Personalized Investing Portfolios: Unlock the Greatest Potential

A young woman looks at her computer screen, which is filled with stock charts and other graphics.

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Last year, I wrote about direct indexing, a lesser-known investment approach that started outpacing both ETFs and mutual funds in investor adoption. One of the hallmarks of this approach, that traditional ETFs or mutual fund structures don’t offer, is personalization.

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Our current financial environment is fraught with recession fears and inflation concerns. Today’s investors, at all experience levels, are seeking investment strategies that not only combat the volatility of the markets, but also address their personal and financial values. Consumers are looking for personalization in most aspects of their lives. A 2021 McKinsey study found that consumers don’t just want personalization, but they demand it more than ever, especially following COVID-19 and the surge in digital behaviors beyond 2020.

Advisors Expect More Clients to Want Personalization in Portfolios

Registered investment advisers (RIAs) recognize that investment personalization is only becoming more important. More than half of the RIAs surveyed in Schwab’s 2022 Independent Advisor Outlook study anticipate clients to expect more personalization of investment portfolios, a trend that will be led by Millennial investors.

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Access to a more personalized portfolio has been historically designated to ultra high-net-worth investors, due to high account minimums required and archaic technology. Today’s digital advancements in financial services have brought these types of offerings to investors across the wealth spectrum, allowing them to align their portfolios with their values and financial goals.

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Personalization can mean a number of things – building a portfolio around existing investments, following a particular investment philosophy or aligning investments with one’s values.

Environmental, social and governance (ESG) investing methods in particular have made headlines in recent years, often getting a bad rap as many companies have been accused of misleading their ESG accomplishments. According to a report from US SIF Foundation, investors held $17.1 trillion in assets chosen according to ESG principles in 2020, up from $12 trillion just two years earlier. ESG standards are intended to help investors screen potential investments through a socially conscious lens.

Similarly, issues-based investing puts a finer point on the concept of ESG investing, allowing investors to overweight companies that align with specific issues and divest from those that don’t. In the process, the investor has more control over their holdings and can personalize their portfolio to match their specific views. Issues-based investing is generally enabled with a direct index or thematic ETFs.

More Personalization Options Are Available

Thematic investments in general have seen increased adoption, particularly in exchange-traded funds (ETFs). Along with greater adoption, there has been a meaningful increase in the options available. Today, an investor can find workaday options like sector and industry funds or more esoteric choices, like funds focused on K-Pop (Korean pop music) or companies that appeal to Gen Z.

While not without risks, personalizing one’s investment might also lead to better outcomes. One of the biggest drags on investor returns is poor investing behavior – things like selling as a reaction after the market has already dropped or waiting to invest cash. The drag on returns from poor investment behavior and other factors can be 1.7% or more. A custom-built portfolio reflecting an investor’s situation and views can help one stick with their investment strategy when markets get rocky.

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All this is to say that with personalization options now available to investors no matter their financial threshold, why not make your investments work for you and your personal situation? Talk to a financial adviser about some ways to tweak your financial plan in a way that is aligned with your values and goals.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Adam Grealish serves as Head of Investments at Altruist, a fintech company on a mission to make great independent financial advice more affordable and accessible. With a career rooted in financial innovation, Adam most recently led Betterment's strategic asset allocation, fund selection, automated portfolio management, and tax strategies. In addition, he served as a vice president at Goldman Sachs, overseeing the structured corporate credit and macro credit trading strategies.