New investing app offers a simple path to stock trading
One of the evergreen problems of personal finance is how to entice non-investors, especially the young ’uns, to cross over the hump into capitalism — that is, to own some stocks.
In the old days of stock investing — maybe two generations ago — this meant sitting down with Daddy’s highly paid stockbroker in a wood-paneled office, making prudent choices from the “Nifty Fifty” list of blue-chip companies. You’d pay this friendly broker hundreds, or thousands, of dollars every time you traded.
A generation ago, a combination of lower-cost trading and online access radically democratized that process, removing almost all the guardrails. My generation learned the joys, and pains, of picking our own stocks, trading as often as we liked from the comfort of our own laptops for a few dollars per trade, or annual fees of less than $100.
Around 2010, robo-advising improved on the old free-wheeling ways, matching an individual’s risk tolerance with low-cost, passive portfolios that required no thinking and reintroduced prudent guardrails without the need for expensive human advisers.
And now? You can use a hybrid robo-investing app like M1 Finance to invest and trade for free, with a starting amount as little as $100.
In fact, the first time I used the M1 Finance app I was driving down the highway, taking my 13-year-old to school, and I told her to build herself a stock portfolio. She’s my willing guinea pig for new finance apps.
She agreed to fund her portfolio with $100 of her own, hardearned money. (OK, mostly from losing teeth to the tooth fairy, if we’re being honest.)
She picked six stocks, all household names you’d recognize, plus three mutual funds. After linking a bank account for funding the portfolio, the app prompted us to automate additional contributions. We did not, as teeth do not grow on trees.
Over time, as her assets shift in value, the app can automatically rebalance her original allocation with new contributions, if she makes any. Things I like about this app: 1. Extremely low, upfront funding amounts — as little as $100
2. An intuitive user interface on your phone with color-coded “pies” showing your asset allocation. Easy rebalancing to maintain the original allocations over time and with new investments.
3. Fractional share amounts allowed. So if each Apple share cost around $200, you could own one-tenth of an Apple share for $20. This matters for investors just starting out. (FYI, she did not choose Apple.) 4. No fees to invest or trade. 5. Hybrid robo-investing. You can take guidance on pre-set “robo-portfolios,” or you can build your own portfolio. Or you can do a hybrid combination. Choose your own adventure.
Two features of the app could be considered, by some, a mixed blessing. The first is that purchases or sales only happen once a day on the M1 Finance platform. With free trading and management, that rule keeps costs low for M1. From my perspective, once-a-day trading is a feature not a bug, since daytrading will only make you poorer in the long run. I think you should sell or change asset allocations somewhere between every two decades and never, so I’m not concerned about this limitation. Day-trading folks, obviously, will avoid this platform.
Another mixed blessing, ironically coming from me because I’m obsessed with fees, is that M1 Finance is free. Normally, low cost is good, and free is the ultimate low cost.
Betterment and Wealthfront, two well-known robo-advisers which I have not used but about which I have a good impression, charge 0.25 percent of assets under management, which is already a rock-bottom price for investment services. Acorns, a robo-advising app I do use and love, also charges 0.25 percent.
Does no-fee investing even make sense? I’m not sure.
I’m cautious about free in this case because of a basic business rule — if you aren’t paying for the product, then you are the product. That’s how Facebook works, obviously. That’s how network television works. The real product of television and Facebook is not our infotainment, but delivering our eyeballs to advertisers. That’s my worry when I see M1 Finance is free — I assume they are delivering my eyeballs to somebody. And if not now, then possibly in the future.
The company’s CEO has reportedly said M1 will make money from securities lending, the business of lending stocks to investors and investment firms. That’s something that traditional brokerages do also, without necessarily emphasizing it as an important part of their business model. I’m skeptical this will earn them enough to survive.
For now, however, it’s a pretty cool on-ramp to the superhighway of low-cost, low-dollar investing.