Fractional investing is revolutionizing how investors are building their wealth, especially for those who are just starting out in their journey, and don't have a lot of experience with building their passive investment portfolios. Before diving in to how we have been leveraging fractional investing to invest small amounts to yield big results, let's first talk about what it is and why it is an important building block for your diversified portfolio.
The growing popularity of fractional investing is transforming the investment landscape, offering investors new opportunities and reshaping the way individuals participate in financial markets. Here, we will discuss the reasons behind the surge in fractional investing.
Accessibility and Affordability: Fractional investing has democratized access to a broader range of asset classes that were previously reserved for high-net-worth individuals or institutional investors. With fractional investing, individuals can now invest in assets like stocks, real estate, cryptocurrencies, fine art, and more, even with small amounts of capital. This accessibility has opened up investment opportunities to a wider audience, allowing individuals to diversify their portfolios and participate in markets that were once out of reach.
Breaking Down Barriers: Traditional investing often required substantial capital to purchase whole shares of stocks or entire properties. Fractional investing breaks down these barriers by allowing investors to own a fraction of an asset, making it more affordable and reducing the entry barriers. This flexibility enables investors to build a diversified portfolio across different asset classes, sectors, and geographical regions, regardless of their financial constraints.
Market Liquidity and Flexibility: Fractional investing can potentially introduce increased liquidity and flexibility to investment portfolios. Investors can buy and sell fractional shares more readily than whole assets, providing them with greater control over their investments. This liquidity allows investors to rebalance their portfolios more efficiently, respond to market trends promptly, and take advantage of emerging opportunities.
Portfolio Diversification and Risk Management: Fractional investing plays a crucial role in portfolio diversification, allowing investors to spread their investments across multiple assets and classes. By reducing reliance on a single asset or market, investors can mitigate risks and enhance their portfolios' resilience. Fractional investing enables diversification not only within an asset class but also across different industries and sectors, reducing the correlation between investments and potentially enhancing returns.
Technological Advancements: Advancements in financial technology have significantly contributed to the popularity of fractional investing. Online platforms and apps have emerged, offering seamless and user-friendly experiences, making fractional investing accessible to a broader range of investors. These platforms provide robust investment tools, educational resources, and real-time market data, empowering individuals to make informed investment decisions.
Investor Education and Awareness: As fractional investing gains momentum, investor education and awareness have also increased. More resources, articles, and guides are available to help investors understand the concept, benefits, and risks associated with fractional investing. As investors become more knowledgeable about this investment approach, they can make informed decisions and embrace fractional investing as part of their overall investment strategy.
Potential for Disruption and Innovation: The rise of fractional investing has the potential to disrupt traditional investment models and open doors for innovative financial products and services. As more investors embrace fractional investing, financial institutions and technology companies are exploring ways to meet the demand for fractional ownership and investment platforms. This trend may lead to the development of new investment vehicles, increased market liquidity, and the evolution of financial systems to accommodate fractional ownership on a larger scale.
So now that we've uncovered the reasons why it has become such a powerful force, let's dive into the platforms and apps that we use for fractional trading and diversification.
M1 Finance
M1 Finance is a unique platform that we've used for years that offer fractional investing of stocks/equities with a feature called "Pies," which allows investors to create customized portfolios based on their financial goals and risk tolerance. Users can select from a wide range of pre-built investment portfolios or create their own pie by allocating percentages to different stocks, bonds, ETFs, and other asset classes. Once set up, M1 Finance automatically rebalances the portfolio, ensuring it stays aligned with the desired asset allocation. The pies enable investors to buy a portion of a share, making it possible to invest even with limited capital. This feature allows users to diversify their portfolios across a wide range of assets, including high-priced stocks, without needing to purchase whole shares.
In other words, you are essentially creating your own index fund by picking your stocks and the target allocation for each of the stocks. Once we found the handful of stocks that we knew were wanted to buy and hold for long-term, we simply added those individual stocks to our pie and created an allocation for each of them and set the account to automatically transfer and invest in that pie on a recurring basis. M1 Finance does not charge for any of this, and all of the trades are commission free.
At this point, you may be asking why go through this trouble and not just invest in an index or mutual fund that tracks the S&P 500. After all, you instantly get diversification using an index fund and you are also able to invest in small amounts for a mutual fund. The primary reason is that with index investing, it is a well-known fact that the majority of the returns comes from only a handful of the top stocks based on market cap. Therefore, your returns are limited due to the exposure of underperforming stocks in the index fund.
Obviously, there is no guarantee that your own stock picking and allocation will beat the S&P 500, but we have designed our pies so that it is consistently beating the S&P500 in up and down markets by simply investing in strong blue chips stocks that are well known and tried and true. We also keep an eye on the target allocations and M1 Finance makes it easy to change these allocations or rebalance the portfoilio seamlessly. While the benefit of this strategy is that it gives you the flexibility to choose your own stocks/allocation, we admit this is a bit of advanced strategy as you have to have knowledge of which stocks to pick and be sure to still diversify your pie. It is also worth noting that you can share your own customized pies and M1 Finance fosters a sense of community by offering a social platform where users can engage with other investors, exchange ideas, and learn from each other.
Acorns
Acorns is another favorite of ours that is simpler to use, but follows the same concept. Instead of picking individual stocks, however, you are able to simply select a portfolio type based on your risk tolerance (Conservative, Moderate, Aggressive, etc.) and purchase fractional shares of the portfolio. On the backend, it is simply a predetermined allocation of index funds. In addition, Acorns' claim to fame includes the ability to invest spare change from your transactions once you link one or more of your credit card accounts to the platform. For example, say you purchase an item for $5.25 on a linked credit card at the store, you can configure Acorns to 'round-up' that transaction to $6 and take the $0.75 difference and automatically invest that amount into your portfolio. This is a great platform for those who want to put savings/investing on autopilot and not worry about managing a portfolio. These seemingly small transactions also add up pretty quickly, since you can link as many cards or accounts as you'd like or even configure multipliers for these round ups.
Fundrise
Finally, Fundrise was one of the first platforms to democratize fractional trading for real estate investing. Fundrise allows investors to purchase shares of real estate assets, such as commercial properties or residential buildings, without needing to buy the entire property. This allows individuals with smaller amounts of capital to participate in real estate investments that were previously accessible only to institutional investors or high-net-worth individuals. Fundrise is designed for passive investors who want exposure to real estate without the need for active management. The platform handles property selection, acquisition, management, and potential sale, allowing investors to benefit from professional expertise. One of the main benefits of the platform is the fact that it has a low correlation to the stock market. Its biggest drawback, however, is that real estate investments on Fundrise are not as liquid as traditional stocks or bonds. While Fundrise offers quarterly redemption opportunities, the ability to sell your investment can be limited. It's recommended to have a long-term investment horizon when considering Fundrise. Recently, Fundrise has even opened up the ability for investors to purchase fractional shares of technology start-ups similar to private equity firms. Our favorite part of Fundrise is its transparency and investor updates on when and why they invest in a certain property or company.
In conclusion, fractional investing is gaining popularity due to its accessibility, affordability, portfolio diversification benefits, and technological advancements. This investment approach has the potential to reshape the investment landscape by providing individuals with greater control over their investments, expanding investment options, and challenging traditional investing norms. As fractional investing continues to evolve, it has the potential to empower more individuals to participate in financial markets and shape the future of investment practices.
Want to Try these platforms for yourself? Start putting your money to work for you.
M1 Finance: https://fxo.co/Gq30
Acorns: https://fxo.co/Gq2n
Fundrise: https://fundrise.com/r/x5p1zz