Many people want to use their investments to support the issues that matter to them, but they aren’t sure how to do it.
Fortunately, the same rules of investing still apply: Stay diversified. Pay attention to risk and return. Invest in noload funds (you don’t have to pay hefty loads or sales charges to invest in a sustainable way).
Here’s how you can put these practical guidelines to work for you.
If you’re new to sustainable investing, these four tips can help you get started and avoid common mistakes:
1. Start with sustainable funds
Sustainable funds or environmental, social and governance (ESG) funds are a great place to start. By investing in sustainable funds, you’ll be diversified, and you also won’t have to try to evaluate a company’s environmental, social or governance (ESG) records on your own. Your fund likely has a whole team of people who are doing this important work.
Where to find sustainable funds?
One place to start is the U.S. Forum for Sustainable Investing (USSIF)’s list. However, some of the funds on the USSIF list are load funds, and others have very high minimum investments ($1 million) so you’ll want to make sure to focus on noload funds that you can invest in.
If you click on the ‘account minimums’ tab, it’s easy to see which funds are available for as little as $1,000. (Full disclosure: the sustainable mutual fund FundX manages is included on the USSIF list).
2. Focus on diversified funds, not riskier concentrated funds
When it comes to sustainable investing, one common mistake is that investors buy funds that are very concentrated in a particular industry in an attempt to directly align their investments with their values.
We talked with an investor who wanted to support renewable energy companies, so she’d invested in a fund that owned a select group of wind and solar companies. The problem is that concentrated funds can be very volatile. The investor’s wind and solar energy fund experienced dramatic swings in performance, and that made it challenging for her to hold this fund. She liked the idea of the fund, but the experience wasn’t what she’d expected.
Diversified stock funds, primarily funds that tend to have market-level risk, are more appropriate for the core of your portfolio, and these funds may be able to help you stay invested through up and down markets. If you’re going to invest in more speculative funds, we suggest investing just a small portion of your portfolio in these riskier funds.
3. Consider a fund’s performance and sustainability
How do you choose which diversified sustainable funds to own? If you’re new to sustainable investing, you might be inclined to focus on funds that support the issues that matter to you. But that’s not all you’ll need to consider. Your investments also need to grow if you hope to retire comfortably and meet your long-term goals, so you’ll want to consider a fund’s performance as well.
In the sustainable portfolios we manage, we first screen funds for performance, and then we screen the strongest-performing funds on environmental, social and governance (ESG) criteria—the three basic principles of sustainability. This way, we can target funds that have both strong recent returns and strong ESG ratings.
4. Monitor your funds regularly
Finally, make sure you have a process in place to help you monitor your funds. Too often investors spend a lot of time initially selecting funds that meet their needs, but then they forget to check on their funds to see if their funds are still worth owning.
We check our fund portfolios monthly, and if a fund doesn’t continue to meet our standards for performance or sustainability, we’ll move on to a fund with stronger returns and better ESG ratings.
Here's the takeaway
You don’t need to be an expert to invest in a more sustainable way. It’s something that most people can do. And if you need help, you can always reach out to an advisor who can build and manage a portfolio of sustainable funds that’s tailored to meet your goals.
Click here to set up a time to talk with one of our advisors. We've been managing sustainable fund portfolios for decades.
Whether you invest on your own or with an advisor, we think you’ll find that this a great time to be a sustainable investor. There are more funds to choose from than ever before, and there are such important issues that we can address together.