400. Granted, it’s money earned, but it makes us wonder how effective Acorns’ change-deposit strategy is.
Now, you can make big one-time deposits that aren’t limited to your change, but we’ll get to that in a minute.
In terms of usability, we think the app is great. You can easily switch between your deposit history, portfolio performance and your investment strategy.
How Does Acorns Stack Up Against Other Investment Apps?
Think of Acorns’ change-deposit strategy as a bike with training wheels. You can get from point A to point B, but if you really want to travel, you’re going to have to take the training wheels off and get a bigger bike.
Don’t get us wrong, we think training wheels are important for anyone who hasn’t invested before. And as you learn more about it, Acorns actually lets you make one-time deposits on top of your change deposits.
However, based on our research, we think Betterment offers you a more diverse portfolio (12 ETFs instead of six) along with better account management tools.
Acorns’ fees are $1 per month for accounts up to $5,000, then 0.25% above $5K. Betterment’s fees are $3 for accounts under $100, 0.35% up to $10,000 and 0.25% after $100K. Acorns has the better fee structure, but we think the tools you get with Betterment are stronger and therefore a better value.
Our Conclusions About Acorns
We live in a great time for amateur investors. Companies like Acorns have applied some pretty complex economic theories to their apps, giving you a pretty reliable platform on which to make your first foray into the investment world.
But, in our opinion, once you get the hang of Acorns there’s a good chance you’ll want to move on to a more powerful investing tool like Betterment. It provides you the ability to set multiple goals for your investments and it spreads your money across a dozen different ETFs.
However, we think Acorns is an excellent way for parents to teach their kids about investing. The app is so simple you can explain it with ease to your kids, whether they’re 6 or 16.
It can be a platform to help them understand the basics of investing and set them up for their own investment endeavors as they get older. And, as Acorns points out, all it will cost is some spare change.