Say you're addicted to your smartphone and so is everyone else you know. That's true for many of us.
Every company looks to be going mobile, apps are everywhere and the cloud seems here to stay. If only you could figure out what companies to invest in so you could make money from this trend. But you figure it's too time-consuming to research stocks and too expensive to open a brokerage account anyway.
A Silicon Valley startup called Motif Investing has introduced a tantalizing way for the small investor to buy stock: Select from baskets of stocks with a common theme, or motif. For example, you could purchase a motif called Mobile Internet Tsunami, a combination of stocks ranging from smartphone power players like Apple and Google to smaller companies like touchpad maker Synaptics Incorporated and Triquint Semiconductor.
With low fees and a fun concept, the motif investing approach may be tempting to investors intimidated by high commissions, high minimums and the hard work of researching individual companies. But should you take the plunge or hold onto your cash? We talked to Motif Investing co-founder and CEO Hardeep Walia about Motif's offerings and to Certified Financial Planner Sophia Bera from LearnVest Planning Services to help shed some light on this new trend.
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How It Works
Motif Investing offers almost 100 different curated collections of stocks and fixed-income investments (such as bonds) on its website, with titles ranging from Discount Nation to Socially Responsible to Biotech Breakthroughs.
'People tend to interact with things they know and understand,' said Walia, who formerly helped handle Microsoft's investment portfolio. 'We want to make it super easy to invest.'
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Many of the company's stock collections focus on hot or current topics. For example, Rebuilding After Sandy contains companies likely to figure heavily in the cleanup and construction after the Northeast's recent devastating storm, including self-storage places and stores like Home Depot and Lowe's. Fighting Fat features companies involved in battling the national obesity crisis, such as Weight Watchers and diet drug manufacturers. And the Lots of Likes motif focuses on the 20 most 'liked' brands on Facebook, including household names Procter & Gamble, Starbucks and Coca-Cola.
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- Each motif contains up to 30 stocks, and the minimum investment is just $250.
- Investors can customize the motifs by using sliders to adjust the weighting of stocks or eliminate them completely from the mix. They can also add stocks of their choice.
- Graphs chart the annual rate of return of motifs against the S&P 500. Investors can also see how their customized motifs would have fared versus the pre-selected motifs.
- The commission fee for buying or selling a motif, whether pre-selected or customized, is a flat $9.95. An investor also can sell an individual stock or add more shares of it for $4.95.
'What they're figuring out is how to make investing affordable and accessible,' Bera said. 'Motif has an interesting concept and it could catch on long-term, but we still have to see how it shakes out.'
How Motifs Differ From Traditional Investments
Walia stresses the low cost, transparency and customization options of motifs versus exchange-traded funds (ETFs) and mutual funds.
While with ETFs and mutual funds, you own a bundled security of stocks that is managed by the fund company. With a motif you own actual shares or partial shares in the various stocks the motif contains. So you can buy or sell an individual stock if you wish.
Also, Walia points out that with ETFs and mutual funds, you don't know exactly what stocks you hold at any particular point in time because the funds generally report their holdings only quarterly. With Motif, you can view your portfolio and adjust the weighting of individual stocks at any time.
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But what really sets Motif apart, according to Walia, is the low cost of trading and maintaining a motif. He says even low-cost ETFs cannot compete because they have annual management fees that Motif does not. Low costs also help distinguish Motif from a similar company called Folio Investing that's been around since 1999 and allows investors to buy groups of up to 100 stocks (arranged according to factors such as industry, geography and index). But Folio charges $4 per stock in a basket or $290 a year for unlimited trades, while Motif charges less than 10 bucks for trading up to 30 stocks, making it more affordable for the lay investor.
Similarly, if you wanted to trade 30 stocks through online broker eTrade, at $9.99 a trade, it would cost close to $300. Even with discount broker Zecco, at $4.95 a trade, buying 30 stocks would cost nearly $150.
Very New, Very Volatile
Despite the enticing fees and intriguing premise of Motif, Bera said she would still prefer investing in ETFs or mutual funds with a proven track record. (Learn what five questions to ask before buying a mutual fund.)
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'Understand that this is very high-risk, very new,' she said. 'Maybe the first year's rate of return was great, but this is very volatile. This is not a place for putting any retirement money -- for that you're better off sticking to time-tested methods.' (Find out the top retirement mistakes to avoid.)
One issue Bera has with motifs is that by their very nature, they may lack diversification. She finds the Home Improvement motif heavily weighted toward The Home Depot and Lowe's for instance.
'It's not as ideal to buy in a single sector,' she said. 'Let's say lumber futures skyrocket. That changes the price of all things dealing with home improvement.'
And the ability to customize may not be useful if investors don't have the time to research specific companies, she said.
The motifs she finds most intriguing are the handful of themes built out of fixed-income investments rather than stocks, including U.S. Treasury Ladder, a collection of bond ETFs. These would be a safer bet than stock motifs, Bera said.
Walia said there are two major advantages to buying fixed-income investments through motifs.
'There are so many ETFs out there, it's nice to have a team of professionals contextualize them,' he said. 'We make you understand why you're buying it. Second, because there is risk even with ETFs, getting a diversified portfolio is very cheap with us. Here you can get up to 30 for the price of one.'
Are Motifs for You?
Before even considering trying Motif, Bera said to first work on building basic financial security by doing these three things:
'If you have a little money you're OK with risking and there is something specific you're very interested in investing in, you could put a small amount into that and see how it goes,' Bera said. 'It's like gambling or Vegas money.'
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Another trendy aspect of Motif is that it allows investors to share their purchases on Facebook and create investing circles on the site to share investment advice. Soon, Motif plans to offer customers the opportunity to create their own motifs from scratch and share them. So investors might be able to put together more diverse portfolios while still taking advantage of the low commission fee. Even if motifs are not for you, the highly interactive and user-friendly site could help you learn more about stocks and bonds.
Julie Mehta is a reporter for LearnVest.com.
This article orignally appeared at LearnVest.com:
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