Over the past several years we have seen a significant increase in interest around impact investing. Many people want to invest in issues that matter to them, hoping that they can make the world a better place by backing certain technologies or issues with their investment dollars. For investors who are interested in trying their hand at sustainable investing, here are five suggestions to get you started.
1. Find Sustainable Funds
What used to be referred to as "socially responsible" or "socially conscious" funds are now often collectively known as sustainable funds, or environmental, social, and governance funds (i.e ESG). The good news is that the number of these funds has exploded in recent years. As a result, it is a lot easier for investors to make them part of their portfolio. A good place to start a search is at the U.S. Forum for Sustainable Investing where investors can find no-load funds that might correspond with the issues that are most important to them. Investors can also consult with their investment advisor who can match them with funds that align with both their investment objectives and personal values.
A common mistake that many investors make when investing in sustainable funds is concentrating the bulk of their portfolio in a specific industry to ensure that all of their investments go towards companies that share their particular vision. The problem with concentrating all of the investment in a single idea is that emerging technologies can be extremely volatile. During a sustained down cycle an investor could end up losing much of the investment. Make sure that the funds are diversified among different asset categories and use managers who employ varying levels of risk. This practice is designed to help reduce the volatility of your portfolio over time. While it does not ensure a profit or guarantee against a loss, it can help you weather the markets ups and downs.
3. Consider Performance and Sustainability
Those new to sustainable investing may primarily put their focus on companies whose social performance and social cause is what resonates with them. While this is obviously important, consider the investment outlook and risks of the investments on their own merits and manage your allocation to those investments accordingly. To help choose funds that work well as investments, screen your target ESG funds using performance relative to their chosen benchmark and peers. You can find such relative performance data on Morningstar.com or by reviewing the fund’s prospectus and fact sheet.
4. Regularly Monitor Fund Performance
A vital step in sustainable investing is making sure the funds are performing up to expectations. Emerging technologies and regulatory structures can change quickly. Regularly monitor your funds underlying holdings, performance relative to benchmark, and industry outlook. If working with a financial advisor, they will be able to provide regular reports on how funds are performing and provide advice on rebalancing or changes that might be beneficial.
5. Align Your Investments With Long Term Goals
It is also important to remember that sustainable investing is still investing. The intent is to do something positive with your investment and grow your nest egg. Keep an eye on risk, measure returns against appropriate benchmarks, stay diversified, and make sure your investments are aligned with your long term needs and objectives.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.