Money

How Fractional Investing is Changing Everything – Data Driven Investor – Medium

It wasn’t long ago that investing in anything required a brokerage account and a minimum deposit of $10,000 at least for most of the brokerage houses available to the common investor. You also had to either understand how the markets worked and have a good understanding of the investment strategies you made, or at least trust your investment manager to know for you. The problem with either model is that neither provided you with either a guaranteed return or assurance that no capital investment would be lost, and either required you to have the money to open an account. Fast forward to today. Anyone with no ties to employees of brokerage houses or publicly traded companies can open up a cash management or brokerage account with no minimum deposit. Transaction fees can range from as low as $0 per trade. Many trading websites offer research tools, which can be quite extensive, sometimes beyond the comprehension of the average investor.

In recent years, investment firms began offering index funds. Index funds are funds that behave similarly to the market indices. Stocks tied to these funds are typically more expensive to purchase because they are in higher demand and as a result have much higher trade volume. They are also less volatile because there is always demand. For example, for every seller’s ask, there is a buyer’s bid not far from the ask and vice-versa. Since the objective of any equity is to outperform the market indices, it is typical for some equities, particularly those in small-cap stocks, growth stocks and emerging markets to be more affordable. They also tend to be considered higher in risk and volatility. That’s because there is usually more speculation revolving around these stocks. Even still, to purchase any stock from an investment website requires capital. For example, the best stocks to buy today are expensive. How expensive? Try $1,103 for one share of Google stock (Alphabet CI A) and $346 for one share of Netflix stock, as of 2/11/2019. The only way to invest in these stocks is to buy the shares at $1,103 and $346 respectively. The average American, especially the recent college grad, doesn’t have the money to do this. This is where fractional investing enters the room and completely disrupts everything we know about how to invest.

Fractional investing is the practice of purchasing only the portion of any stock or fund based on how much you are able to invest. Through fractional investing, you can purchase any fraction of the current value of any share of stock. What’s more is that there are a great number of investment platforms that allow you to buy and sell infractions. Purchasing shares in fractions offer you the ability to slowly buy into shares of desirable stock that you normally could not afford to buy outright. For example, you may not be able to purchase one share of Google stock, but for $10, you can buy just under one-hundredth of one share (if Google is trading at $1,100). You can purchase one-tenth of a share of Netflix stock for $35 (if Netflix is trading at $350).

Image: Business Businessman Cellphone Checking Closeup. Source: RawPixel, Pixabay.com

Many new investment platforms are popping up each day, tailored to the new investor. These investment platforms use the index fund model combined with fractional investing so you can buy fractions of popular index funds that don’t try to beat the markets, but rather perform in line with the markets. This reduces volatility and increases the likelihood of long-term gains that exceed the inflation rate. People can elect to have their monies deposited from their chosen checking account as one-time occurrences or as recurring deposits. The monies are then invested fractionally based on short and long-term goals.

Image: M1 Finance Portfolio Pie. Source: M1Financ.com

My favorite investment platform is M1 Finance. M1 Finance allows you to create your own investment portfolio where you can mix index funds, bonds, and stocks. As you make recurring deposits, the system automatically rebalances your portfolio based on the percentages you created for your equity and fixed income holdings. There are no fees and no minimums, though you may have fees associated with expense ratios for managed funds.

If you want an investment platform that does all the work for you and even buys and sells holdings to maximize tax-losses or tax-loss harvesting, look no further than Betterment, Acorns, and Wealthfront.

Image: Acorns Sign Up. Source: Acorns.com

All of these investment platforms automatically invest your pennies into popular portfolios with a healthy mixture of equities and fixed income holdings. If you want the ease of automatic investing, but you want some control over what sectors you value most, then look no further than Stash and Motif, where you can select from curated mixes of stocks based on industry, mission, and value. Many curated stocks are pooled together based on social responsibility, something that rings interest among millennials.

Why is fractional investing changing everything? Well, let’s think about this for a moment. Fractional investing introduces more people to market investment. This dilutes the number of investors not only among shares of stock and sectors but within individual shares. Fractional share investors are less likely to buy and sell positions when announcements are made about a particular company or sector, thus reducing sudden fluctuations in stocks and the market as a whole.

Image: Graph Diagram Recession Economic Downturn. Source: Mediamodifier, Pixabay.com

It could be concluded that recent dips and volatility in the markets may have been stifled from even higher volatility because of the constant inflow of new investment capital into the markets, created by the passive recurring deposits scheduled by fractional investors. This leveling effect is in sharp contrast to the volatility created by day traders that flooded the markets nearly two decades ago, which today, can only be compared to the current wild, wild west of the cryptocurrency market. Unlike fractional investors who characteristically do not pay much attention to the markets, day traders use a mixture of methods with the sole purpose of beating the markets. They buy and sell securities many times over to gain profits from short-term price fluctuations. Positions are held on a short-term basis with day traders relying mostly on hour-to-hour sentiment. Sentiment depends on many factors including news regarding publicly traded companies, analyst ratings and forecasts, stock price fluctuations, sector indications, federal reserve announcements, and of course the jobs report. Very rarely do most day traders use the sophisticated models used by actual fund managers.

The introduction of the passive fractional investment platform may have accidentally created a whole new segment of investors that reflect a more mature investor who is not concerned with daily sentiments, but rather long-term performance, and who is more concerned with long-term returns rather than short term bets to beat the markets. The hope is that we can invest not only in solid companies but also in socially responsible companies, well at least fractionally.


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