What is Your (Investing) Motif?

Microsoft recently launched an investment company that looks like an interesting spin for people who do not have lots of money to put into the stock market.

Every-man's (and woman's) Investing Resource

Their approach is to create a flat-fee trading system to empower investors with "neat ideas" but not a lot of cash to make it happen.

But Walia thinks he can better their lot in other ways—by offering diversification at a lower cost and giving them a more direct way to turn investing ideas into trades.[1]

For beginners in financial management, "diversification" is an old term for protecting your assets. A foolhardy (read: risky) thing to do would be to put one's entire retirement savings into a single company's stock. Splitting assets into multiple investments is a common piece of advice.

Every trade however has a separate fee... and a separate commission, etc. If you're not careful, a diversified "Share Basket" of 30 different stock positions at ONE share each could cost you more in commissions and fees than the total value of the actual positions you purchased.

How Do We Cut the Middle-Man's Cut?

So yes, many people can leverage the power of diversification, but at a great cost. It is not practical to put money in stock to leverage your own investment ideas. One comment that made me chuckle looks like it came from Motif CEO Hardeep Walia himself:

The problem with both ETFs and mutual funds? Fees, or the nagging feeling that you're paying some doofus to lose money on your behalf. And it takes so long to launch a new fund that they rarely capture the best ideas in time.[1]

There's a lot to be said about that "doofus" in the middle. We may still need a "middle" guy running the trades, but wouldn't it be better if you had more say in where the money is going? In case you're wondering, if you just followed a Stock "Index" (Such as the S & P 500), you could expect to outdo 90% of the actively managed funds on the market in your first three years alone.

The mid-year S & P Indices Versus Active Funds Scorecard (SPIVA) shows that, with few exceptions, index funds have dominated their actively managed counterparts. As one example, over the past year, the S & P Composite 1500 beat 89.84 percent of all actively managed domestic stock funds. Over the past three and five years, those numbers were 73.24 percent and 67.72 percent, respectively. (For the purposes of the latest Scorecard, all returns are as of June 30, 2012.) [2]

FYI, fund managers are paid from the income stream and growth of the portfolio itself. Compare the cost ratios for un-managed index funds and ask yourself why are you paying for skilled management when autopilot investing seems to outperform by a margin of 90%? Hey Californians, maybe buying 100,000 lotto tickets next week will get you somewhere faster, eh? Provided you can print them all out in time...

Reach Out to Your Inner Doofus

So, there you have it. Read the Business Insider article for more of Walia's notions as he has some wacky but creative ways at looking for short-term investing trends... which doesn't immediately require sweating over stacks of 10K corporate reports or financial prospectuses (though in the long run, you should find some way to understand that those things reveal anyways).

Motif isn't the only company to do this, but their push for even lower fees does open an opportunity for smaller players to participate in the stock investing arena. They claim it's a new way to assign your assets for the long term. While some may encourage investors to buy and sell like Wall Street "day-trader" players, now that you have access to the market's offerings there is greater responsibility on the horizon.

If you buy the damn stocks yourselves, you have nobody left to blame now.

With that in mind, do your homework, research carefully and try not to make a mad dash for the next shiny object on the market. Just because the world has made it more affordable to jump into the Stock Market for investing doesn't mean it's any safer.

Additional Comments

  • Man, that Business Insider site ranks yellow-orange on my spamminess meter. Pop-ups everywhere, huge ads and ads inserted in the middle of the flow of the eyes following their article, which 80% of looks like a copy-paste-rewrite of a Motif press-release itself. Ad to article presence looked pretty high to me.
  • I am a long-time customer of Sharebuilder (Please note however that I do not own any direct investment positions in this company itself). Their offering is based on a good long-term disciplined approach. You can own fractions of any share traded on the market and you can earn fee-free trades provided you pay a low monthly subscription. Warning: Day traders who like to buy-sell the same position more than once before lunchtime need not apply!
  • No need to follow the U.S. News link. I've quoted the relevant part to this chat which was also probably also just a quote from another source. This site is cleaner of spammy ads, so it's a yellow. I am just surprised there are lots of well-maintained internal links but also not many citations to other external sources. (Use footnotes, guys!  It is highly unlikely you came up with all this material just by yourself!) I had to jump a few links and still couldn't find the original source statement about managed funds vs. indexes (If not mostly true, this has been an ongoing suspicion of investors like me).

References and Sources

  1. Read more: http://www.businessinsider.com/motif-investing-hardeep-walia-2012-6#ixzz34jZy18qD
  2. Read more: http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/10/12/study-active-funds-consistently-fail-to-beat-benchmarks

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