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With Investing, Little Things Make a Big Difference

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With Investing, Little Things Make a Big Difference

With Investing, Little Things Make a Big Difference

The difference between good and great is often found in the details. As discussed in this infographic, a few little ideas can make a big difference in the long run.

First, the equation for growing wealth is actually quite simple: produce more than you consume, and save the difference. Being disciplined and smart means that unnecessary expenses are cut, and any savings can go towards the bottom line. For example, if the money going towards a $4 latte each day was invested, it would amount to $25,994 in 10 years or $440,198 in 40 years. This is based on a fairly ambitious 8% annualized return, but still proves the point.

There are other expenses, including some coinciding with investing itself, that can eat away at the bottom line as well. Keep in mind that the investment industry is designed around taking a haircut off of each dollar spent, and that this money helps employ millions of people around the world. Fees, commissions, and other extras can add up. In the above example, a 1% difference in expenses translates to a $30,000 difference to the investor over 30 years. Keep in mind that the average mutual fund charges a whopping 1.163% in fees.

Related reading: The Myth of the Successful Money Manager.

Two other little things that make a big difference include investing early and proper portfolio diversification. By saving early, those extra years of compound interest can make an impact in the hundreds of thousands of dollars at retirement. By diversifying a portfolio, the example shows that 90% of risk from asset allocation can be avoided.

Original graphic from: Motif Investing

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Investor Education

How MSCI Builds Thematic Indexes: A Step-by-Step Guide

From developing an index objective to choosing relevant stocks, this graphic breaks down how MSCI builds thematic indexes using examples.

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Title text says “How MSCI builds thematic indexes” and funnel is pictured with the following labels from top to bottom: global parent universe, relevance filter, and false positive control.

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The following content is sponsored by MSCI

How MSCI Builds Thematic Indexes: A Step-by-Step Guide

Have you ever wondered how MSCI builds its thematic indexes?

To capture long-term, structural trends that could drive business performance in the future, the company follows a systematic approach. This graphic from MSCI breaks down each step in the process used to create its thematic indexes.

Step 1: Develop an Index Objective

MSCI first builds a broad statement of what the theme aims to capture based on extensive research and insights from industry experts.

Steps 2 and 3: List Sub-Themes, Generate Keyword List

Together with experts, MSCI creates a list of sub-themes or “seedwords” to identify aligned business activities. 

The team then assembles a collection of suitable documents describing the theme. Natural language processing efficiently analyzes word frequency and relevance to generate a more detailed set of keywords contextually similar to the seedwords.

Step 4: Find Relevant Companies

By analyzing financial reports, MSCI picks companies relevant to the theme using two methods:

  1. Direct approach: Revenue from a company’s business segment is considered 100% relevant if the segment name matches a theme keyword. Standard Industrial Classification (SIC) codes from these directly-matched segments make up the eligible SIC code list used in the indirect approach.
  2. Indirect approach: If a segment name doesn’t match theme keywords, MSCI will:
    • Analyze the density of theme keywords mentioned in the company’s description. A minimum of two unique keywords is required.
    • The keyword density determines a “discount factor” to reflect lower certainty in theme alignment.
    • Revenue from business segments with an eligible SIC code, regardless of how they are named, is scaled down by the discount factor.

The total percentage of revenue applicable to the theme from both approaches determines a company’s relevance score.

Step 5: Select the Stocks

Finally, MSCI narrows down the stocks that will be included:

  • Global parent universe: The ACWI Investable Market Index (IMI) is the starting point for standard thematic indexes.
  • Relevance filter: The universe is filtered for companies with a relevance score of at least 25%.
  • False positive control: Eligible companies that are mapped to un-related GICS sub-industries are removed.

Companies with higher relevance scores and market caps have a higher weighting in the index, with the maximum weighting for any one issuer capped at 5%. The final selected stocks span various sectors. 

MSCI Thematic Indexes: Regularly Updated and Rules-Based

Once an index is built, it is reviewed semi-annually and updated based on:

  • Changes to the parent index
  • Changes at individual companies
  • Theme developments based on expert input

Theme keywords are reviewed yearly in May. Overall, MSCI’s thematic index construction process is objective, scalable, and flexible. The process can be customized based on the theme(s) you want to capture.

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Learn more about MSCI’s thematic indexes.

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