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. Finally, long term index fund investors love the expert pies.
The best part is, M1 Finance is 100% free even for retirement accounts!
That being said, you might need a little bit of hand-holding when it comes to getting started with M1 Finance. Here is our step by step guide on how M1 Finance works for a complete beginner.
If you prefer videos, here is a quick M1 Finance tutorial!
M1 Finance allows you to create your own portfolio of ETFs and stocks with no trading fees or commissions. Or, you can invest in one of the dozens of expert built portfolios for free!
What separates M1 Finance from competitors is the offering of fractional shares and automated investing features.
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.
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 operates by creating portfolios of stocks and ETFs called "Pies". Each pie can be customized meaning you can choose specific stocks and ETFs that you want to add. For example, you could build a pie with 50% Tesla stock and 50% Google stock.
There are also prebuilt pies that M1 Finance has created based upon the amount of risk you would like to take, investment time horizon and personal preferences. All of these features are included free of charge.
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 offers expert-created portfolios for free.
There are just a few simple steps to get started with M1! Right now, M1 Finance is available to US investors only.
When 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.
Your pie may contain 1 stock or up to 100.
When you create an account, they will need information like your name and email address.
Once your account is open, you will be guided to create your brokerage account.
This 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.
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!
For example, investing $500 every Monday into your account.
If 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.
Say you have $100,000 to invest. You may want to invest just $5,000 into the market every month for 20 months.
By doing so, you lower your risk of investing into an overheated market. When you invest over time using dollar-cost averaging, you have less risk of getting in at the top of the market. However, the disadvantage to dollar-cost averaging is that you may miss out on exceptional market performance by not being fully invested during that period of time.
Many financial professionals and seasoned investors would agree that dollar-cost averaging is the way to go.
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.
The bottom line is that you don't have to worry about any hidden costs or fees as an M1 Finance user.
We already talked about the portfolio level DRIP, automated deposits, expert pies and fractional shares.
M1 Finance offers a variety of additional features, the two most prominent being tax minimization and smart rebalancing.
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:
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.
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.
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.
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, to buy a car, or pay for an addition on 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.
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.
Smart Transfers allow you to create integrations and automations 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.
By utilizing Smart Transfers, it's possible to significantly reduce the number of times you need to check in on your personal finances throughout the month. You're able to set these automations up once and sit back knowing that your finances are on autopilot.
M1 Finance is a member of 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.
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 investors should have a minimum time horizon of 5 years.
As Warren Buffett has said, investing in stocks with a time horizon of less than 5 years is speculating.
M1 Finance would not be an ideal platform for active traders.
Anyone who would like to make frequent trades in and out of the market should try alternative platforms to M1 Finance such as Robinhood.
M1 Finance is also not a great platform for those looking for hand-holding or an in-person broker. M1 Finance is able to offer all of these features for free by minimizing the expenses the business incurs. Unfortunately, this means no brick and mortar locations or paper statements.