Why is it hard to choose an investment portfolio of funds?

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Investing is a powerful tool for building wealth and securing financial futures, but the abundance of investment options can be overwhelming for both novice and experienced investors. Exchange-Traded Funds (ETFs) and Mutual Funds stand out as two popular choices due to their accessibility, transparency, and potential for long-term growth. However, even these investment vehicles can be overwhelming due to their large number. The US alone counts about 10,000 of these assets. For comparison, there are only 6,000 US listed stocks, and that includes penny stocks! At the same time, the number of ETFs keeps increasing, as ETFs continue to replace mutual funds.

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As an example, etfdb.com lists 923 ETFs under the Large-Cap asset class and 876 under the Multi-Cap asset class. And if we dig into sectors, we find 161 Technology ETFs, 65 Healthcare ETFs, 86 Energy ETFs. Faced with such a huge number of investment options, even when targeting specific sectors, what should the individual investor do? Is there a quick, easy and trustworthy way to address seemingly simple investment questions like “which healthcare fund should I pick”?

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The current available solutions seem to struggle with this problem. Investors are faced with the tedious work of going through the endless results of fund screeners or analyzers which take a significant amount of time. Or they can use advisors, who circumvent the problem by usually curating their universe and severely restricting the funds they work with. It seems that no one is trying to address this problem. 

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Investing is a deeply personal endeavor

It turns out that the above problem requires a little bit of thinking outside the box. I believe that because the financial science orthodoxy is so focused on quantitative aspects and metrics it tends to ignore that investing is a deeply personal endeavor, one that involves a myriad of emotions like greed, fear, hope and even philosophical considerations like morality and ethics, like we have recently seen with the rise of ESG investments. This is something that human advisors understand well, but do not offer a systematic answer to.

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Basic financial theory lists the different factors to consider when making investment decisions in funds. These are diversification, performance, risk, fees, trustworthiness. Mix that with the investors risk tolerance or financial goals and we get a large number of parameters to consider. To make matters worse, these parameters are not easily translated into quantitative rules that can be used for decision making.

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First know yourself, or customization.

So first I say, know yourself. That involves thinking about not only risk preferences and financial goals, but also your tolerance to the various types of risk or other non-traditional preferences like length of the track record, recent vs historical performance and so on. For example, are you going to freak out when a bond fund that has delivered consistent returns over the last five years suddenly loses 20% during a crisis? Are you willing to pay extra management fees for funds that have consistently overperformed in the past, even though there is no guarantee that they will do so in the future? 

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Many complex factors

There are so many personal preferences to consider, so many fund specific factors to consider and so many funds that getting quick and trustworthy answers to seemingly simple problems like which healthcare fund should I invest in become impossible. It is no wonder that current solutions have shied away from these problems.

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Next generation solutions

Next generation solutions should be able to offer advanced customization while keeping it simple enough to the individual investor. This is what we are doing at DAYOSS.

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The app takes in non-traditional qualitative user preferences, mixes them with the fund factors and produces a ranking system for each fund or a combination portfolio. Do you want to know which healthcare fund to invest in? The Smart Fund Screener gives all healthcare funds, ranked by a personalized suitability score. Picking funds has never been easier. Do you want a whole portfolio with a high suitability score according to your preferences? The Portfolio Builder gives a list of high suitability portfolios with their risk and reward to choose from.

As the world's First Smart Fund Screener, Analyzer and Portfolio Builder, DAYOSS revolutionizes the process of finding the right funds and portfolios that align with your preferences, eliminating frustration, saving valuable time, and minimizing effort.