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What is impact investing? Think of it as “Values Investing” or “Socially Responsible investing”. Or when it comes down to it, investing in companies that think as you do.
1. First, define what you mean by impact investing, what does it mean to you? Are you concerned about social issues, environmental or religious issues? Are you interested in medical or pharmaceutical companies? Do you support firearms? No matter what your interests are, there are stocks or mutual funds to fit your values.
2. Second, find an advisor that will listen to what interests you. If the first words out of their mouths are, “You can’t make money doing that!” Find someone who says, “I think we can find something to align with your values.” There are plenty of choices, and they are getting better all the time. Costs have come down and many are actively participating in the companies they hold as activist shareholders.
3. Third, after defining what you mean and finding the right advisor then start paying attention to the annual shareholder materials and proxy voting. The more active you are in learning about the funds you hold the more aware you can be about what you are supporting. Too many people invest in a fund thinking it is socially responsible, only to find out later it wasn’t what they thought it to be. An educated and open-minded advisor can help you before you invest.
Nothing is perfect, but you can feel good about the choices you are making and still invest wisely. It takes a little time and devotion but can be rewarding as well.
Investors who are concerned about market volatility should examine their investment choices from all angles when constructing a portfolio – evaluating not only return, but risk too.
There are a variety of risk measures that may come in handy. Of course, numbers don’t tell the whole story, but they may help you determine whether owning a particular investment is consistent with your personal risk tolerance. You and your financial advisor may want to review the following risk measures:
1. Alpha is a measure of investment performance that factors in the risk associated with the specific security or portfolio, rather than the overall market (or correlated benchmark). It is a way of calculating so-called “excess return” – that portion of investment performance that exceeds the expectations set by the market as well as the security’s/portfolio’s inherent price sensitivity to the market. Alpha is a common way to assess an active manager’s performance as it measures portfolio return in excess of a benchmark index. In this regard, a portfolio manager’s added value is his/her ability to generate “alpha.”
2. Beta is the statistical measure of the relative volatility of a security (such as a stock or mutual fund) compared to the market as a whole. The beta for the market (usually represented by the S&P 500) is 1.00. A security with a beta above 1.0 is considered to be more volatile (or risky) than the market. One with a beta of less than 1.0 is considered to be less volatile.
3. R-squared (R2) quantifies how much of a fund’s performance can be attributed to the performance of a benchmark index. The value of R2 ranges between 0 and 1 and measures the proportion of a fund’s variation that is due to variation in the benchmark. For example, for a fund with an R2 of 0.70, 70% of the fund’s variation can be attributed to variation in the benchmark.
4. The Sharpe ratio is a tool for measuring how well the return of an investment rewards the investor given the amount of risk taken. For example, a Sharpe ratio of 1 indicates one unit of return per unit of risk, 2 indicates two units of return per unit of risk, and so on. A negative value indicates loss or that a disproportionate amount of risk was taken to generate a positive return. The Sharpe ratio is useful in examining risk and return, because although an investment may earn higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The higher a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
5. Standard deviation is a measure of investment risk that looks at how much an investment’s return has fluctuated from its own longer-term average. Higher standard deviation typically indicates greater volatility, but not necessarily greater risk. That is because standard deviation quantifies the variance of returns, it does not differentiate between gains and losses. Consistency of returns is what matters most. For instance, if an investment declined 2% a month for a series of months, it would earn a low (positive) standard deviation. But if an investment earned 8% one month and 12% the next, it would have a much higher standard deviation, even though by most accounts it would be the preferred investment.
Using a variety of risk measures may give you a more complete picture than any single gauge. Your financial advisor can help you decide which ones will serve your needs and assess the risks and potential rewards associated with your portfolio.
Financial Planning Association
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Every time you turn around the news seems to be worse about our economy, taxes, jobs, etc…. What do you do? If you have a savings account for emergency and/or current needs it should be in a money market or Certificate of Deposit. You’re already ahead of the game. Both are FDIC insured, up to $250,000, and are the most secure place for money you need in the next year or two.
But what about investing for future needs? The easiest way to give yourself options and more control when you do retire is by investing in retirement accounts. Everyone should have a traditional IRA or Roth IRA, you can start one as long as you have wages. If you are self-employed there are options for you. If you are retiring in the next 5 years this may not apply to you, but for those with 5 or more years to retirement you need to look closely at your retirement plan. Too many people wait until the last minute to plan out their retirement income and realize there were things they could have done to make it better. They start looking for investment’s that don’t exist. There is no such thing as no risk, high return investments. Where investors get in trouble is trying to find that one investment that will make up for time lost. Listen to the marketing messages out there. They play on people’s insecurities and fears and end up costing people their hard earned money. Your overall risk is actually lower the younger you are, which gives you more flexibility. If you are reading this and think I’m already old, then make sure you are teaching your kids and grand kids good money management. There is no age limit for clients in my practice. The younger the better.
How many times do you say “If only…..” it’s up to you to seek the information you need to have a powerful and effective plan. I can help you but only you have the power to make it happen.