M1 Finance is a financial services company that allows users to automate the process of investing and allows you to purchase fractional shares of stock. I use M1 Finance for a portion of my portfolio. I have used it for about 5 months and am very impressed. In this post I will go over how I use the platform and my opinion regarding the pros and cons compared to other brokerages.
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How I use M1 Finance
My M1 Finance account is split between growth stocks and income stocks. The main value that I get out of having this account is that it eliminates the barrier to entry of high priced growth stocks.
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As all of us has seen throughout 2020, growth stocks fluctuate rapidly. By using M1 Finance I don’t have to worry about missing out on a great opportunity to get impressive gains. For example, at the height of the pandemic I sold off my Shopify stock because of the craziness of the market and to realign my portfolio. I was kicking myself after seeing how much it was rising in value. I didn’t want to sell my stock but I also didn’t feel comfortable having so much exposure to growth stocks. This was before I had M1 Finance so the only way to rebalance by account was to sell whole shares.
M1 Finance is perfect because it allows me to continue to stick to the guidelines that I have out lined in my investing plan and not feel like I am missing out on any opportunities. In my plan, I choose not to have any one stock be more than 5% of my total portfolio. I was able to balance my portfolio with a good mixture of growth and income stocks without my allocation becoming extremely overweighed.
I have other stocks that I invest in outside of this portfolio but primarily use my M1 Finance account to invest in stocks I have confidence in that are at higher price point. This is for both higher priced growth and income stocks. This allows me to reap the benefits through capital gains and dividends.
How are you able to own fractional shares?
M1 Finance purchases whole shares and sells you a fraction of a stock at the market price. They essentially keep an inventory of shares to sell to their users. You then own the fraction of the stock you purchase based on your portfolio allocation free and clear.
You are probably wondering why all brokerages don’t do this. The simple answer is that it isn’t advantageous for them to do so. If you purchase an index fund or a mutual fund, you will pay a fee for that fund to be managed. With M1 Finance you can create your own diversified fund with absolutely no cost to you. Other companies don’t offer this service because they make money by managing funds and charging a fee to their customers. Offering fractional shares is a competitive edge M1 Finance has that allows them to appeal to millennials and new investors that want to get their feet wet with investing. This allows you to start small but still invest in the companies you believe in.
These are the pros and cons that I have when using the M1 Finance platform.
Pros
- Fractional Shares
- Pies (Your own ETF)
- Automate portfolio allocation
- M1 Borrowing
Fractional Shares – Being able to buy fractional shares means there is no barrier to entry for buying stocks. If you want to buy $1 of Google or Amazon stock you can do that. If you want to spread $100 across 50 different companies, you can do that easily and you can automate it!
Pies (Your own ETF) – You can create your own pie or use a pie that someone else has made public from their portfolio. This is a very easy way to essentially create your own ETF without the fees.
Automate portfolio allocation – After you set up your pies you can have the funds you allocated based on your preferences. This is great if you dollar-cost average on a consistent basis. You can automate how often you allocate money to M1 Finance (weekly, monthly, etc.) and the rest is taken care of from there.
M1 Borrowing – You can borrow against your portfolio if you have over $10,000 at an interest rate that varies based on your tier level. If you are a Plus Member the interest rate is 2%. When you are a regular member, the interest rate is 3.5%. M1 Finance advertises this as a way to cover costs for a wedding, vacation, or some other type of miscellaneous costs at a very low interest rate. While there is risk taking a loan out against your investment, it is still a great opportunity to be able to use your portfolio as leverage to be able to borrow money at a low interest rate. You won’t find that interest rate with a credit card! While I don’t recommend borrowing against your portfolio for just anything, knowing that you can do so can be another tool in your toolbox.
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Cons
- Time window to buy shares
- Lack of reports
- Tier structure
Time window to buy shares (at 9:30 am in the morning for a basic account and 9:30am or 3:00pm if you have a Plus account). Since M1 Finance buys the shares that they then sell to you for partial ownership in bulk, shares can only be purchased at these specific time windows. This is one of the big drawbacks for me. With my other brokerage account, I can buy stocks at any time during the trading day as well trade during extended ours in the mornings and evenings. Only being able to buy at one time during the day at the beginning of trading day is unfortunate. If you are a growth investor, there can be a lot of movement throughout the day that can be a missed opportunity. However, the benefit of being able to buy stocks in fractional shares outweigh this disadvantages.
Lack of reports – After the time windows to buy shares, this has to be the biggest con for me. I use other brokerage accounts that allow me to do more analysis on my portfolio and prospective stocks. There is a cost basis report but I do wish they had other reports that would make it easier for me to track my income, review financial statements, and track dividend history. To do the analysis I need to export the data and create my own analysis.
Tier structure – The whole purpose of having a brokerage account is to make money. If you are paying for a monthly service for M1 Plus that takes a decent chunk out of your returns. You would need a reasonably sized portfolio for that to be worth it.
Why M1 Finance is worth it
From a personal perspective, I felt like I had nothing to lose by at least trying out the service. My only regret is that I didn’t start using it as soon as I heard about it over a year ago!
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
