If you've done much reading about investing, you've probably seen the statistics about how few investors actually beat the market. The thing is, one of the reasons investors struggle to beat the market is how bad we are at making predictions about what will happen in the short term, which leads to more bad decisions when things don't go as we expect a few months later. In short, all of our actions -- buying and selling as we try to time the market -- just doesn't work well for most of us.
A small online broker called Motif just finished up a round of investment that included funding from JPMorgan Chase and Goldman Sachs. Motif offers some unique tools that could help you break the mold and become more successful as an investor. They're even rolling out some tools that could help financial advisors -- a group that historically doesn't do any better than individual investors -- provide better returns for their clients.
What does the investments made by two of the largest investment banks in the world tell us about the future of investing for the individual? Could Motif hold the key to your success?
What's special about Motif
Low-cost ETFs have become a favorite way for many investors to diversify. A solid ETF like SPDR S&P 500 (SPY -0.87%) is a great way to invest in a broad, diversified way. This index fund tracks the S&P 500 index, giving investors exposure to essentially the same market force that's returned around 8% annualized over the past century. Investing in a fund like the SPDR S&P 500 is a great way to get large exposure to stocks. SPDR Down Jones Industrial Average ETF (DIA 0.57%) is another example. And while it's made up of only 30 individual companies, they are a very broad representation of the economy, thus heavily correlated to the S&P 500:
For investors looking for more targeted exposure to specific trends or industries, ETFs are very rarely tightly targeted on an industry, and never customizable. 3D printing, for example, is an industry that's showing explosive growth, but if you're looking to invest in the industry, there isn't really an ETF that's truly focused on 3D printers. This is where Motif comes in.
Motif offers a number of targeted baskets of stock that provide direct exposure to an industry, trend, or market, calling them "motifs." You can even add or remove companies, and decide how much to allocate to each company. Think you're an expert? Build a "motif" of companies of your own choosing if you want. And where even index funds like the SPDR S&P 500 and DIA charge fees, you only pay a trading fee to buy the motif -- usually around $10.
Asset allocation the secret to your success? Motif thinks it could be
The stock market will decline by 20% or more about five times over the average worker's career, and these periods of underperformance can be devastating, especially if you're in or near retirement. Proper exposure to cash and bonds will lessen these losses, as well as provide adequate returns in better interest rate environments, which often correspond to weak periods in the stock market.
Motif CEO Hardeep Walia. Source: Hardeep Walia's Twitter
And Motif is here to help you fortify your portfolio. The $35 million that Motif received in this funding round will allow the company to expand its services, including a series of asset allocation models that the company is calling "Motif Horizons." The idea behind these motifs is that they will allow investors to choose their investing time-frame -- hence the name "horizon" -- and risk tolerance, and motif will automatically allocate the investors funds into multiple asset classes like stocks and bonds as time passes. Motif CEO Hardeep Walia had this to say when I spoke with him about Motif's asset allocation offerings, and where he sees Motif's role in the investing community:
A lot of other companies think of advice as allocation models. Robo-allocators are not robo-advisors. They don't give you any advice. They only give you allocation models ... They charge anywhere from 25 to 75 basis points. We don't charge any basis points. And for the Horizon Motifs, we aren't even going to charge any transaction fees. We're not an advisor; we partner with real people. I believe that software can solve a lot of things, but I don't think software can replace the advice that advisors do give. We partner with independent Financial Advisors that offer the Motif platform.
Asset allocation or "targeted diversity"?
Motif is offering an interesting mix of tools for both advisors, and for individual investors. As Walia put it to me, their goal is to help investing be more transparent for individuals, while giving advisors better and cheaper tools to help them them generate better returns and reduce fees for their clients. In short, Motif isn't trying to replace the current model of paid financial advice, but is offering tools that both advisors and investors can use to get a better return.
Is Motif right for you, or should you just stick with ETFs? Either way, you get exposure to stocks, and the evidence strongly supports this as being central to building wealth in the long term.
