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Written by Ryan Scribner on November 10, 2021
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How Does M1 Finance Work For Beginners?

M1 Finance is a cutting-edge robo investing/brokerage hybrid that has an array of useful features for both long-term passive and active investors. However, because M1 packs so much into the platform, it can be difficult to tell where to start.

Dividend investors love this app because of the automated rebalancing feature and portfolio level dividend reinvestment. Active stock pickers love the custom pies, which are perfect for portfolio-based investing. Plus, long-term index fund investors love the expert pies feature.

The best part is, M1 Finance is 100% free even for retirement accounts!

Read more about the M1 Finance Roth IRA here. 

How Does M1 Finance Work?

There are just a few simple steps to get started with M1! Right now, M1 Finance is available to US investors only.

If you prefer videos, here is a quick M1 Finance tutorial!

How To Get Started

Getting started with M1 is really quite simple. Before you get started, you will need to know what a "pie" is. This is really what makes M1 unique. A "Pie" is simply an investor's portfolio within M1. However, this pie offers investors a few unique benefits. First, you have the ability to customize your own pies or select from over 80 pre-built expert pies.

When you buy and sell, your money is automatically allocated to this pie. For example, if you have a pie with 25% of 1 stock, and 50% of an index fund, and 25% of a particular bond, then when you add $100 to your account, that money will be spread to your various investments.

Your pie, or pies, can have 1 stock or up to 100.

Second, these pies keep your portfolio organized and easy to understand and monitor.

Now that we understand pies, let's dive into creating an account:

  • Step 1: Create An M1 AccountWhen you sign up, you will be guided through a process to build your portfolio or pie. You may choose to create a custom pie from a variety of ETFs and stocks offered on the M1 Finance platform. You can also choose from a variety of expert pies that are designed by M1 Finance that offer templates for ideal pie creations.

    When you create an account, they will need information like your name and email address. Download the M1 Finance app here to start.

  • Step 2: Open A Brokerage AccountThis is where you will put in your personal information and decide which type of investment account you are going to open up (individual brokerage account, retirement account, etc.). You may open up multiple types of accounts if you’d like.

    During this step, they will ask you questions about your investing experience. They will also ask for more personal information like your address and social security number. This is because M1 Finance is required to verify your identity and report your investment activity to the IRS. Learn more about M1 Finance taxes here.

  • Step 3: Link Your Bank & Build Your Pie:After you have set up your M1 Finance account, you will be able to link a bank account and begin funding your account.

    M1 Finance requires a minimum deposit of $100 ($500 for retirement accounts) to begin investing.

    You already built your pie in previous steps, or you chose to invest in an expert pie. Your money will automatically be invested across your portfolio based on your target allocations. If you earn dividends or add more money to your account, that money will be invested as soon as your cash balance exceeds $10.

    You can turn off this auto-invest feature at any time. You can also automate your deposits to put your portfolio on autopilot!

 

  • Step 4: Building Your PortfolioIf you are new to M1 Finance, you may want to consider a steady entry into the market. In the investment community, we call this dollar-cost averaging.

    This is simply investing your money into your portfolio over a period of time rather than all at once. We talk a great deal about dollar-cost averaging in our beginner's guide to the stock market.

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    Answer a few quick questions and we'll recommend the best advisor for you, based on our objective analysis.

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What Is M1 Finance?

M1 Finance was launched in 2016 and is an online robo-advisor and brokerage hybrid designed for everyday people who want to invest in stocks or exchange-traded funds (ETFs). The platform focuses on low-cost passive investing with additional features such as automatic rebalancing of your portfolio and tax minimization strategies.

M1 Finance allows you to create your own portfolio of ETFs and stocks with no trading fees or commissions. You can also invest in one of the dozens of expert-built portfolios for free! Other platforms like Stash and Acorns offer these prebuilt portfolios, but they charge an asset management fee for this. M1 Finance is one of the only reputable investing platforms that offer expert-created portfolios for free.

What separates M1 Finance from competitors is the offering of fractional shares and automated investing features.

M1 Finance Free Training

We put together a free 30 minute video training that walks you through the entire process, step by step. This training will help you get up and running in no time at all.

GET THE GUIDE

These fractional shares allow investors to create their own portfolio of stocks or ETFs by buying as little as 1/10,000th of a share at a time. Your M1 Finance account can be set up to automatically invest your cash balance. In doing so, M1 Finance automatically rebalances your portfolio by buying whatever you are low on.

For the first time ever, investors can build a well-diversified investment portfolio with as little as $100, or $500 for retirement accounts.

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What Are The Features?

Two of the most prominent features M1 offers are tax minimization and smart rebalancing. Additionally, as previously mentioned, investors gain access to automatic investments, dividend reinvestment, and no commissions. Let's dive into a few of these features.

Tax Minimization

Using a simplified method of tax-loss harvesting, M1 Finance offers options to sell positions in the most tax-favored way.

When you withdraw money from your M1 account, they will sell assets and aim to return you to your target allocations as closely as possible.

Beyond that, they also prioritize sales in this order:

  1. Losses that offset capital gains
  2. Stocks/ETFs that result in long term capital gains
  3. Stocks/ETFs that result in short term capital gains

By doing this, M1 aims to minimize the taxes associated with your investment activity. This is not the same as tax-loss harvesting, offered by robo-advisors like Betterment. But it still has the potential to save you some serious cash without you needing to worry about manually optimizing for taxes.

Smart Rebalancing

Another feature of M1 Finance is smart rebalancing.

Using smart rebalancing, all deposits will be automatically invested into your "pie" without your manual input. If you withdraw money from your account M1 will automatically rebalance your pie so it has the correct weight of your holdings at all times.

Have you heard of the old saying "buy low, sell high?"

Well, M1 Finance will do this for you! When you add money to your portfolio, you can opt to have M1 Finance automatically invest this money. This money will be used to purchase whatever you are low on in your portfolio.

If you decide to withdraw and take money out, M1 Finance will sell whatever you are overweight or high in. This feature helps keep your portfolio balanced at all times.

Other M1 Finance Products

In addition to their investment accounts, M1 Finance also offers a few other services to individuals looking to streamline their finances. The two most popular additional products are M1 Borrow and M1 Spend.

M1 Borrow

With M1 Borrow, investors are able to borrow against their portfolio by using a portfolio line of credit. This essentially allows you to borrow money from M1 at a lower interest rate by using your investment account as collateral.

On the platform, you're able to borrow up to 35% of your portfolio's value to use for whatever you would like. You can use this additional cash to invest with, buy a car, or pay for an addition to your house.

However, if your portfolio goes down in value significantly, M1 may request that you add more funds to your account. This is very important to keep in mind if you plan to take advantage of M1 Borrow.

M1 Spend

An M1 Spend account is a fully digital checking account and debit card issued by M1 Finance. You'll be able to use this card to avoid ATM fees, earn interest, and keep your cash ready to invest on the sidelines.

Typically, when you move money into your M1 investment account from an outside bank, it will take multiple days for your funds to arrive. However, transfers from M1 Spend are instant and allow you to get your money invested much faster.

The account is available to M1 users on the free plan as well as M1 Plus. However, you'll need to be on the M1 Plus plan in order to take advantage of some of the more attractive benefits of M1 Spend like earning 1% cashback on all of your purchases.

M1 Credit Card

The M1 credit card, called the Owner's Rewards Card, is one of M1's latest features.

With this credit card, you have the opportunity to gain up to 10% cashback! When you make a purchase with a company you 'believe in,' you are awarded cashback. To 'believe in' a company means you own that company's stock. For example, if you make a purchase with Apple, and you own any portion of their stock, then you would get cashback rewards. This does not apply to index funds or ETFs.

There are currently over 70 participating companies that are separated into 3 tiers. The bottom tier provides 2.5% cashback. The second tier 5%. And the third tier, 10%. The card also offers 1.5% cashback on every other purchase.

A great feature of this credit card is that you can set your cashback to automatically invest in your pies.

This credit card is currently only available to those that have an M1 Plus account. (More on this later.)

M1 Smart Transfers

Smart Transfers allow you to create integrations and automation between the various products that M1 FInance offers. This can allow individuals to further streamline their personal finances and take even more things off of their plate.

For example, if you wanted to invest all of the excess money in your checking account every time your balance went over $1,000 you could set up a Smart Transfer for that. In order to do that, you would set up a Smart Transfer between your M1 Spend account and M1 Invest account to watch your M1 Spend account. Whenever your balance went over $1,000, it would automatically put the rest into your Invest account.

M1 Smart Transfers are available to M1 Plus accounts only.

M1 Plus Account

When you sign up with M1, you will automatically join with a free account. However, M1 also offers a premium account called M1 Plus. With this premium account, you gain access to a number of additional features such as custodial accounts, better interest rates with M1 Borrow, better cashback with M1 Spend, and better rewards with the M1 Credit Card.

The M1 Plus account currently costs $125 per year, though they give you the first year free.

Is M1 Finance Safe?

M1 Finance is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities and Investor Protection Corporation (SIPC). SIPC insures your account in the event that M1 Finance goes out of business or goes financially insolvent. SIPC insures your M1 Finance account up to $500,000 in coverage ($250,000 for cash).

The platform also uses top-of-the-line cybersecurity and encryption measures to keep your account secure. There have yet to be any significant hacks of the M1 Finance platform while other platforms like Robinhood have seen multiple hacks take place.

Here's what would happen if M1 Finance went out of business.

What Are The Fees?

M1 Finance has grown a great reputation for its no-fee structure. There are no trading commissions or mark-up fees for using M1 Finance.

You may be asking yourself, so how do they make money?

M1 Finance makes money in a way similar to Robinhood, by directing order flow and offering margin to investors. They also offer a paid service called M1 Plus that comes with some added features. M1 also gives you access to M1 Borrow where you can take out a low-interest loan against your stocks. Check out our full article on How M1 makes money.

Who Is M1 Finance For?

In most cases, M1 Finance is best for someone who is a passive investor, relatively fee sensitive, and does not want to spend a significant time managing their investments. This would not be an ideal platform for active traders.

M1 Finance is also popular among index fund investors, dividend investors, and portfolio-based investors. The features are fully tailored to longer-term investors and shorter-term traders would be much better off with a platform like Webull or Moomoo.

Any individual stock investor should have a minimum time horizon of 5 years.

As Warren Buffett has said, investing in stocks with a time horizon of fewer than 5 years is speculating.

Anyone who would like to make frequent trades in and out of the market should try alternative platforms to M1 Finance such as Robinhood.

How M1 Finance Works: Final Thoughts

This modern investing platform is a great option for long-term investors of all kinds. With a wide array of features for automation and rebalancing, it makes portfolio management easier than ever.

M1 Finance also makes entry into the stock market for the first time a great deal less intimidating for beginner investors. The ability to borrow portfolios from experts offers a stepping stone to building your own portfolio for the first time.

With no fees billed directly to users and FDIC insurance, M1 is an appealing choice for the masses of Americans that are entering the stock market or who are looking for a more efficient platform.

Article written by Ryan Scribner
Ryan Scribner is a personal finance YouTuber that is approaching 500,000 subscribers on his channel. He has created a thriving business around his passion, which is helping others navigate the complicated world of investing.

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