The rich get rich by buying appreciating assets like stocks, bonds, real estate, and fine art. They have very diversified investment portfolios.
The people who don't get rich spend their money on depreciating assets. They buy cars they can't comfortably afford instead of using my 1/10th rule for car buying. And, they waste money on things like clothes they only use a few times a year.
It takes discipline doing research on investable assets. This is probably one of the reasons why many people don't even bother. But, investing and building a diversified portfolio are keys to growing wealth.
#1 Excuse: It's Too Hard To Build A Diversified Investment Portfolio
One of the biggest push backs I hear from readers who want to get rich, is that investing is too complicated. People don't like change either, because it takes effort. But anyone can learn how to invest.
And thanks to the boom in fintech companies, investing today is easier than ever. Not only that, fintech companies have made a wide array of investment types accessible to every-day investors. You don't have to be a hedge fund manager or a professional day trader to build a diversified portfolio.
Any novice can open an E-Trade account and the like. Just stay away from RobinHood trading platform.
#2 Excuse: I Can't Afford To Have A Diversified Portfolio
The second most common push back I get from readers is that they don't have enough disposable income to invest. People whine all the time that investing costs too much. In the past, broker commissions might have been a deterrent. But guess what folks – most reputable trading platforms like Fidelity now offer free trades.
And thanks to technology, some brokerages let you buy fractional shares of stocks. Fractional share trading was introduced by Motif Investing, which was acquired by Charles Schwab. Now anyone can afford to buy positions in stocks with 3 and 4 digit share prices.
Not only that, fintech companies have enabled both non-accredited and accredited investors to invest in a wide range of asset types. For example, you can now invest in real estate crowdfunding, farmland investing, fine art, collectibles, and more with just hundreds of dollars instead of millions of dollars.
A Diversified Portfolio Is A Wise Move
I've been encouraging folks to save, invest, earn passive income, and build a diversified portfolio for well over a decade.
It's been a while since I've had to carefully watch my own cash position. But since I spent a lot of money buying a fixer last year, cash flow is tight. I have a goal of rebuilding my liquid cash hoard to $100,000, while also paying off roughly $85,000 in rental mortgage debt. It won't be easy because I don't want to cheat by selling assets to pay off debt.
Despite my debt elimination and savings goals, I want to continue investing in stocks and bonds when I see opportunity. With the recent volatility in the market, I see A TON of opportunity right now. Oil and energy stocks have gotten crushed, but aren't going to zero.
Market darlings such as Tesla, Pandora, GoPro, Yelp, and Lending Club have all taken a beating, and I love all their products and services. Interest rates are moving, providing a tailwind for a couple industries. And I want to invest!
How To Cheaply Invest In A Diversified Portfolio Of Stocks
Common pain point: How do I build a portfolio of stocks at a low price if I don't have a lot of money to invest?
In the past, it used to costs $7.95 to buy or sell a stock online. If you've only got $1,000 to invest, buying a basket of 20 stocks at that rate would cost you 20 X $7.95 = $159. Paying $159 in commissions for a $1,000 portfolio is a whopping 15.9% fee! Even if you had a more chunky $10,000 to invest, $159/$10,000 is still a 1.59% commission. We all know that commissions and fees puts a drag on returns.
But, trading commissions aren't an excuse anymore. Competition in the fintech space has really helped retail investors save a ton of money. Online brokerages offer free trades now.
It doesn't take a lot of money to start investing in stocks folks!
Given the high cost of investing, the following is what happens:
1) Don't bother investing. People who want to invest in a diversified portfolio of stocks, but who don't have a lot of money to invest, end up not investing at all. Savings is important, but buying assets that appreciate over time is the real kicker to generating wealth. Not bothering to invest due to cost and understanding are the two main reasons why people don't invest. It's much easier to spend money on a gourmet meal, a fancy watch, or a nice handbag rather than research and invest in a stock, and then hope it goes up.
2) Go the easy route. People who don't have a lot of money to invest will often end up buying a market index fund or ETF like VYM or SPY. This is not a bad way to go at all. In fact, this is the way to go for 70%+ of your investment portfolio. Low cost index funds and ETFs are about gaining exposure in a risk-adjusted manner. The only downside is that you lose flexibility in exactly what you can invest. For example, SPY is the ETF for the S&P 500 Index. What if you only like 100 companies out of the 500? You're stuck.
3) Invest in a risk inappropriate manner. People who don't have a lot of money to invest may end up investing way more than they should on a particular stock, ETF, or fund because they want to save on commissions. This action can be a penny wise and pound foolish, especially when things go bad. I've been guilty of this and lost thousands of dollars by overallocating into one stock.
If only I had invested in a bunch of different names, I would have lost much less or made money. It just feels like a waste to spend $79 on commissions to buy 10 stocks. But most of the time this isn't an issue anymore. If you're still paying for trade commissions, it's time to switch brokerages!
Related: Reasons For Hiring A Financial Advisor
THE SOLUTION TO BUILDING A DIVERSIFIED STOCK PORTFOLIO
Thanks to the 270 or so participants in my survey on company loyalty, I took a part-time consulting job with Motif Investing (had a good two year run until end of 2016). I'm lucky to live in San Francisco where there are so many innovative companies in the area. I first heard about them when they won best in show at Finovate 2014. I believed in their value proposition for retail investors, but I wasn't 100% sold until I experienced the pain point of not having the normal amount of money I usually invest in stocks.
There's a great feeling of making money from investing that's hard to explain. There's also a terrible feeling of missing out on investing opportunities that you strongly believe will do well. I was planning on buying Amazon and Netflix before their 4Q2014 results, but I didn't because life got in the way. As a result, I lost out on 12%+ returns. Just in case oil and my favorite tech stocks snap back, I want to participate in the recovery, even if I only invest a much smaller amount that I'm used to.
I'm generally a VERY aggressive investor when it comes to actively investing 20% of my investment portfolio (~80% of my investment portfolio is passively managed and pretty conservative with index funds and structured notes). I'm aggressive because of my experience as a 22 year old who turned $3,000 into $165,000 with one very lucky trade.
If I had invested $25,000 into VCSY, I would have been an instant millionaire after taxes! At least I parlayed the $165,000 into a $580,000 San Francisco condo in 2003, which has since grown in value thanks to inflation and a robust economy.
How I Built A Diversified Investment Portfolio
Although Motif Investing was acquired by Charles Schwab and isn't available anymore, here's a look at how I constructed my motif at the time. I decided to bank transfer a lower than desired, but still respectable $10,020 into my Motif Investing account in order to build a meaningful portfolio full of stocks and ETFs I think are attractive at this moment.
I added the $20 for commission purposes, but I realized afterward that every new account with at least a $2,000 balance over 45 days gets at least $50 in free trade credit if they make at least one transaction (up to $150 total free credit). That's me because as soon as the ACH transfer was confirmed, I got to work in building my motif that day.
Originally, I was thinking of just buying around 10 highly speculative stocks to punt around. But then I was reminded that I can buy up to 30 stocks in one Motif for the same price of $9.95. That's a $228.55 commission savings if I were to buy the same names at E*TRADE or Fidelity, my other two brokerage accounts. Furthermore, $10,000 is not exactly chump change. It can buy half a Rhino, my 2015 Honda Fit beast.
Given I'm all about getting the best deal possible, I decided to do just that by actually building a real 30 stock/ETF portfolio divided into seven main categories: International/Defensive, Internet, Oil & Gas, Autos, Financial Institutions, Property, and Technology.
I built my diversified investment portfolio under the following assumptions:
1) Stocks that have corrected and are currently out of favor. Target beaten up stocks that have corrected by 20% or more from their highs. I'm biased towards growth stocks that have brand names.
2) Buy companies I use and understand (the Peter Lynch model). One of the easiest ways to get over your fear of investing, or finding stocks to buy, is to research and buy stocks that you know. Names in my portfolio include: Apple, Yelp, Netflix, Hawaiian Airlines, Chevron, Bed Bath & Beyond, and GoPro.
3) Stocks that may benefit in a low interest rate environment: real estate, home furnishing/remodeling, banks. Rates have fallen off a cliff recently with the 10-year yield now at ~1.63%. If stocks start falling out of favor, real estate and real estate related stocks may be relative outperformers.
4) Stocks that may benefit from a sustained low oil and gas price environment: autos and airlines. Nobody expected oil to collapse by 50% in one year. Airlines have already zoomed higher, but not Honda partially due to supply constraints. Low oil should actually hurt Tesla Motors at the margin, since this makes their product more expensive on a relative basis, but I like their upcoming product cycle. I'm a buyer of oil here, rather than a seller, hence the oil ETF USO.
5) Create a total portfolio performance that severely underperformed the S&P 500 over the past year. Once you've built your motif, the platform will show you how it would have done over the previous three month, one year, and five year periods. This particular motif would have returned -15% over the past year, while the S&P 500 returned +16%, a 31% spread. Picking stocks with a downward bias generally leads to more losses over the shorter term as it's impossible to pick bottoms. My hope is that these stocks will return back to favor if the markets stabilize over the next year.
Grow Your Wealth Today
Building a diversified investment portfolio is a wise move. I would spend most of your time focusing on a proper asset allocation of stocks and bonds. Once you have the proper asset allocation, then consider investing in real estate.
With a limited amount of funds and a strong desire to invest now, I completely understand the frustration of paying expensive commissions that inhibit one from investing. A large part of the reason why I want to save up $100,000 again is so that I never have to feel like I can't invest in something because I don't have enough money.
For those of you who want to improve your own financial health, check out my top financial products page. There are a lot of great resources that I've regularly used to invest and grow my own wealth.
Personal Capital has the best free wealth management tool for investors and people who are the most serious about planning for a healthy retirement. You can easily x-ray your portfolio for excessive fees, get a snapshot of your asset allocation by portfolio, track your net worth and plan for your retirement.
When there is so much uncertainty in the world, you absolutely must stay on top of your finances. Understand where your risk exposure is. Stay on top of your cash flow. Personal Capital’s free tools will help you bring calm to the chaos. Sign up for free here.
i’ve decided to avoid USO because of its tax complications. Under the right conditions, the IRS will send a pretty steep bill (as far as I can tell). :-/
It looked up VYM and on morninstar it seemed to show worse performance than SP500 every year and the drawdown in 2008 was close to SP500. Do you know overall how vym has done….? I know that smallcap value is the best performing long term asset and Paul Merriman has spoke lot on it….anyways good…..
Also do you have a post about how you like to ladder CDs?
[…] After some friendly initial discussion at a conference, Motif Investing hired me on to consult with them for 16 hours a week on their content marketing. It’s been great going into their office once a week in San Mateo and getting to know all the researchers, engineers, marketers, and senior management. Only after I sat down with multiple people for hours did I realize their value proposition of allowing investors to cheaply build a diversified investment portfolio. […]
[…] value proposition until I built my own motif. Their user interface is slick and the ability to build a diversified portfolio for only $9.95 blows away the competition. How neat it is to be able to consult with a company […]
[…] portion of assets I’d consider farming out, I personally like the do-it-yourself approach by creating my own low cost diversified portfolio while using free financial tools to optimize my investments. But for those who have no interest in […]
[…] do just as good a job as the IBM CEO. I’m picking on IBM here because I bought the stock in my active portfolio. One day this dog will […]
Hello Sam,
What do you think about apps like Acorns Investments? I am currently investing 25% of my 48000/year income into my 401k, so money can be tight when talking about investing in other stocks. I want to invest, but it is painful. I’ve been using Acorns for about two months and it really takes the edge off of feeling I am doing absolutely nothing with the rest of my disposable income.
Bump on this….i just started investing in that app also. I have it for the long run. I have little funds but plan to deposit at least $300 per month at my current income. I will up it up a notch once my income level increases. Is it worth it to invest my money into the acorn app? Or is it better to open up a motif and try my luck there?
[…] the IBM CEO, for 1/10th the compensation. I’m picking on IBM here because I bought the stock in my investment portfolio. One day this dog will bark! There is so much money out there for the […]
Hi Sam,
I cloned your motif. Have you made any changes to it lately?
:)
Wow! Good luck to you :)
I haven’t changed anything, but I plan to write a quarterly update to discuss the holdings at least.
My goal for the portfolio is to construct it so I don’t have to rebalance more than twice a year.
[…] I personally just buy bond ETFs like I bought MUB, the iShares National AMT-Free Muni Bond in my $10,000 Motif Investing fund. I view bonds, cash, and some commodities as defensive positions in a […]
Great read, great comments – thanks to all.
FS – is your motif available on the site that we can track?
I’ll provide quarterly updates here on my site Bill, not to worry! I don’t plan on rebalancing more than twice a year. Let’s see how it does.
Is motif investing the same as FolioFN?
stock bought at after market using basket?
I’m a Motif fan. It will be a big part of my taxable portfolio strategy going forward.
[…] really too early whether oil will climb back, but I’m betting money in my Motif Investing portfolio that oil prices will rebound. I’ve got oil exposure in USO and Chevron, for […]
Sam,
did you use a Motif Created Motif? Or did you create your own Motif?
I would definitely buy the Motif you have shown here
Thanks
JJ
Hi JJ,
I created this bad boy myself. I could go into deeper analysis on my weightings, and stock by stock reasons for buying, but the post would balloon from 2,000 words to 3,000+ words. I haven’t made the post available in the motif community yet, but when I do, I’ll let you know. Or, you can simply just copy my weightings and picks. I missed out on one, Zillow for my real estate section. That stock moved 8% today. Crap.
Sam
Sam,
Yes, please let me know , I am interested.
Great work here, keep it up
JJ
Another great article! Thanks a lot!
Motif’s seem like a great place to invest money. Now lets say one does have $120K plus in liquid $ to invest. How how your strategy change and what break down would you allocate to a Vanguard account vs Motif’s vs p2p lending?
Hi Flyers – It depends on your income, cash flow, net worth, and risk tolerance.
I like P2P lending for a passive, no stress, 7-10% return profile. I like Motif because I’m able to buy a bunch of stocks and build a portfolio at a low price. There is no guaranteed return of course. And I like Vanguard simply b/c it has low fees, but there are lots of Vanguard funds to invest, so deciding which one is more important.
Well cashflow is pretty good and IRA/401K are fully funded each year. Only real debt is mortgage but rate is like 2.7% and I don’t know how long I will be there so im ok not paying it down. Looking to invest about 60K extra a year on top of initial $100K and just trying to put together a strategy for 2015. Your articles on Motifs have got me hooked with the limitless possibilities. I have some risk tolerance so if I can net around 10% a year avg, I would be completely ok with that.
I feel with 80% confidence that a A to AA portfolio of at least 30 notes in Prosper will return at least 7% per annum. I earned 7.4% a year for two years and only had around 10, A and AA notes. I feel with 90% confidence that a lending portfolio of 50+ A and AA notes will not lose money over the next year. During the downturn, P2P lending was flat to up for those with 100+ notes.
Regarding investing in stocks, it all depends on what you invest and the overall market. The variance is much wider e.g. -10% – +30% in a bull market, -20% – +10% in a bear market, etc.
I constructed my motif so it is a relatively balanced portfolio that I can hold for the long term and rebalance just twice a year. I recommend everybody rebalance at least twice a year to make sure they are on top of their money, even if they don’t do any rebalancing. There’s nothing I like better than having a passive perpetual returning portfolio, but that doesn’t exist, except for if you invest in private equity and have to commit for years due to the lockup.
Do you think investing lets say 70K into the Vanguard VTSMX (70%) and VBMFX (30%) and the extra 30K between motifs and p2p would be a good start?
I have to jump in here and add a couple words regarding P2P…
Sam mentions 30 or 100 notes… If you’re jumping in with $30k, I’d consider investing $50-75 per note. This will give you 400-600 notes, all but assuring you some tremendous diversification. If you put in $15,000 or less, I’d really recommend no more than $50 per note.
While Sam still handpicks his notes, some simple filtering coupled with the diversification just mentioned will greatly narrow the expected range of returns in a positive way.
I agree with your statement. The more the merrier when it comes to P2P, especially the more capital you invest.
Sam another great article per usual. Have you heard of RobinHood? You can trade commission free on any stock, eft, etc. it is only supported as an app on IOS devices such as iphone and ipad. No minimum investment amount and you can trade as much as you want all day every day. It allows the smaller capital investor to have a balanced portfolio without being eaten alive with fees.
Yep, I first heard of RobinHood a couple months ago. Motif has a very cool social investing aspect as well. The community has actually built over 70,000 motifs already, and I’ve added one more with mine in this post! You can follow others, you can also build one and I think if others follow your ideas you get rewarded as well.
For RobinHood, I’m just afraid of people investing solely based off social. People tend to invest with a herd mentality, which causes great bubbles and explosions.
I’m lost on what we mean by ‘investing solely based off social’
You can essentially create you own mutual fund / motif with robinhood by just buying small portions of whatever you’d like…I’m not understanding what the social aspect of robinhood is?
Sam,
Great post. I have been using Motif (read about it in your previous post) for a few months now and I enjoy tracking my motif compared to the S&P 500. ‘
I wanted a way to invest in oil stocks in a way that would reduce chances of total loss if these companies started to go under, but also reap some gains if oil started rising. My favorite aspect of Motif is that I can dollar cost average into my custom Motif for only $9.95, while staying diversified.
Thanks for the post,
Caonex
Thank. Yep, it’s nice to continuously dollar cost average every pay check or whatever the cadence and have the money automatically diversified in the particular motif you own. Makes things so simple. I might have to create a new goal of building my motif balance up to $50,000 by year end if the positions turn out OK. My motif was up 1.69% today when the market was up 1.29%. Now let’s see how the motif fairs during down days.
The great unicorn is a portfolio outperforms on the way up AND down.
My first post disappeared, so I will have to repeat myself and say one can make investing easy with balanced funds. They own a mix of stocks and bonds, so you get an all in one diversified portfolio with minimal complexity. Most people can hold these funds for decades, if not their whole lives. Here are some good low minimum funds to look into:
Vanguard STAR: $1000 IRA and Taxable Accounts
Dodge & Cox Balanced: $1000 IRA; $2500 Taxable Accounts
FPA Crescent: $100 IRA; $1500 Taxable Accounts
Mairs & Power Balanced: $1000 IRA; $2500 Taxable Accounts
The funds listed below are stock funds but have relatively low volatility
Amana Growth & Amana Income: $100 IRA; $250 Taxable Accounts. The Income fund is the less volatile of the two, although are less volatile than your typical stock mutual fund.
Parnassus Equity Income: $500 IRA; $2000 Taxable Account. This fund is more like a balanced fund in terms of volatility. It also focuses on socially responsible companies. The expense ratio, while not super cheap, is reasonable compared to other socially responsible mutual funds.
But what are in these funds? And what are the expense ratios? I’m friends with a number of Dodge & Cox fund managers (they are based here in SF), and I know they are not cheap. They also all earn multiple millions of dollars a year as a private company that rakes it in, in fees.
Like I said, the balanced funds are a mix of stocks and bonds. Typically the stocks are in the 60% to 70% range and the bonds are in the 30% to 40% range. You can look up their allocations by typing in their 5 letter tickers at http://www.morningstar.com
Fund name, ticker, & expense ratio
Vanguard STAR (VGSTX): .34% (cheap) Sticks to a 60% stock 40% bond mix. It invests in several different Vanguard Funds..so it’s a “fund of funds”.
Dodge & Cox Balanced (DODBX): .53% (Dodge & Cox, expensive? They’re the cheapest fund company after Vanguard. They also just waived their $12.50 IRA fee for all. I know because I own one of their funds, although not the Balanced fund) Morningstar rates the expense ratio for this fund as “Low”, which puts it in the cheapest 20% of no-load funds in its category.
FPA Crescent (FPACX): 1.14%. The expense ratio for 2014 hasn’t been reported yet. It’s probably come down a notch, but I’ll concede the expenses for this fund are above average. But it does have excellent 10 and 15 year trailing returns, and its more recent returns are decent, although not outstanding. It’s a great fund to get started with if you don’t have much money.
Mairs & Power Balanced (MAPOX): .72%. Below Average Expenses. The fund has been around since the late 1950s and has consistently above average returns.
Amana Growth (AMAGX): 1.09%. Yes, it’s expensive, but its asset base has grown and costs have come down. They recently introduced a lower cost share class for those who have 100K or more that charges a more reasonable .87%.
Amana Income (AMANX): 1.14%. Same deal as above. Cheaper share class for 100K is .90%. Both funds have well above average returns over the latest 10 and 15 year periods.
Parnassus Core Equity (PRBLX): .87% This is below average and the ER for 2014 hasn’t been reported yet, so it will probably tick down a notch. They also have a cheaper share class for those with balances of 100K or more which charges .69%. I am lucky to have the cheap share class of this fund at work. Full disclosure: This is my largest mutual fund holding. I actually don’t want too many people to find out about it because I don’t want it to become asset bloated. It’s a great, socially responsible, growth oriented stock fund with top notch returns and moderate volatility. Like Dodge & Cox, Parnassus is also a San Francisco based firm.
If you ever want me to write an article on mutual funds for your blog, please contact me. I am a mutual fund junkie/geek/whore.
Wow, thanks for the detailed info and response!
Yes, SOLD! I would love for you to write a detailed post on some of the best performing, and oldest mutual funds in America that you think are great for XYZ type of investor and person at a particular stage in their life.
There’s been a movement away from long only active funds to just passive index/ETF funds, and I’d love to get the “Why Investing In Active Mutual Funds Is Still A Great Move” type of post! Obviously there are active fund managers who consistently do well, so this post will be a good reminder.
I think you have my e-mail.
Cheers
As i consider JEMSTEP, Betterment, Fortune Advisor, Motif, would be great to see “Why Investing In Active Mutual Funds Is Still A Great Move”…… thanks!
Here’s a post you might like, “How Investing In A Hedge Fund Saved My Retirement“. Hedge fund investing is about as active as one can get.
Here are some more balanced funds with low minimums:
Oakmark Equity and Income: $1000. $500 if you do the Automatic Invesment Plan.
Mairs & Power Balanced: $1000 IRA, $2500 Taxable Account
This is off topic, but I thought people here might actually know the answer.
If my wife and I each have a health plan at work which has a HSA and we are both covered on each others plan, can we max out both HSA’s per the family contribution limits?
I really like the idea of Motif, Shareowner is something similar that we can utilize here in Canada. I wish there are more companies like Motif here in Canada though.
Sam-
Can you add stop losses to the positions within your motif?
Good question! Let me ask my colleagues and I’ll revert.
Thanks! If it’s not currently available, it could be a great feature to add in the future for less active investors.
Hi Aaron, I just asked the Motif guys and you cannot do a stop loss for individual stocks in a Motif yet, although it is on the roadmap to not only provide this function, but to also have a stop loss function for the overall motif as well.
What they plan to do beforehand is build Alerts and Signal notifications of positions so the individual can make an informed choice.
This Motif investing seems very interesting, and a cheap way to build out an index fund to your specifications.
I’d have to agree with Steve above. I wonder about the tax headache that this may cause if you rebalance twice a year. Short-term capital gains are never fun when you’re trying to limit your tax liability.
I asked the Motif guys and every time you rebalance/sell etc, you will get a sale price entry per individual security since you own those securities. Hence, there is no simplification of taxes, unfortunately. All the more reasons to do a lot of research on companies you plan to hold for the long term, and not tinker too much once the portfolio is created.
Motif looks really neat. I am kind of interested in giving it a try and it seems like a logical recommendation for a lot of people.
Commodity ETFs are a turn off for me. USO has exposure when the forward strip enters contango because they’re rolling front month contracts. It becomes a serial loss. Its historic performance also proves a low correlation to the price of oil itself. For more pure commodity exposure, with the potential for significant dividends, I would look at royalty trusts instead.
Any specific publicly traded royalty trusts you can recommend? I’m all ears for optimizing my portfolio. USO and GLD in my motif are hedges, and probably not enough with the way this market is reacting!