Are you thinking about getting started investing? An investment app like Raiz is a great way to dip your toe in the water before you take the plunge. In this blog post I will (hopefully) answer all the questions you have about Raiz. Let's dive in!
Overview:
What is Raiz?
Raiz is a microinvesting app. It allows you to invest in the stockmarket using small amounts of money. Traditional stockbrokers require you to start with an investment of $500 or more, whereas with Raiz you can start investing with just a few dollars. This is great if you are apprehensive about committing money to the share market for the first time.
How does Raiz work?
Raiz works by connecting to your bank account. It automatically withdraws your investment amount and uses it to purchase shares in their managed ETFs (for more on ETFs, read this article). You can choose from a range of portfolios ranging from conservative to aggressive. They also have two other portfolios. Sapphire, which has 5% bitcoin and Emerald, which invests in socially responsible shares.
The benefit of Raiz is they decide which stocks to purchase, taking a lot of the guesswork out of investing. You can also set a weekly investment amount and just forget about it, meaning your money is growing (hopefully) without you having to do much work.
Who owns Raiz?
Raiz was founded by George Lucas in 2016, under the name Acorns Grow Australia. It was renamed Raiz Invest in 2018. Raiz is both Spanish and Portugese for root, or base, so it makes sense as a name change. The point is to help consumers grow their money, and lay down a solid financial base. Since then it has been listed on the ASX and has over 900,000 users, managing over $250 million dollars in funds. That means the average Raiz user has about $250 in their account.
This is a far cry from the $5000 that George Lucas suggests is needed to start investing. Why is this a good thing? It means that Raiz users can start investing with smaller amounts of money, removing the barrier of entry.
How to Use Raiz
To use Raiz you must set up an account with some personal details, and then link a spending account. This involves providing some permissions to your bank account, including your login and password, and permission to make withdrawals. I will admit, this made me a little nervous at first, but it is integral to the way the app works. More on security later in this review.
Once you have linked your bank account, Raiz works in two ways. You can set a recurring investment, or set up round ups.
Recurring investment
You can choose any dollar amount to invest either daily, weekly, fortnightly or monthly. You can also set the day of the week that the money comes out of your account. For example, I have my investment set up to come out on Friday, the day after I get paid.
Roundups
This is the real strength of the app. With round ups, Raiz rounds up each purchase you make to a full dollar amount and invests the extra cents in their ETF. For example, if ytou purchase a coffee for $4.50, Raiz will round the transaction up to $5, and invest the extra 50cents. Pretty neat, huh?
With roundups you can also choose to round up to 0.25, 0.50, 0.75 or whole dollars. That means if can round up to smaller amounts and not have as much extra money being taken out of your account. You can also choose not to round up smaller amounts. The limits are $5, $10, $20 and $40. So, if you choose the $20 option, transactions under that will not be rounded up.
You can also make one off investments from $5 to $10,000
Is Raiz safe?
I will admit that providing my bank login details to an app made me pretty nervous. But in the 5 years I have been using Raiz I have not experienced any issues with security. It is not uncommon when applying for a loan to provide your bank statements via a secure link in a similar manner. Companies that provide these services take security seriously and as yet have not experienced a data leak. Now, if you would do it for a loan application, why not to invest?
Raiz also has insurance against fraudulent and criminal activity, meaning if there is a security breach your money is assured.
Is Raiz a good investment?
This depends on what you want to get out of investing. I started investing in the share market as a way to grow my savings faster than keeping them in cash. To illustrate the point, let's compare $10000 in savings in the share market over the last 5 years, vs keeping it in cash and term deposits.
For this graph, the average interest rate for a savings account overthe last 5 years is calculated as 0.6% percent. The average term deposit rate has been calculated at 2%. The average Australian share market return has been calculated at 9% (average for the last 30 years).
Savings Account
In a savings account at the average rate of 0.6%, your $10000 would be worth just $10304 in 5 years time.
Term Deposits
In a term deposit account at the average rate of 2%, compounding quarterly (meaning interest gets added to your balance 4 times a year and you earn interest on that interest), your $10000 would be worth $11049. Much better than an ordinary savings account, although term deposit rates are currently much lower than that. Check out this article for the best rates available at the moment.
Share market
Keep in mind that although the share market has a much overall higher return, it is a much riskier form of investment. It might average 9%, but the biggest loss was close to 70% in 1983. 19% of the time the market has negative returns. Raiz reports that their average investor has earned about 11% returns on their platform.
Does Raiz pay dividends?
Yes. The dividends are rarely large, but it does pay them and they get reinvested into your account balance. At this point you cannot choose to receive them directly into your bank account.
Does Raiz charge fees?
Yes, Raiz does charge fees. They charge a monthly account keeping fee of $3.50/month or .275% per year on balances over $15k. That works out to $3.43/month for $15K, which would then get bigger as your balances grows. When compared to brokerage fees of at least $10 per transaction for Commsec, $3.50 per month isn't that bad.
There are no fees for investing or withdrawing.
Are Raiz fees tax deductible?
Yes. Raiz provides you with a tax statement at the end of the year and you can claim your account fees.
Do I have to pay tax on the money I make through Raiz?
Yes and no. You have to pay tax on dividends you receive throughout the year. Raiz will provide you with an annual tax statement for that. However, you don't have to pay tax on the growth of your investment unless you sell them by making a withdrawal. This is known as capital gains tax.
What does Raiz invest in?
Unlike spaceship, Raiz does not reveal exactly what companies they invest in. They merely show graphs like this:
Luckily, I am nosey. When I opted for the Emerald portfolio of socially responsible shares, I enquired exactly what they were buying and was sent a spreadsheet detailing exactly what Raiz invests in on my behalf.
What Raiz portfolio should I choose?
That depends on your investment style! I chose socially responsible because I think that will be a great area of growth in the future. Sapphire buys 5% bitcoin, so would be a great choice if you want to get into the cryptocurrency market with less risk. If you are very risk averse, you may be tempted to go for the conservative portfolio. However, it is mostly comprised of bonds, which are very slow growth. The aggressive portfolio is mostly Australian Large cap stock, which are still a safe bet. The main thing to remember is: never invest more than you are willing to lose!
How does Raiz make money?
Raiz charges a $3.50/month account keeping fee. This has increased considerably from the $1.25/month when I signed up in 2016. With over 900,000 users, that equates to about $3.15million in management fees per month. According to barefoot investor, in 2017 when their fees were lower and they had less users, they received just shy of $1million in fees from customers with $3million in payments to suppliers and employers. Their 2020 income statement also shows a $5million gulf between revenue and expenses. Keeping this in mind, it's no wonder they raised their fees!
How will using Raiz affect my tax return?
You will need to pay tax on the dividends received via Raiz. You will also be able to claim any fees associated with managing your portfolio. I won't bore you with the details here, because Raiz has a really detailed yet simple guide to adding the info to your tax return - even if you do it yourself through Mygov!
How long does it take to withdraw money from Raiz?
Raiz is a great way to stash your cash and grow it quicker than a regular savings account. But how long does it take when you want to withdraw it to use it? It is a little slower than withdrawing from a savings account though. It will take 5 business days when you want to withdraw funds. This is because your money isn't being held in cash, it is invested in shares. So when you are withdrawing money, you are actually selling your shares, meaning that it takes a bit longer for funds to clear.
For this reason, I keep a decent amount of my savings in cash, so it is close to hand should something happen and I need to use it. For me, this is the only argument for keeping money in a high interest savings account.
Raiz vs Spaceship
This is the burning question! I use both, so I can offer you an honest comparison based on my experience. I have had Raiz for about 5 years. Last year my partner started using Spaceship, and I was very jealous of the returns he was getting. It was growing much quicker than my Raiz portfolio, which was growing at about 9%, whereas he was getting returns close to 20%! However, I noticed when the stock market had a bad day, his fell a lot lower than my Raiz did. Since I started investing using Spaceship I have noticed this also. When it's good, it's great, but when it's bad, it's awful!
So in summary, Raiz grows slower but is more stable. Spaceship grows more aggressively but is more volatile. Which makes their respective names rather fitting, don't you think?
Raiz and Bundll
Raiz has teamed up with another Australian company, Bundll, to offer a rather weird and confusing partnership. If you are not sure what Bundll is, read my handy guide here. To put it simply, it is a Buy Now Pay Later service similar to Afterpay. To use it you must nominate a spending account by linking a debit card. The partnership with Raiz offers you the option to add Raiz as your funding method. This allows you to use your Raiz balance to pay for anything from coffee to a new pair of pants.
The upside to this is that it is a sneaky way to circumvent the 5 day waiting period needed to withdraw funds from your Raiz account.
The downside is that you are missing out on future growth of money you have invested to pay for trivial everyday expenses. You are essentially stealing from your future self! If you are going to use Bundll, link it to your debit card instead
The Bottom Line
Raiz is a great way to grow your savings passively. It's convenient features make it easy to "set and forget" and before you know it you can have hundreds, if not thousands, of dollars invested. It is a great option for first time investors who are wanting to dip their toe in the share market without learning a great deal about how it works. One caveat - don't put all your investing eggs in one basket! A good rule of thumb in never invest more than you are willing to afford. Which is why I only invest $20/week. That's less than you'd spend on a good lunch, but the rewards will stack up in the future. Happy investing!