Being well diversified is one of the key tools a value investor can use to build wealth over the long haul. However, accomplishing this task is often easier said than done. Pouring over financial statements is time consuming, but very necessary. Once we find stocks that meet our value investing criteria, we now need to invest. But what broker should we use? How many stocks should we invest in? How do we account for unsystematic and systematic risk?
When we invest in risky assets, we should be rewarded for the type of risk we take on, otherwise we are taking unnecessary risks without any type of compensation. Every investment has inherent risks, or unsystematic risks, than can be reduced through diversification. This doesn’t mean that all of our risks will be diversified, because we’ll still be exposed to systematic risk, or market risk.
30 stocks that are well diversified seems to be the magic number in reducing a portfolio of stocks unsystematic risk to just market risk. Of course, we can diversify our holdings into different asset classes, such as bonds and real estate, to hedge any fluctuations in our portfolio and preserve our capital.
We now understand the basic benefits of having a well diversified portfolio, with different asset classes, and at least 30 holdings in different market sectors. Where do we go in order to implement our ideas? We could buy a Vangaurd fund to own all the stocks in the S&P 500, and pay very low management fees. But what about investors who want a more hands on approach to their investing? Those who want to take an aggressive approach to their investments? Enter Motif Investing.
Motif allows any investor to build their own ETF based on their ideas. Want to invest in smaller caps? Think social media stocks want to explode? Want to invest in solid dividend paying stocks? Now you can build your own portfolio of up to 30 holdings. You can also create an IRA to take advantage of tax savings for your investments.
Personally, I really like the platform and concept, and have built two motifs, one for a diversified stock portfolio and the other is a bond portfolio. There is no limit to the number of motifs in an account. Motif also allows those who build motifs the opportunity to share their motifs and receive a royalty if people trade on their ideas. Now before this sounds too much of a sales pitch, I’d like to give some reasons as to why this technology is great for value investors.
When we buy individual stocks, we can incur a lot of commission fees depending on the number of trades we make. We can also invest in mutual funds and pay a fee to the portfolio managers, but we wouldn’t be able to change the weights within the portfolio or swap certain holdings for others. We would be completely at the mercy of the mutual funds or pay high commissions that would eat into our returns.
We should be focusing on preserving our capital and achieving the highest returns we can on the risks we are willing to take instead of worrying about commission and management fees. As a value investor, wealth preservation should be top priority. This is why I think Motif Investing can be very beneficial to value investors. There are no management fees. Their commission fees are $10 for a motif and 4.95 for individual stocks. You could potentially own 30 holdings for just $10. Motif puts you in the driver’s seat, and allows you to invest the way you want to.