• Investing & Markets

How Does Socially Responsible Investing Impact Your Investment Portfolio?

May 14, 2018 | Brendan Erne, CFA

Socially responsible investing is a hot trend for individual investors right now. In fact, according to Morgan Stanley’s Institute for Sustainable Investing’s 2017 “Sustainable Signals” survey:

  • 75% of individual investors, overall, and 86% of millennial investors, are interested in sustainable investing.
  • 80% of survey respondents are also interested in sustainable investments that can be customized to meet their specific interests and goals.

For those interested, you may be wondering how investing for the “greater good” will impact your overall portfolio. After all, you now have two goals: aligning your investments with your values and earning a sufficient financial return.

Can These Two Goals Coexist?

It’s a serious question for any investor because, ultimately, your portfolio is designed to fund your future—and you want that future to include as much financial security as possible.

The body of research regarding long-term performance is mixed, but most studies indicate that socially responsible investing does not result in lower returns relative to the broader market.

However, you need to be careful with the types of socially responsible filters you apply. The goal is to align your values with your investments, but not if it puts your entire retirement in jeopardy. If you’re too restrictive or narrow in your approach, you could end up with a portfolio heavily concentrated in a few sectors or industries. Diversification is still the critical element for long-term success—so don’t lose sight of that goal.

Do Your Homework

Life is about choices, and there are many options when it comes to selecting socially responsible investment products. No matter what approach you take, you should fully understand the potential limitations you are placing on your assets, as well as the control you will have over those assets.

There are mutual funds or exchange traded funds (ETFs) offering a wide variety of exposures based on specifically defined values, such as diversity and/or environmental or labor issues. Just be careful—narrower exposures can often translate into higher costs, less liquidity, and less diversification.

As an investor, you need to understand how your personal value preferences impact the overall structure of your portfolio. Remember, the primary goal for most people is to invest responsibly without sacrificing the returns achieved though more conventional methods.

Finally, you should explore how much control you have over the included assets. If you choose a mutual fund or ETF, you obviously cannot adjust the individual stocks within the fund. If you want to retain the ability to exclude certain companies or categories, you will likely need a portfolio consisting of individual stocks.

Our Take

Like every investment option, the key to successful socially responsible investing is knowledge. Fully understand the product you are considering, ask about the constraints of the investment mandate—and never stray from an overall portfolio that is fully diversified based on your personal risk tolerance.

If you would like to learn more about SRI or Personal Capital’s socially responsible plan for Personal Strategy®, schedule an appointment with one or our advisors today.

Read About Our Socially Responsible Personal Strategy


Disclaimer: The information and content provided herein is general in nature and is for informational purposes only. It is not intended and should not be construed as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax advisors or other professional to help answer questions about specific situations or needs prior to taking action based on this information. Tax laws and authorities are subject to change, either prospectively or retroactively, and any subsequent change could have a material impact on your situation. To comply with U.S. Treasury Regulations, in particular IRS Circular 230, we also inform you that, unless expressly stated otherwise, the information contained in this communication is not intended to and cannot be used to avoid IRS penalties, and is provided to support the marketing of our services.

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