Investors should stick to what they know best and avoid falling in love with the latest trends. (GETTY IMAGES)
Forget the investing style of your parents and grandparents. As times have changed, so have attitudes. Thematic investing is trending upward as more millennials and everyday investors look to change up their portfolio.
"It's a paradigm shift," says Peter Krull, president of Krull & Co., a socially and environmentally responsible investment firm in Asheville, North Carolina. "The new, younger millennial investors want to have a hand in picking what they are investing in and they want interactive tools. They want to be more intentional about their investment strategy. They want to be the change makers and they don't like the old school Wall Street way of doing things."
Although thematic investing has been around for a long time, it has traditionally been used as a tilt on one's portfolio, say for oil price fluctuations to actively manage a passive model with diversification while still being as low cost as possible, says Hardeep Walia, co-founder and CEO of Motif, an online investment broker in San Mateo, California, that offers investors the opportunity to create themes around stocks.
After the market crashed in 2008 many investors wanted to understand what they were investing in and began caring more about the types of investments, he says.
"If I were to buy a mutual fund and wanted exposure to technology, in general mutual fund companies don't necessarily tell me a lot about these products," says Walia, whose company creates indexes of up to 30 securities within each of its more than 250,000 motifs. "But if you know you've invested in a connected car or 3D printing, then all of sudden it's a very intuitive."
That has bred interest around investing in everything from robotics and female-led companies to high-yield dividends. It is more than just impact investing – investments made with a social or environmental focus.
"A lot of the rise is because of social media," says Kirsty Peev, a portfolio manager for Halpern Financial in Ashburn, Virginia. "We are all armchair activists. We can now make bold statements online. Companies are very smart and they see people wanting to make a statement with their investments so they've built a niche."
Here's how you can create theme-based investments.
Invest in what you know. Walia points to his father, a retired vascular surgeon who knew nothing about investing, but understood the nuances around a minimally invasive surgery-themed index fund.
"If you are starting to do thematic investing, start with something you understand," Walia says. "Everyone knows something about something."
Keep in mind your risk tolerance and time horizon, since a climate change themed fund may take longer to grow or investing in shale oil will be sensitive to market volatility, he says.
Pick a broad-based theme and stay diversified. Avoid being too heavily concentrated in one industry. Minimize investment risks by making sure you are not overweighting certain sectors in your portfolio while remaining properly diversified, says Matt Hylland, an investment advisor for Hylland Capital Management in Virginia Beach, Virginia.
"We all like to think that we can read the news and predict things," says Peev, who typically cautions against theme-based investing. "In reality, investors' predictive skills aren't very strong if you look at the history."
Instead, she recommends allocating less than 10 percent of your portfolio toward a particular sector or theme.
Look at themed-based exchange-traded funds. Consider creating value-based or dividend themed portfolios with less expensive companies. Vanguard Large Cap Value (ticker: VTV) ETF, which invests in large companies, and the Vanguard Small Cap Value (VBR), which invests in smaller companies, both trade at a cheap price compared to their net worth, Hylland says.
For investors looking for dividend appreciation, Hylland recommends Vanguard Dividend Appreciation ETF (VIG), which invests in companies that have increased their dividends over the last 10 years, or Vanguard High Dividend Yield ETF (VYM), which invests in stocks that currently have a high yield.
Make sure to review the expense ratio. The lower the better, but aim for less than 0.3 percent, Hylland says.
Try a theme that minimizes volatility but still offers equity exposure. Many investors who pick themes are doing rule-based investing that focuses on low volatility via "smart beta."
"It's less trendy and sector chasing than most people think of theme investing," Peev says. "They'll take a particular index, say an emerging index, and instead of buying the whole index you buy only the stocks with the lowest volatility within that index."
Consider the future economy. Use what Krull calls the "what's the next economy" philosophy. Ask yourself what the economy will look like a decade from now.
Consider what companies may be providing energy and consumer goods. Look for companies that are doing innovative research and development that are open to trying new things.
"Companies that aren't afraid to make educated risks on new products and services have every chance," he says.
Avoid what's trending. "Five years ago we had clients who wanted to invest in gold, because everyone was talking about it," says Stuart Blair director of research for Canterbury Consulting in Newport Beach, California. "We counseled them not to make an unnatural tactical play because if you get caught up in the excitement it becomes a problem. Shortly after that gold dropped off and equity markets took off like a rocket ship."
Conversely, he says many investors are overlooking emerging markets which have slowed their growth, but are still growing at a rate far greater than the rest of the world.
"We aren't saying that this is the year emerging markets are going to do well," he says. "But we believe long-term the emerging markets are going to return more than U.S. and international developed markets."
Know that it is harder to exclude something than include it. Especially for investors who looking for socially responsible investing, it may take more work to create a customized equity-based portfolio.
Most socially responsible investing mutual funds are not going to exclude everything, such as animal testing and big pharma, as one of Krull's clients requested. It's not easy to hit those specifics, which means you have to look individual stock portfolios, he says.
Or if an investor is trying to remove guns from their portfolio, they may settle with eliminating gun manufacturers versus not buying any securities tied to guns since copper, which is used in bullets and a large part of the U.S. economy as well as emerging markets. - money.usnews
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