0Remember when MySpace was the hot site for social networking? Or when Research In Motion's (RIMM) BlackBerry was the smartphone everyone just had to own? Or how about when Woolworth's was the largest department store chain in the world?

All of them -- and countless others -- are now merely shadows of their former selves, even though they once completely dominated their industries.

The fates of those companies illustrate one of the biggest problems in many investing plans: To succeed, you not only need to guess the overall trend before the market does, but you also have to pick out the eventual winners from the eventual losers. That's usually far easier said than done, and failure brings with it nothing less than the loss of your money.

The Workarounds

There are ways to hedge your bets, mainly by putting your eggs in many baskets to make broader bets on a given sector. Traditionally, those types of hedges have come in the form of mutual funds or exchange-traded funds that invest in the general sectors a person is interested in owning.

That works to a point, but there are still problems with that approach, including:

  • The fund manager, rather than the investor, owns the stocks and has the ultimate stock buy or sell decision and voting rights.
  • The funds have to deal with investor inflows and outflows and can be forced to either hold excess cash or trigger capital gains to manage redemptions.
  • Investors are limited to whatever funds are available in the market, which may not be exactly aligned with the exposure those investors are looking for, and
  • Those investors are required to pay the fund management fees and trade churn costs on top of the commissions for buying the funds.

Those disadvantages have been the price investors have paid in order to get both the focus on the type of stocks they're looking to own while still having a broad enough reach to be likely to capture the winners. Depending on the specific fund, they've ranged between a minor annoyance and a major drain.


An Even Better Way

Now, there's a new vehicle for those looking to invest in a specific part of the market. It's called Motif Investing, and it aims to combine the best of funds with the best of individual stocks.

Here's how it works: You pick a "motif" -- essentially, an investing theme -- and Motif Investing presents you with a group of stocks and a suggested weighting in line with how well the stocks fit within that theme.

You then can customize your motif even further until you wind up with a basket of up to 30 stocks built around the overall idea.

Take the "home improvement" motif as an example. The collection is anchored by retailers Home Depot (HD) and Lowe's (LOW), but it also includes housewares retailer Bed Bath & Beyond (BBBY) and toolmaker Stanley Black & Decker (SWK) among its picks with at least 5% initial (though customizable) weightings. And of course, if you like the stocks but aren't a fan of the weightings, you can change them, as well.

With a minimum $250 investment and a $9.95 commission, you own actual shares (and likely, partial shares as well) in the stocks in the motif. You pay no additional management fees. Since you are acting essentially as the "fund manager," the only costs you incur are when you choose to buy more or sell the shares you own.

All told, Motif Investing provides a unique way to combine the broader exposure of fund investing with the lower cost and higher control of owning individual stocks. At minimum, it's certainly worth investigating. And if it catches on, it could truly revolutionize the way people invest.

At the time of publication, Motley Fool contributor Chuck Saletta owned shares of Lowe's. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Home Depot and Bed Bath & Beyond, as well as writing covered calls on Lowe's.


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