This article explains the impact that changing micro-investment apps like Spaceship and Raiz could have to your investment portfolio, covering factors like taxes and fees.
Money Question Received
“I was just wondering if you could help with a question about investing. Is there any harm in swapping micro investing apps. For example, accumulating $5k in say the Raiz app and then transferring all of it to Spaceship. Is this a negative move or will it make no difference to my investments?“
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When deciding to swap between any investment type or strategy, there are a number of considerations that you should keep in mind, and these will apply regardless of the size of your investment.
Capital Gains Tax (CGT)
The first important consideration here is whether you will incur Capital Gains Tax or CGT. When you withdraw your money from a micro-investing app, your investments will need to be sold, and depending on whether you’ve made a profit or loss, this may trigger a CGT event. This will then need to be declared on your end of year tax return and you will need to pay tax on the capital gains you’ve made.
Entry and Exit Fees
Another factor to explore are the entry and exit fees charged by the micro-investing apps, and whether you will incur any costs to move between the different investment portfolios. It’s also worth checking the management fees of the product you want to move to, and whether you will be paying more or less fees over time. MoneySmart has a helpful fee calculator to assist you with this.
This is a minor point but experimenting with different investment apps and platforms does lead to quite a hassle at tax time (trust me, I’ve been there). Make sure you’re not over-complicating your investments and keeping any purchases, sales and income received, well documented!
Loss of Compounding
Compound interest is probably the most important factor to consider, as it’s easy to switch between different apps and chase performance, to your own detriment.
For example, if the only reason you are switching investments is because one of them has performed better over the past month or year, keep in mind that you are chasing returns. And unless you truly understand why the ‘good option’ will still perform well into the future you could be making a mistake. You’ve probably heard this warning before: “past performance is not indicative of future performance”. Make sure you understand what the new app will be investing in to help you decide if it will keep performing well — or if it’ll start to do worse going forward.
Also, when you leave one micro-investing app and move to another, you’ll be out of the market for at least a week while the investments are sold and transfered out to your bank account. Compounding is an extremely powerful force in investing — don’t interrupt it!
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