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I have been researching how to invest without paying fees. I’ve also looked into methods of investing small amounts of money. A popular way to invest $1,000 or less and avoid sales commissions is to buy ETFs.
Recently, the online broker Motif Investing introduced commission-free motifs containing commission-free ETFs that are designed and marketed to serve as the core of your portfolio.
When I did a review of Motif Investing awhile back, I came to the conclusion that this online broker was best for more experienced investors who are willing to take more risks with their money in order to (possibly) get higher returns.
Though more conservative motifs are available, the trendy themes seem most prominent to me, probably because such baskets of stocks are not typically offered at other brokers. For example, uniquely through Motif Investing (for the flat trading fee of $9.95), you can invest in “online gaming world” providers, companies with well-known brands and “lots of [Facebook] likes,” or businesses that enable parents to induldge their children through “child’s play.”
The newer, broader offerings at Motif Investing make the broker more attractive to more investors
Things have changed for the better at Motif Investing. You can now buy market-index-like holdings in addition to the quirkier motifs (or baskets of stocks based on a big idea).
Among the new additions to the broker’s catalog are the Horizon motifs. They have a couple of attractive features: 1) they are designed to serve as the core of your portfolio and 2) they are fee-free. Now, this online broker has a greater appeal to the regular investor.
Here are a few observations about the Horizon Asset Allocation Model motifs:
- “Horizon” references the time horizon for which the motif is optimized.
There are three time horizons available through these core porfolio offerings: one year, five years, and 15 years. Also, within these time frames are the risk-tolerance options of conservative, moderate, and aggressive, making nine motifs.
Your investing time horizon indicates how long you plan to hold an investment until you sell shares to generate income for a specific purpose. For example, if you plan to buy a retirement home in 20 years and are investing for that home, then your time horizon is 20 years.
Typically, the longer your time horizon and the more aggressive you are, the more volatility you’ll accept with your portfolio. Volatility is generally associated with a heavier concentration of stocks.
- “Asset Allocation Model” references the use of modern portfolio theory to determine the weighting of asset classes within each motif.
The Motif team has developed various asset allocation models using elements of the Nobel Prize-winning research associated with modern portfolio theory (MPT). This theory suggests that you can optimize investment performance at specific risk levels by diversifying holdings among multiple asset classes.
One of the foundational ideas is that asset classes tend to have dissimilar patterns of investment returns and risk. So, by having a mix of stocks, bonds, etc., over time, your portfolio is expected to move or change in value within certain ranges. In a given timeframe, overall holdings should increase in value as at least one of the asset classes will grow even if other asset classes falter or stagnate. Note, however, that motif growth is not guaranteed and your investments may decline in value, particularly when the markets are down overall.
MPT is interpreted and executed in many ways. At Motif Investing, the Horizon motifs contain the asset classes of stocks, bonds, real estate, and commodities in the form of commission-free ETFs of U.S. equities, international equities, U.S. bonds, and international bonds. The specific mix is based on the chosen time horizon and risk tolerance.
- Motifs are rebalanced periodically.
As I mentioned earlier, the various asset classes tend to experience various types of growth. When one asset class grows more than the other ones, then the percentage mix (or asset allocation) gets out of kilter or out of balance. So, investors rebalance periodically.
Some investors rebalance according to a time schedule, such as monthly, quarterly, or yearly. According to its website, Motif Investing will rebalance based on growth in asset classes, rather than a particular timetable.
- Horizon motifs are available commission-free if you stick with the preset allocations.
Note that if you buy these motifs off the shelf (as designed, with preset allocations), then you won’t pay any commissions. Plus, when the motif is rebalanced, you’ll get the rebalance for free.
However, if you want to customize the ETF by tweaking the allocation, then you’ll pay a regular trading fee of $9.95 when you purchase the motif and when you rebalance.
- The Horizon motifs are similar in concept (but not design) to target-date funds.
When I first started looking at these motifs, I realized that they are similar in concept to target-date funds. The idea behind target-date funds (which are generally designed and marketed for retirement investments) is that you choose a fund based on your time horizon, specifically your planned retirement date. As you move closer to retirement, the asset allocation of the fund changes from a heavier to a lesser weight of stocks.
For example, Vanguard target-date funds with a 16-year time horizon have a mix of 76% stocks and 24% bonds whereas the one-year time horizon has 52% stocks and 48% bonds.
However, the allocations among asset classes in the Horizon motifs seem to follow a different formula. For example, the 15-year aggressive motif holds 44% in stocks (U.S. and international) whereas the one-year moderate motif has closer to 45% of its holdings in stocks (as of this writing).
The professionals at Motif Investing have developed their own unique approach to core-portfolio design, possibly based on recent market trends or simply weighted more toward bonds than usual in order to deliver more stable or consistent returns.
You can buy commission-free ETFs with Motif Investing and other online brokers
Many of the ETFs contained in the Horizon motifs are Vanguard funds. You can easily open an account with Vanguard or another online broker and buy these funds or similar ones without paying a commission or fee.
The benefits offered by Motif Investing are 1) the accessibility of a professionally designed portfolio with an established asset allocation; 2) the ease of investing a small, specific amount of money (the minimum is $250); and 3) the simplicity of rebalancing. Also, the company has frequent promotional offers that can add to your investment portfolio or help offset other costs.
For example, you can simply invest $500 each month in a Horizon Motif instead of figuring out how to allocate $500 among several ETFs with varying prices per share, achieving the right balance, and then rebalancing as needed.
How these model motifs will perform in one, five, or 15 years is uncertain. But the concept is excellent and the price is right.