The Power of Values-Based Investing
Many people seek out a financial advisor because they are looking for guidance on investments. And although investments are only one facet of holistic financial planning, they are an area that I’ve historically neglected in blog posts. Truth be told, I wasn’t very passionate about investment selection and investment management until recently.
Traditional Investing
In the traditional investment landscape, you have stocks (or equities) and bonds. Stocks are considered riskier but offer more potential return. Bonds are typically treated as a safer investment because they don’t fluctuate in value as much as equities. If your investments are 100% in bonds, your upside potential is limited and may barely beat inflation. On the other hand, you’re taking on a large amount of risk if you are invested 100% in equities because the next market crash could send your investment portfolio into a tailspin. Many clients hire a financial advisor to help with asset allocation decisions, or the investment mix of equities and bonds.
My objective today is not to tell you what optimal investment mix to have. There are a variety of factors – age, risk tolerance, years to retirement, etc. – that influence your ideal asset allocation. Getting this mix right (often with the help of a trusted advisor) is key to reaching your financial goals.
Another factor is asset diversification. In other words, you don’t want all of your metaphorical eggs in one basket. When a child goes easter egg hunting, he won’t be satisfied with gathering all blue eggs. Searching for a variety of colors, he also finds green, purple, pink, yellow and orange eggs. The end result is a beautiful array of colors.
The same can be said for personal finance. Within equities, there are several nuances. You could invest in companies domestically or overseas. Even overseas, companies are separated by country of origin, with emerging market economies treated as a distinct asset class from international companies based in established first world countries. Business market capitalizations vary as well; small, mid-cap, and large cap segmentation is typical. I usually advise clients to invest in mutual funds, a basket of individual stocks within the same asset class (i.e. large cap equity mutual fund, small cap equity mutual fund, emerging market fund).
Values-Based Investing
Once you have decided on an asset mix that is properly diversified, it is time to explore an overlooked aspect of investing: the companies in which you are actually invested. This is where values-based investing comes into play.
In the secular world, values-based investing refers to ESG, or Environmental Social Governance, investing. ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments, according to Investopedia. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, internal controls, and shareholder rights. Morningstar now offers a Sustainability rating for mutual funds to measure their environmental, social and governance risks.
Biblically Responsible Investing
Biblically responsible investments allow Christians and Catholics to take values-based investing one step further. We can screen out “sin stocks” such as gambling, tobacco, and alcohol companies because we feel a moral responsibility not to own or profit from investments in businesses that violate God’s moral code. Along the same lines, we can seek out investments with shareholder impact -- an expression of faith to own companies that have a positive impact on the world.
This Faith Driven Investor article offers four motives for excluding “sin stocks.” It increases our:
1. Focus on Christ
2. Influence on others
3. Trust in the Lord, and
4. Personal resolve against sin.
Nonetheless, a person’s motivation for biblically responsible investments may extend beyond exclusionary tactics. This idea of shareholder activism to invest in companies that will make the world a better place rings true in my heart. I want to see an end to diseases that threaten the lives of the poor and vulnerable.
Eventide Asset Management invests in a biotechnology company that uses gene therapy to cure rare genetic diseases. Eventide also invests in a company that offers promising solutions to schizophrenia, ranked by the World Health Organization as the third most debilitating disease worldwide.
Investing to Change the World
I’ve advised families on investments and personal finance for over fifteen years. And this is the first year I can say that I am truly proud of an investment portfolio. Historically, I paid little attention to the underlying companies’ business practices when exploring investment models for clients. Now, there is a model portfolio for WorthyNest® clients that not only screens out harmful companies but also invests in companies that contribute to the greater good.
At WorthyNest®, we guide parents through important financial decisions using a values-based approach. Contact us to explore a one-on-one relationship.