Most likely, you’ve heard the phrase “put your money where your mouth is.” This idiom refers to turning talk into actions that support your opinion or stance. For example, you could give money to a local food bank if you are an advocate for ending hunger.
Increasingly, investors in the United States are using this notion through personal values-based investing, which is an umbrella term for more specific subsets, such as socially responsible investing (SRI); environmental, social & governance (ESG) investing; impact investing; shareholder advocacy; and community investing.
The personal-values investment approach focuses on creating customized investment portfolios that fit a specific individual’s personal beliefs, values, and preferences. The goal is to give you the benefits of investing while also effecting change in accordance with your personal belief system.
Investment News recently reported that the United States’ withdrawal from the Paris accord is expected to increase the demand for ESG investing as people use their investment portfolios to express their personal expectations and desires regarding climate matters. The publication reported that in the United States, “at least $7 trillion was focused on ESG in 2016, according to The Forum for Sustainable and Responsible Investment.” Now investment professionals anticipate this number to grow even more.
In today’s world, where precisely slicing and dicing data is an easy match for technology, investors have all sorts of options when it comes to supporting or rejecting certain specific investments. Investors interested in this type of investing typically buy into a socially responsible fund (if this is the choice for you, you’ll want to educate yourself on what values the fund represents to ensure it reflects yours). Most values-based investment approaches focus on equities or bonds. For example, some equity investors exclude all companies that report revenues from tobacco, alcohol, or gambling. Other investors may seek to keep their investment portfolio clear of all environmental abusers. Sometimes investors have a larger lifestyle agenda, with very specific sets of inclusions and exclusions based on an overriding philosophy. Religious investors may wish to create a portfolio that adheres to their beliefs.
The question becomes less about how to establish a portfolio that reflects your individual values and more about how to do it without sacrificing market-level returns.
The question becomes less about how to establish a portfolio that reflects your individual values and more about how to do it without sacrificing market-level returns. After all, investing is ultimately about building a net worth to support your lifestyle, either in retirement or before.
Should You Consider Values-Based Investing?
The decision to embrace your personal values within your investment strategy is, like most investment approaches, a very personal one. It may be possible to establish an investment portfolio that fits your personal beliefs and fulfills your investment needs—but there are some restrictions. The number-one restriction is likely the size of your portfolio. If you are a high-net-worth investor, you can immediately explore your options regarding a highly customized portfolio. If you are a new investor, or your portfolio is modest (under $200,000 for example), a customized portfolio may be something to strive for in your future. You can discuss your ultimate goals with your financial advisor as soon as possible, but you may need to wait before you move your portfolio into full customization. When you are just starting out, your resources may be a bit too constrained to accommodate both your need for return and your desire to fashion a portfolio that fully supports your belief system. However, you will certainly move faster in the direction of customization if you identify your preferences early, and you keep your personal-values investment goals at the forefront of your investment actions.
Screening for Success
Many institutional investors use screening to fully customize their portfolios into a socially responsible one. Screens do exactly what they imply—companies that meet your criteria are included and companies that don’t meet your criteria are excluded. There are both negative and positive screens, but it doesn’t really matter whether the screen is inclusionary or exclusionary if the resulting list includes only companies that are good candidates based on your personal beliefs.
You can even use multiple screens to further narrow your personal investible-company universe. For example, if you want to only support environmentally friendly companies and you want to eliminate all companies that sell tobacco products, you would use two screens. A fully customized approach can screen for both factors. Once the screens are complete, you build a portfolio strictly from the list of companies that passed both screens. The key to creating a successful list is to fully articulate your investing parameters.
Personal Capital & Values-Based Investing
Here at Personal Capital, we can customize portfolios for many of our clients after talking to them about what makes sense. Because we use individual securities for our clients who invest a certain amount with us, we can customize portfolios based on what makes sense for them.
If you want to learn more about value-based investing and whether we can provide this for you, schedule an appointment with a registered financial advisor.
Amin Dabit, CFP®
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