The single most popular trend in investing today is passive investing. Most people associate passive investing with low cost, broad based index funds like those you can purchase at Vanguard. But can you be a passive investor with a more complex strategy? M1 Finance thinks you can.
Their innovative investing platform brings together the best of “behavioral alpha” and low cost brokerages to help users invest with confidence.
If your investment strategy includes individual shares and low cost ETFs, you’ll be hard pressed to find a better investment tool than M1 Finance. Here’s why.
Intersection of Behavioral Finance and Portfolio Theory
In his book Nudge, behavioral economist Richard Thaler, “people have a strong tendency to go along with the status quo or default option.”
Humans need a good default option, or we’ll make bad decisions. This is especially true in investing. It’s easy to have great investing intentions, but fail to follow through on them.
M1 Finance addresses this concern. Their low cost investing platform allows you to set up your ideal portfolio, and automate contributions to the portfolio. Once your default is set, you don’t have to think about it again.
But the platform does more than automate investing. It automates efficient rebalancing. Modern portfolio theory posits something called the “efficient frontier.” The efficient frontier is where you maximize your returns while minimizing portfolio volatility. If you have a higher tolerance for volatility, then you can see higher returns in the long run… as long as your portfolio is on the efficient frontier.
The key to keeping a portfolio on the efficient frontier is regular rebalancing. That means buying the asset class that is underweight and selling that class that is overweight. “Buy low, sell high” is a shorthand way of saying rebalance your portfolio. M1 Finance does that for you automatically. M1 Finance doesn’t hold any money in cash, so you don’t lose any time being invested in the market.
As an investor, you set your ideal portfolio structure. This can include individual stocks, ETFs, Bonds and more. If you can buy it on the New York Stock Exchange, you can put it in your portfolio. Then, every time you add money to your portfolio, M1 Finance automatically buys the most underweight asset. Every time you sell, they automatically sell the most overweight asset.
M1 Finance calls this “pie investing” because you set your portfolio preferences using a pie graph interface.
Low Price Includes Fractional Shares
It’s important to mention that most robo advisors work in the intersection of behavioral finance and portfolio theory. Most implement efficient rebalancing into their algorithms. Some (including Betterment and Wealthfront) are cheaper than M1 Finance.
But some users won’t find those lower cost robo-advisors as compelling as M1 Finance. This is because M1 Finances allows investors to include fractional shares in their portfolio.
What are fractional shares? Imagine that Amazon stock $AMZN is $800, but you only want to own $200 worth of stock. Traditionally, you could buy no less than 1 full share of stock. Fractional shares allow you to own just $200 worth of $AMZN or .25 shares. Low cost brokerages have allowed investors to employ fractional shares for years. But M1 Finance is among the first automated investment platforms that allows you to invest in fractional shares.
This means that investors can invest in particular stocks in part of their portfolio and in index funds in the other part. You can own hundreds of fractional shares if you want.
All of the investments come at the low price of .35% of your portfolio value. You pay almost nothing for trades. What do you pay for trades? M1 Finance passes on the SEC Fee and the TAF fee which is less than .01% of each trade value.
If your portfolio is less than $5000, you’ll pay a yearly fee of $30 instead of the traditional .35% for retirement accounts. For normal, taxable accounts, there is no $30 minimum for accounts under $5,000 – just the 0.35% all around.
Who Should Use M1 Finance?
As with all investing platforms, M1 Finance isn’t for everyone. If you don’t intend to include individual shares in your portfolio, you’ll find a cheaper Robo-advisor options through Betterment and Wealthfront. It’s cheaper yet to buy low cost ETFs directly from a brokerage like Vanguard or Charles Schwab.
Anyone who subscribes to a “technical analysis” investing philosophy should avoid M1 Finance too. You’ll spend too much time manipulating your portfolio. Instead, buy and sell shares and options through TradeKing or Options House.
M1 Finance offers real value to investors who subscribe to modern portfolio theory but want to include individual shares in their portfolio. The easy to use interface and low costs will draw you in. You can even use M1 Finance to manage assets in your Roth IRA or a rollover IRA.
One thing that you should note. All of M1 Finance’s portfolio dashboards consider your M1 Finance portfolio. If you’ve got significant assets in your work 401k or an outside account, you’ll need an overall portfolio balancing strategy. Consider Personal Capital or DIY.Fund to get total portfolio statistics.
If you've tried M1 Finance we'd hear your thoughts below!
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