Why Micro-Investing Apps Aren't Always a Good Idea

If there's one thing I am a huge fan of, it's apps for micro-investing. Being able to sock away spare change and watch it grow is an amazing thing, especially for those who have never invested before.

Apps like Acorns and Stash have allowed millions to start investing in the stock market. Before them, the sheer financial and educational barriers made it nearly impossible for many people to invest—even if they desperately wanted to do so.

That being said, micro-investing apps aren't always a good idea. Check out these reasons why people might want to go the "traditional" route in certain situations.

Though I love micro-investing apps, I'll also be the first to admit that the maintenance fees are way higher than they would be if you had a regular stock portfolio with a typical bank. Fees obviously will eat into your earnings, and for many people, that's a dealbreaker.

If you aren't going to be putting in a lot of money, the fees could actually make your earnings a wash. This is one of those times where micro-investing apps aren't always a good idea. After all, it's not going be worth investing if all your money gets eaten by fees.

That being said, not all apps have high fees. So, your mileage may vary.

Buying single stocks can get pretty risky on micro-investing apps.

Speaking from personal experience, I had this happen with Robinhood. I bought two or three shares, then the company decided to merge its shares with a five to one ratio. I lost everything.

After realizing that Robinhood's refusal to allow fractional shares was what did it, I closed my account with them. This is one of those situations where micro-investing apps aren't always a good idea—and one where actually using a micro-investing app could cost you serious money.

Day trading and micro-investing just don't mix.

At best, you'll have Robinhood, which offers up the ability to day trade for an added fee but doesn't have the amount of speed or tools that day trading requires. At worst, you might get booted from an app.

It's a far better idea to just download a day trading app like IBKR. You'll get lower fees, fast service, and awesome tools to help you maximize your profit potential.

Experienced traders are often better suited by traditional apps.

Here's the thing you need to remember about micro-investing: you're not always in control. With an exception for Robinhood, Stockpile, and Stash, you won't actually be able to select individual stocks for your portfolio. And, if you do, you will end up paying a lot of fees.

If you are very experienced and want to improve your returns, micro-investing apps aren't always a good idea. Should you choose this route, you need to make sure that the app's features will line up with what you want to do. Otherwise, you're going to waste time and money on an app that's not right for you.

Admittedly, there are some micro-investing apps that allow you to create a Roth IRA with them. When discussing this point, we're not going to talk about those apps. Some of them are really great!

However, there's a growing trend of people who don't want to open an IRA through an app and instead choose to use their micro-investing account as their retirement fund.

Using micro-investing apps aren't always a good idea for people who want to build a retirement fund, simply because you don't always invest enough to make it worth it. Besides, an IRA is a wiser decision; you get tax benefits that way.

It's also worth noting that most apps don't have tax-loss harvesting built-in.

Let's say that you decide to make a trade. The trade fails and you end up biting a huge loss. Pretty bad, right? Well, Uncle Sam decided to add a silver lining by allowing you to claim that loss as a tax deduction. This is called tax-loss harvesting.

If you want to take advantage of this, micro-investing apps aren't always a good idea. In fact, they almost never are a good idea, since the vast majority of them don't have this as a feature. Unless you're okay with doing the math yourself, you'll pass for a more traditional trading platform.

One of the reasons why people like micro-investing apps is because they allow you to start investing in the stock market with minimal knowledge. Many, such as Acorns, are absolutely wonderful for learning the basics of stock investing and personal finance.

The problem with this is that you don't always get the kind of educational tips you'd hope to see from apps. Robinhood, for example, doesn't really offer any information for people who might not know what charts mean.

Regardless, if you're looking to become a stock market guru, micro-investing apps aren't always a good idea. They don't give you a full education, and frankly, you'd be better off reading a couple of books instead.

Considering how much Millennials know about stocks, though, any education would be beneficial—even if it's superficial like the stuff you might see in apps.

There's also the fact that they also could put users at risk during volatile markets.

When the markets are booming, micro-investing apps are often touted as the best thing since sliced bread. They show people that investing can be a great way to make your money work for you. So far, they've seen their climb to popularity through the economic upturn.

But during volatile markets? Well, we're not so sure people will be touting them as much. A lot of analysts believe that these apps could cause people to overreact, which could put them at risk of selling at a bad time.

There's something to be said about being able to invest in almost any stock you want—including your favorite Vanguard Exchange Traded Funds. Unfortunately, most micro-investing apps won't give you that breadth of investment options.

That being said, they still offer a decent number of stocks, bonds, and ETFs to choose from. However, we'd be lying if we didn't say the options aren't as good as they could possibly be.

Even though there are many reasons why micro-investing apps aren't always a good idea, they are still worth a shot.

As I said before, there are a lot of reasons why everyone should start investing using a micro-investment app. They do offer education, help you amass wealth, and also can give you your first taste of investing through a non-threatening approach.

Sure, they may not be a great main vehicle for everyone, but they are a great supplement for anyone that wants to better their bottom line. They beat saving money in a bank account—at least, if you want long-term growth.