Both global institutions and individuals alike are taking a sustainable approach to pursuing their investment goals. The thought used to be that you could only accomplish one goal (sustainability or profit) at a time.
Today, statistics reveal that you can achieve diversification through the purchase of ETFs that specialize in Socially Responsible Investing (SRI). Through SRI you can help create a more sustainable future and develop a portfolio that will perform well in any market.
A common debate with SRI investing revolves around the idea that incorporating socially responsible factors into the investment process will hurt overall performance.
However, some studies suggest that companies with ESG practices displayed a lower cost of capital, lower volatility, and fewer instances of bribery, corruption, and fraud.
On the other hand, studies show that companies that perform poorly on ESG have a higher associated cost (in the long run). These costs are linked with an increase of capital, higher volatility due to controversies, and other damaging incidences.
Companies that do not create contingency plans or mitigate risks face massive PR backlash from spills, labor strikes, fraud, accounting, and other governance irregularities.
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Diversification:
Diversification is arisk managementtechnique that mixes a wide variety ofinvestmentswithin a portfolio.
The rationale behind this technique is that a portfolio that contains uncorrelated investments will have a higher return. This is because stocks that are uncorrelated move in different directions during different times of the economic boom/bust cycle.
In laymen’s terms, “not having all of your eggs in one basket”.
By purchasing stocks that are different from each other (whether by company size, industry, sector, country, etc), you are spreading out your risk.
Making a Positive Impact by Investing in Socially Responsible Funds:
One way to diversify is to invest in socially responsible companies through ETFs. In the money management world, Socially Responsible Investing (SRI) is also known as ESG (environmental, social, and governance) funds.
You can make an impact today by investing in sustainable companies that help solve the world’s biggest challenges. It is about putting your dollars to work by buying products from and investing in companies that put the people and the planet first.
In a prior article, called “New Year’s Resolutions to Create a Sustainable 2019“, I write about how UN scientists have recently released a warning. In their statement, the UN gives the world less than 15 years to reduce the carbon output to nearly 0 or else face serious climate change consequences.
What’s really scary to think about is that three-quarters of the world’s mega-cities are by the ocean. Just imagine the level of geopolitical instability that would occur should billions of people need to relocate due to rising sea levels.
According to the UN,2.4 billion people(40% of the world’s population) live within 60 miles of the coast. To give you a comparison, the recent instability in Syria has displaced13 millionpeople.
Ask yourself, what would happen should 1 billion people need to find new homes. I am not an alarmist, I just want you to know the facts.
So what can you do? Become minimalist, which will inherently help you save more money. This, in turn, will allow you to invest more. The zero-waste lifestyle has many health and budget benefits.
Support sustainable businesses by buying products from and investing in companies that put the people and the planet first.
Sector investing: Using the Business Cycle
I am sure you know that the economy goes through economic cycles. These ups and downs in the economy are called boom and bust cycles or bull/bear markets.
So if you know that these cycles exist, then it makes sense to study which sectors of the market do well in each phase of the cycle.
The photo below, provided by mrshearingeconomics, is a great depiction of how our economy expands and contracts to grow over time.
Early-cycle Phase:
Sectors that typically benefit the most are ones that thrive due to a reduction in interest rates.
Interest rates are set by the Federal Reserve, which meets 8 times per year. A reduction in interest rates spurs the economy because it incentivizes companies to borrow/take out loans.
The industries that benefit first are:
- Financials
- Capital goods
- Transportation
- Raw materials (aluminum/copper)
- Consumer discretionary
Mid-cycle Phase:
The mid-cycle phase is characterized by a positive but more moderate growth rate than the early-growth phase. Typically, the mid-cycle phase is the longest phase of the business cycle.
The industries that benefit the most from this phase are:
- Information technology (Nasdaq)
- Real estate
- Industrial
- Raw materials
- Transportation
- Manufacturing
Late-cycle phase:
In this stage of the business cycle, the economy has “overheated” and will soon slip into a recession. There is a tightening of credit availability and corporate profit margins begin to deteriorate. Unfortunately, consumers and businesses become overleveraged and begin to miss loan payments. Moreover, company inventory levels become too high, and not enough of their products are selling to continue the growth curve trajectory.
The industries that benefit the most from this phase are:
- Energy
- Health care
- Consumer staples
- Utilities
The Recession Phase:
Often, this phase is marked by a contraction in economic activity. Corporate profits decline and credit is scarce. At this time, the Federal Reserve eases the monetary policy by lowering interest rates to stimulate the economy. Companies offer sales and coupled with a decrease in manufacturing,inventories gradually fall. Consequently, these actions set the stage up for the next recovery.
The industries that benefit the most from this phase are:
- Consumer staples
- Utilities
- Telecommunication services
- Health care
Here is a quick video by You Will Love Economics, that explains how the business cycle works.
The Take Away:
Diversification is critical to lowering your portfolio’s risk. Simultaneously, by diversifying you can own enough of the market to maximize your gain. Moreover, it gives you the best opportunity to do well no matter what stage the business cycle is in.
After building an emergency fund, investing for your retirement through a Roth IRA or 401k is the most important financial step you can make to ensuring that you can retire comfortably.
Want to learn how you can grow your retirement account by investing in commodities and skip paying the 28% capital gains tax legally? Read my prior article called, “Tax-Free Money: The Secret of Buying Gold Inside of a Roth IRA”
Like what you see? Stay a while!
- How to Save for a Down Payment on a Home and Fund a Roth IRA
- How to Reduce Climate Change by Acting and Buying Green
- Financial Freedom: Investing in Sustainable Companies
- How to Defer Taxes Forever with a 1031 Exchange
Be the catalyst that helps create a bright and sustainable future. If you have learned anything new, please remember to share so that I can continue to provide you with more free content!
Feedback is always welcome, so feel free to comment below! What’s your favorite sustainable brand?
