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How to Create A Socially Responsible Portfolio

At Thorley Wealth Management, the most common question asked of us by clients interested in building a socially responsible portfolio is straightforward:  “How do we do it?”

Socially Responsible Investors Have Many Options

Some may think that socially responsible investing is a “new age” practice, but that is not the case. It actually has its roots in the 1960s and 1970s, when social issues of many types were finding heightened importance in the public agenda.

Back then, a perception existed that eliminating some companies from one’s investment options based on social issues also limited the potential for financial returns.  To a degree, that perception persists today.

How to Be a Socially Responsible Investor

According to the popular website Wikipedia, “socially responsible investing (SRI), or social investment, also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy that seeks to consider both financial return and social good to bring about a social change.”

Socially responsible investors may seek to align their portfolios with companies or funds whose missions or corporate policies and practices are favorable to the environment.   On the flip side, investors may want to screen out companies or funds that they may find socially unacceptable, anything from poor environmental practices to human rights abuses.

How then does an individual go about becoming a socially responsible investor, as many Thorley Wealth Management clients have done?

Socially Responsible Investing

The professional investment community today is realizing that a large majority of our clients are interested in socially responsible investing, sometimes known as “sustainable” or “impact” investing.

In fact, a recent Morgan Stanley study revealed that more than 70 percent of investors had an interest in sustainable investing.  Yet a similar survey conducted by Cerulli Associates indicated that nearly two-thirds of investment advisors expressed no interest in it at all.

I believe this puts Thorley Wealth Management firmly – and happily -- in the minority camp, because I have long embraced socially responsible investing and I encourage clients to seriously consider it.

Just what is socially responsible or sustainable investing?

 

The Importance of Benchmarks

By definition, financial benchmarks provide a point of reference – a means of determining how an investment or account is doing versus other similar options.  The first rule in benchmark monitoring is to be sure you have an “apples to apples” comparison.  In other words, don’t compare a stock market performance against a bond market performance.

Analyzing Existing Holdings – Do They Fit the Plan?

In an ideal world, a client would begin working with an advisor with assets that are entirely in cash.   This would make it relatively easy to establish whatever investment accounts are recommended to create a portfolio designed to meet the client’s goals and objectives.

However, this is not an ideal world, and the hypothetical “all-cash scenario” is certainly unlikely.  Most often, people have done some investing and established several – or many – accounts of various types before working with a professional advisor.

Monitoring One’s Portfolio – a Key to Success

Clients generally and appropriately take time and great care when working with their advisor to select allocations to establish a portfolio. 

Investment Policy Statements: Why Have One?

A traditional and popular concept in achieving goals – financial or otherwise -- is to actually write them down.  The act of writing, itself, helps clarify and reinforce one’s objectives.  And the physical list can then serve as a reminder and monitoring device to keep one on track.

Evaluating Risk – How to Make Decisions

With all the types of risk in the marketplace, the question becomes:  Where does one look to get information to help evaluate risk before making an informed investment choice?

Basically, there are two research categories – proprietary and nonproprietary.

Proprietary information, for example, would include that issued by a company, such as annual and quarterly reports, or data on the company’s website.  The prospectus for a mutual fund would also be proprietary information.

Several Types of Investment Risk

The term “market risk” is often heard in discussions regarding investments.  It simply is recognition that an investment may actually lose value because of various factors – economic, political, or other – in the financial marketplace.

Let’s take a look at a few of these risk factors that need to be considered when building a portfolio: