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It’s no secret that diversification is key to lasting investment success. Still, many investors are unsure of how to distribute their funds to get the best results according to their unique goals. One increasingly popular strategy is to leverage micro-investment platforms.
As the name suggests, micro-investing involves depositing small amounts — sometimes just a few dollars — into various assets or markets over time. While each contribution is minute, it gives investors a slow but accessible and easy way to build a diversified portfolio.
Benefits of Micro-Investments
The key advantage of suggesting micro-investments to your clients is that it lowers the financial bar to begin investing. More than 40% of non-investors in the U.S. believe they don’t have enough money to do so. Fractional stocks and other micro-investment channels provide a way around that barrier.
Similarly, micro-investments make it easier for clients to diversify their holdings. Some people have money in the stock market or real estate but hesitate to invest elsewhere because of a lack of familiarity with other options or financial concerns. Recommending a micro-investment strategy lets you show them how they can dip their toes in different areas before putting more money down.
This ease and low barrier to entry also make automated investments easier, leading to more consistency. Similarly, it’s a good way to introduce clients to the concept of incremental contributions adding up over time. That’s important for the 34% of non-investors who say not understanding this field is their primary barrier to investing.
Potential Downsides to Micro-Investing
Naturally, micro-investing’s benefits come with some trade-offs. Most notably, many micro-investment platforms carry fees of varying amounts and structures.
Some of the most popular apps charge $3 or more a month, which may not be much but represents a considerable portion of the return when only investing a few dollars at a time. Forgoing such an app to invest small amounts yourself is also possible, but some low-cost options like fractional stocks are not available outside these platforms.
The low cost of a micro-investment also means significant returns take a long time. Managing multiple small investments can complicate clients’ tax situations, especially if they ever change platforms, which requires selling off fractional stocks.
Strategies to Diversify Micro-Investments
As with all investment strategies, diversification is one of the most crucial steps when optimizing micro-investments. The most obvious route is to invest in mutual funds or stock indexes. These options are popular — 54.4% of American households rely on mutual funds — but impactful diversification will take time when only contributing minuscule amounts.
Alternatively, you could direct clients to invest small funds into multiple asset classes, forgoing micro-investing apps to avoid their fees. Remember to take advantage of all available cost-saving avenues if you go in this direction. When investing in real estate, for example, the IRS allows taxpayers to deduct furnishings and utility costs, which can compensate for the higher upfront amounts.
Clients could also use fractional shares to make getting a stake in multiple specific companies, geographies or markets more accessible. This is similar to the index fund route but is more targeted, which can help when investors have particular goals in mind. Avoid advising people to use multiple micro-investment apps, as this may complicate their taxes and fees.
Other Micro-Investment Best Practices
Regardless of the strategy you recommend, consider positing micro-investment itself as a diversification option for existing portfolios. While the practice may not produce significant returns, it could lead to larger diversification down the line for clients who are unsure about other markets or asset classes. These low-stakes alternatives are a great way to branch into different areas while other, larger contributions make up the majority of a portfolio.
Given how complicated managing multiple small investments can be, technology is an indispensable tool here. Automation significantly improves transaction efficiency and reduces human error to streamline micro-investing. Similarly, artificial intelligence could provide helpful insights into potential investment opportunities to put micro-funds toward as clients experiment with diversification.
Micro-Investing Can Be a Helpful Diversification Option
Paying into multiple asset classes, industries or geographies can be intimidating. Micro-investments make it less imposing, so financial advisers should consider how they can direct clients to capitalize on these opportunities. While they may not be perfect financial vehicles by themselves, they can be a great way to encourage your clientele to grow a more diverse portfolio.