A smart way to invest with just pocket change

Poverty used to be a good excuse to put off opening an investment account. After all, if you want to buy just one share of Apple (AAPL) stock, it will set you back about $109.50 -- $102.50 for the share and $7 to trade. And most mutual funds require minimum initial deposits of $500 or more.

No longer. A Newport Beach-based company called Acorns has developed an automated investment system that turns micro-deposits into real savings. If you have an iPhone and a credit or debit card, you can invest in a smart and widely diversified portfolio with nothing more than pocket change

The way the system works is simple: You download the company's free iPhone app (they plan to add Android apps in the future) and link it to a bank account, credit or debit card.

Then, every time you spend money, it asks you if you want to invest the change. Or, you can set it on automatic, and it won't even ask. It will just round up every purchase. You spend 47.62, for instance, and it would round up that purchase to $48, with the 38 cents going into your investment account. If you feel the urge to invest more, you can tap in a deposit of any amount at any time.

But the really brilliant part of the Acorns system involves how your money is invested. When signing up, you'll answer a series of questions that are designed to assess your goals and risk tolerance. That will cause the company's program to suggest one of five model portfolios, which range from conservative to aggressive.

All of the portfolios are made up of a mix of just six different exchange traded mutual funds. The stock funds are all Vanguard offerings -- Large company (VOO); Small Company (VB); emerging markets (VWO) and real estate (VNQ). The corporate bond piece is a PIMCO investment-grade ETF (CORP) and the final piece is a government bond fund offered by iShares (SHY).

The only difference between the model portfolios is the percentage of your assets invested in each fund. The conservative offering is 60 percent in corporate and government bonds; 29 percent in domestic and international stocks and has 11 percent of assets in real estate. The aggressive portfolio, on the hand, is 59 percent stock; 30 percent real estate; and just 11 percent in bonds.

All the funds are highly rated; exceptionally low-cost; and all provide a broad mixture of investments within their respective categories. The wise investment mix may be explained by the fact that Acorns' investment advisor is Harry Markowitz, the father of modern portfolio theory.

All the regular maintenance you'd normally have to do with an investment portfolio, such as occasionally rebalancing to make sure that your investment mix remains in line with your risk tolerance and goals, is done for you automatically. It's the pitch-perfect version of simple, straightforward investing.

It's worth noting that a number of other so-called "robo-advisors" also offer simple index-fund investing. But Acorn's does it cheaper. The fee to have an account is $1 per month, plus an investment management fee that starts at 0.5 percent of assets and drops to 0.25 percent of assets once you've got $5,000 or more invested.

"Micro investing may seem insignificant, but the compounding effect coupled with automatic dividend reinvestment can make a big difference, if started early and held for the long-term," said Jeff Cruttenden, co-founder and chief operating officer.

Indeed, while the app was launched to the public at the end of August, the system has been beta tested with a group 10,000 volunteers for the past several months. Company officials say the average subscriber is young -- 40 percent are age 22 or younger. And they're investing an average of $7 a day -- more than $200 a month.

If this 22-year-old keeps investing at this pace, he'll be a wealthy man. Assuming a reasonable 9 percent average compound investment return, he'll have $60,000 by age 35; $184,000 by age 45; $491,000 by age 55 and a cool $1.2 million by age 65.

"People have long known the power of compounding just a dollar a day. But the question has been how to do it," adds co-founder Walter Cruttenden (Jeff's dad). "We believe Acorns is the vehicle. It is the easiest way to gather and turn small dollars into something big."