Robo advisors can be the perfect investment platforms for people who like hands-off investing. They handle all of the investment details for you, including portfolio allocation, investment selection, and periodic rebalancing. All you need to do is to fund your account, and then live your life to the fullest.
Acorns is a robo advisor, but it is one that also offers an angle for people who also want a hands-off strategy to fund their investment accounts. You fund your Acorns account simply by making regular purchases and contributing a small amount of each purchase toward your account.
What is Acorns?
Although Acorns is a robo advisor, it is more specifically an automated portfolio management system that uses technology to streamline the investment process.
There are many other robo advisor platforms available, but one of the main features that sets Acorns apart is the way investors fund their accounts. Funding is accomplished using virtual spare change. You tie your spending accounts to your Acorns account, and each time you make a purchase, a predetermined amount of money is transferred into your investment account.
That gives you the ability fund your Acorns investment account in an almost passive fashion, quite literally enabling you to save and invest money while you spend. This is the perfect application for a person who has traditionally found it hard to save and invest money on a regular basis.
How Acorns Works
You can fund your account in traditional ways, such as with lump sums or automatic recurring deposits. But one of the features that makes Acorns unique is the virtual spare change funding method discussed above.
Acorns refers to this funding method as “round-ups.” You make purchases through your regular accounts, such as credit cards, your checking account, or PayPal. Then, round the charge up, with the difference going into your investment account.
For example, let’s say that you purchase an item for $42.95. The transaction is rounded up to $50.00 – $42.95 goes to pay for the actual amount of the purchase, while the difference of $7.05 is moved into your Acorns investment account.
The whole process happens automatically without any additional effort on your part. While making dozens of routine purchases over the course of a month, it’s easy enough to see how several hundred dollars could end up in your investment account as a result of those purchases.
You can choose to handle the round-ups on either a manual or automatic basis. For example, you can choose in advance to have all purchases rounded up to the nearest $10 threshold. The higher the threshold, and the more that you use the connected accounts, the more money that will end up in your Acorns investment account.
Your Acorns Investment Portfolio
As is typical of robo advisors, Acorns is a Limited Trading Authority account. This means that the platform does the investing for you, freeing up your time for other pursuits.
Acorns determines your portfolio allocation based on your age, investment time horizon, investment goals, income, and risk tolerance. However, unlike most robo advisors, Acorns does give you the option to change your allocation should you decide that you want your portfolio to be either more or less aggressive than what the app recommends.
The investment strategy is based on modern portfolio theory, or MPT, which is also typical of robo advisors. It is based on the idea that security selection is less important than having your portfolio diversified across certain asset classes. Nobel Laureate Dr. Harry Markowitz – often referred to as the “Father of Modern Portfolio Theory” – has even helped develop the portfolios that are used by Acorns.
Acorns allows you to choose one of five investment portfolios. Each portfolio is comprised of differing allocations of just six index-based exchange traded funds (ETFs). This not only eliminates the need for individual security selection, but it also results in lower transaction costs because index funds trade component securities at a much lower rate than actively managed funds do.
The six ETFs include:
- PIMCO Investment Grade Corporate Bond Index Exchange-Traded
- iShares 1-3 Year Treasury Bond ETF (SHY)
- Vanguard Small-Cap Index Fund ETF Shares (VB)
- Vanguard REIT Index Fund ETF Shares (VNQ)
- Vanguard 500 Index Fund ETF Shares (VOO)
- Vanguard Emerging Markets Stock Index Fund ETF Shares (VWO)
The combination of the six ETF’s means that your portfolio will actually be diversified across literally thousands of individual securities, since each ETF represents its own portfolio of stocks and/or bonds that make up the underlying index.
Once you have set your portfolio allocation, you won’t need to concern yourself with rebalancing either. Acorns will automatically rebalance your portfolio each quarter to maintain the desired allocation. Furthermore, Acorns will automatically reinvest your dividends in a manner consistent with the intended portfolio allocation.
Signing Up With Acorns
Like everything else about Acorns, the sign-up process is simple and painless. The Acorns app is available through either the Apple App Store or on Google Play, and is free to install.
You’ll need to have your online banking login information (which generates the round ups) and your checking account and routing number from which you want your roundups pulled. Apart from those, you’ll also need to provide your email address and the link to a funding account. You’ll be required to answer a few questions about yourself, and then to create a secure password.
The more spending accounts that you link to the app, the faster you will accumulate funds in your Acorns account. That should provide a strong motivation to link any and all spending accounts that you have, especially your credit card accounts.
As the roundups are transferred to your Acorns account, they are invested according to the portfolio allocation that has been chosen for you by the platform or that you have modified to your own personal preferences.
Acorns has three fee structures:
- $1 per month for account balances with less than $5,000
- 0.25% of the account balance for accounts over $5,000 (a $100,000 portfolio could be managed for just $250 per year)
- Students invest for free. That’s all students (any age) and anyone under 24 (even if they aren’t students) – and account size doesn’t matter! Acorns refers to these as the next generation of investors. All you have to do is sign up for an account using your .edu email address and enter “student” as your employment status.
There are no other fees charged by Acorns. That means no early withdrawal fees, no inactive account charges, or transaction fees. And since there is no required account minimum balance, there are no fees charged if your balance falls below a certain threshold.
You can withdraw any amount of money from your account that you like, though there is a daily deposit limit of $10,000 to put funds into your account.
Acorns has your back on security and offers the following safeguards:
SIPC Insured Accounts. Each account is insured up to $500,000 against broker failure. (This coverage however does not extend to investment losses.)
SSL Encryption. The website and app are secured with a 256 bit encryption.
Account Alerts. The company will contact you about any unusual activity in your account as a way to protect against fraudulent activity.
Bank-level Security. Acorns uses secure servers, security supported by McAfee, privacy verified by TRUSTe, as well as physical security.
Account Safeguards. Acorns uses multi-factor authentication, automatic logouts, and ID verification help prevent unauthorized access.
The company also pledges that it will not sell or distribute your information to anyone, for any reason, at any time.
Is Acorns Worth Trying?
It certainly is if you have had a problem with saving money in the past. Acorns will allow you to accumulate your investment capital simply by going through the routine of your normal purchase activity. You won’t need to have money deducted from your paycheck or your bank account to fund the account. Capital accumulation has never been easier!
And once the money is in your account, Acorns will professionally manage your portfolio at an extremely low cost. That makes both investing and saving money for investing effortless affairs in your life.
You may even find that Acorns helps you to reduce your monthly spending. After all, if each purchase that you make is being rounded up, that will leave you with less money to spend and prevent you from spending too much. In a real way, you’ll have investing, investment funding, and budgeting all included in a single app.