What if you could invest in an idea, instead of a specific company, industry, or fund? Your options might include motifs like fighting fat or housing recovery. The latter, for example, would include a mix of residential REITs, homebuilders, building products marketers, and mortgage and title insurance firms expected to benefit from improvements in the national housing market.
These and other ideas are just a few investors are testing out via a concept known as “motif investing.” Individuals can invest in motifs comprised of 20 to 30 different stocks that fit with their investment idea. Leading the charge with this new concept is San Mateo, California-based Motif Investing, which charges a one-time fee of $9.95 for a portfolio of 30 stocks, and then $4.95 each to sell those stocks (or $9.95 to sell the entire motif).
Hardeep Walia, Motif Investing’s CEO and co-founder, says the alternative investment option was born out of the fact that investors lost close to $8 billion in net worth in 2008 — the same year they paid a cumulative $376 million in investment fees. “We didn’t think that was very American,” says Walia, who founded Motif Investing in 2010 with Tariq Hilaly, chief investment officer.
Armed with experience in the financial services and technology sectors, the pair wanted to develop a more intuitive and affordable online investment concept that centered not on individual companies, but on ideas. According to Walia, the firm allows individuals to invest in baskets of stocks that Motif Investing weights “in a manner that everyday investors can understand,” and then rebalances them either quarterly or annually. A dividend reinvestment option is currently under development.
Users range from newbie investors to high-net-worth individuals who don’t want to shell out 2% to 5% in investment fees annually for load-based mutual funds. The “baskets” include 20 to 30 stocks that are selected from — and then tracked against — an index of about 200 options. “We use an index model and we don’t try to pick stocks,” Walia says. “Even the pros have shown they can’t pick stocks.”
Meir Statman, professor of finance at Santa Clara University in Santa Clara, California, is not enamored with the idea of motif investing. “People who are in the frying pan are frustrated because they’re hot and tempted to jump into the fire,” says Statman. “They’re frustrated and ignoring the age-old, banal advice about investing in diversified portfolios.”
The problem, says Statman, is investors are determined to beat the stock market just like the poker player is bent on winning. The better approach, he says, is to buy and hold a diversified portfolio of investment options.
Ivory Johnson, founder of Delancey Wealth Management, LLC, in Washington, D.C., is also skeptical about the motif investing concept. “It’s a different way to drill down and invest in niche markets,” says Johnson. “But it lends itself to short-term trading.” It also creates emotional attachments to groups of stocks and/or individual picks, which can make it difficult to sell when it’s warranted. “Motif investing could be a good tool if you’re good at investing,” says Johnson. “But most people aren’t.”
Statman and Johnson stress that individual investors can’t beat the market, even with theme-based options. They compare motif investing to short-term trading and say that regardless of the specific format, investing in niche markets — versus developing a diversified portfolio — rarely works.
Motif investing might be an option if you’re looking to round out an already diversified portfolio. But if you’re still licking the wounds left by the stock market downturn and seeking the “next best thing,” this strategy might not be right for you.
Additional reporting by Sheiresa Ngo