Updated on 06.29.16

Building a Nest Egg Out of Acorns

A new app invests your money in the background of daily life.

Acorns app

The Acorns app rounds up your credit and debit card charges to the next dollar, and invests the difference. Photo: Acorns

Let’s face it, investing in the future is no easy task. Taking money that you could spend right now and socking it away for decades takes discipline. That bi-monthly 401(k) paycheck deduction, the big fees wealth managers charge, and all those brokerage commissions… who wants any of it?

This is especially true for new investors. Shoveling large chunks of cash into long-term investments can discourage novices and lead them to reduce contributions or even abandon investing altogether. Might it seem easier (and more logical) to invest just a little at a time? Well, that’s where the investing app Acorns comes in.

How It Works

Basically, Acorns invests your money in the background of daily life. This makes deductions a lot less painful and your saving a lot more apparent.

The main functionality of Acorns relies on rounding up everyday purchases and spilling the difference into an assortment of six low-cost exchange-traded funds (ETFs). For example, if you were to purchase a bavarian cream donut for $2.75 (on credit or debit) at your local bakery, your card would be charged $3, and the extra 25 cents would get deposited into your Acorns account and invested.

This steadily accumulating sum is then managed and controlled by a combination of mathematicians, computers, and (as goes anything in the tech world) engineers. The company has, in part, developed its investment strategy with the help of Nobel Prize-winning economist Harry Markowitz on board (aka the guy who invented modern portfolio theory).

While your risk tolerance is customizable, your default investment strategy is initially determined by factors such as your age, your goals, and the amount of risk you’re comfortable with. Acorns considers all of these elements before making a portfolio recommendation, but ultimately lets users decide on which funds they prefer. Your choices include the Vanguard S&P 500 ETF (VOO), Vanguard Small-Cap ETF (VB), Vanguard FTSE Emerging Markets ETF (VWO), Vanguard Real Estate Investment Trust ETF (VNQ), as well as ETFs comprised of corporate and U.S. Treasury bonds.

Like competitor Betterment, Acorns automatically rebalances your portfolio and allows users to physically adjust contributions by dragging values within the app interface, instantly showing how additional allowances could affect long-term outcomes.

Apps like Acorns and other online financial advisors represent crumbling barriers to entry between laypeople and the stock market. A new wave of (relatively) lower-income users now has access to investment streams once reserved for those with more heavily padded bank accounts. No longer is the casual investor forced to pay steep fixed rates or percentages to licensed brokers who perform the same, or most times worse, than common indexes.

Acorns requires no minimum account balance to use the app, but users will need at least five dollars to begin investing — a presumably easy-to-hit threshold.

So, Is Acorns for Everyone?

The company is clearly targeting millennials and younger investors who may be more comfortable with technology than the stock market and wouldn’t otherwise invest — whether because of the costs, the learning curve, or a general post-Great Recession distrust of the financial industry. Does this mean Acorns isn’t useful for more privy investors? Not at all. The app allows lump-sum contributions of up to $30,000 with this type of investor in mind.

Here are a few other things to consider:

  • Fees: With a flat $1 monthly fee on accounts up to $5,000, a fixed 0.25%-per-year fee on balances above that threshold, and an annual .25-.5% deduction on total investment (expenses associated with the ETFs themselves), Acorns is a serious bargain relative to more traditional means of wealth management. There are no commissions for buying, selling, or withdrawing; fees on a $50,000 portfolio would run about $250-$375 per year. By comparison, expenses at actively managed mutual funds tend to run about 1% or even up to 2% per year, or $500-$1,000 for a $50,000 portfolio.
  • Investing strategy: Acorns combines two popular investing strategies: dollar-cost averaging and index investing. By regularly investing small, steady amounts — say, $100 every month — you will, by default, tend to buy more shares when they’re priced low, and fewer shares when they’re expensive. Index investing, meanwhile, emphasizes reducing fees (which can eat into your returns) by investing in low-cost index funds and ETFs.
  • Customization: Hands-on investors might find their options too limiting — after all, there are just six choices. While customization options afford some of the flexibility most seasoned investors demand when managing their cash, this amounts to fine tuning how much stake is invested in each of the six basic ETFs offered, from more conservative short-term government bonds to often volatile emerging markets. If you want to devote a portion of your portfolio specifically to, say, energy companies or telecom stocks, you’ll have to look elsewhere.
  • Security: Acorns accounts are SIPC secured for up to $500,000, and the entire application incorporates industry standard SSL 256-bit encryption. If you feel comfortable with the level of security in your brokerage account, you won’t have an issue here.

No, Acorns won’t make you rich overnight… it’s not trying to. If high-risk, high-reward is your game, you’ll want to look elsewhere. But, if you’re a new investor trying to get your feet wet in the world of ETFs without putting too much effort into it, Acorns probably isn’t a bad way to start.

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