Should You Invest in a “Motif?”

A friend of mine recently asked me what I thought of a site called Motif Investing. The idea of the site is that it allows you to buy a basket of up to 30 stocks or ETFs based on an idea or “motif.” Some popular examples are stocks benefiting from things like the rise of 3D printing or biotechnology, stocks  that have recently suffered a sharp decline, or stocks with good dividend payouts. The weighting of each motif can be customized and individual stocks or ETFs can even be removed. It costs $9.95 to purchase, sell, or re-balance each motif. So is this a good way to invest in stocks? Let’s take a look at the pros and cons:

Pros

It makes investing fun. The look and feel of the site is appealing (at least compared to other investing sites) and it’s fun to click around and explore the different motifs. I can see the site making more people interested in investing.

It makes it simple to invest in customized portfolios. Want to invest in Chinese solar companies? There’s a motif for that. The ability to remove particular securities is also pretty nifty, especially for people who want to invest in socially conscious companies.

It’s cheap. It’s certainly cheaper to buy 30 stocks in a motif for $9.95 than to buy them individually even through the lowest cost discount brokerages I’ve seen. (You can buy ETFs and mutual funds without a transaction fee but they charge annual fees.) This is important because it’s one of the most significant factors in your investment success that you can control.

Cons

You may not be diversified. Some of the motifs have up to 25% in one stock (it’s generally not recommended to have more than 10-15% of your portfolio in any one stock) so you can be in trouble if that’s all you have and that stock doesn’t do very well. A bigger concern is that it’s very easy to be under-diversified by sector or geography since the motifs tend to be focused on particular areas.

It encourages short-term performance chasing. The first thing you see when you click “explore motifs” are several motifs ranked by one-month returns like +26.7%.  Numbers like that make it very tempting to chase short-term returns, which is a pretty poor investing strategy. (Chasing long term returns is no better but at least you’re less likely to expect +20% returns.) A case in point is how poor the performance numbers of the well-diversified asset allocation motifs look in comparison. Who wants boring diversification when you can get returns like that in just a month?

It can actually be more expensive. If you trade motifs a lot (and performance chasing can do that to you), you can easily see how the costs can start adding up with $9.95 for each time you buy, sell, and re-balance.

Bottom Line

A site like Motif Investing can make sense for two types of people. One is fairly sophisticated investors who can take advantage of the site’s low cost motifs and build a properly diversified portfolio. This is a fairly small percentage of the population. The second is for people who are just using it to have fun with some side money, kind of like gambling but with much better odds. I wouldn’t recommend that most people bet their entire nest egg on a motif though.

 

 

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