When it comes to investing, millennials want more than just returns. In a Spectrem Group study, 49 percent of millennials with a net worth of $1 million or more said social responsibility was a factor in choosing investments. Fifty-three percent of non-millionaire millennials agreed.
“Millennials are interested in being part of a change toward a sustainable planet, and their investments are an expression of who they are,” says Kristin Hull, founder and CEO of Nia Global Solutions in Oakland, California. “They realize they can leverage their investment dollars to invest in a world they want to see.”
Socially responsible investing also speaks to this young generation’s desire to do good now.
[See: The Top 10 Investment Portfolio for Millennials.]
“Historically, investors have had to build wealth over decades before being able to give back through philanthropic donations,” says Komson Silapachai, vice president at Sage Advisory in Austin, Texas. Sustainable investing, he says, allows younger investors to stay true to their social values from the start without sacrificing financial returns.
The challenge for millennials is choosing diversified investments that match their values and risk tolerance. The end result should not be “a portfolio with concentrated risks,” Silapachai says.
Socially responsible exchange-traded funds, sustainable individual retirement accounts and automated portfolios offer younger investors three different paths for putting their money where their values are.
Investing with ETFs. Thanks to their low costs and tax-efficiency, ETFs are popular investing vehicles, with 52 percent of investors planning to invest in ETFs over the next 12 months, according to BlackRock.
Socially responsible ETFs typically include companies that incorporate environmental, social and governance issues into the business. Not all these ETFs are alike, however, and they require careful comparisons before choosing one to invest in.
“The impact of the portfolio, the cost and the risk profile are all important,” Hull says, noting that millennials should select funds with a transparent fee schedule.
In addition, younger investors should consider how the companies an ETF invests in plan to address social responsibility and environmental sustainability long term. This isn’t just about easing an investor’s conscience. Hull says companies intent on finding solutions to social and environmental challenges may be better poised for growth.
Values-minded millennials want businesses with staying power, says Katherine McGinn, a financial advisor with Ameriprise Financial in Rye Brook, New York.
There are three metrics millennial investors should consider when evaluating a socially responsible company: how efficiently it uses natural resources, whether it encourages diversification in its workforce, and the methods used to attract shareholders. All can provide an idea of how well the stock might perform.
Your goals and investing timeline will also shape your ETF choices.
If you’re talking about a flexible goal, such as a buying a larger home, you may want a fund that prioritizes your social or environmental objectives, McGinn says. On the other hand, if you’re thinking about retirement, “you’ll want to balance your social and environmental goals with your financial ones.”
[See: 10 Long-Term Investing Strategies That Work.]
That includes managing investment costs. Matt Granski, a financial analyst at Miracle Mile Advisors in Los Angeles, says that socially conscious ETFs can sometimes have higher expenses than traditional index funds because more research is needed to determine which companies are socially responsible.
“These higher research costs can get passed on to investors,” Granski says.
Be aware of the total assets under management of a socially responsible ETF, Granski cautions, because “thinly traded ETFs can have larger bid-ask spreads,” potentially resulting in more risk.
Fund retirement with sustainable investments. Investing in a sustainable IRA can support socially responsible values, while yielding tax benefits.
Aspiration, a Marina Del Rey, California-based financial services firm, offers traditional IRAs with investments concentrated in sustainable companies. The Aspiration Redwood Fund (ticker: REDWX), for example, which has a sustainable IRA option, invests in companies in the technology, health care and financial sectors. The fund has a 0.5% expense ratio and a $100 minimum initial investment.
Aside from minimal fees and low barriers to entry, the emphasis on social responsibility sets these IRAs apart. Millennials who already have an IRA, however, can still emphasize sustainability by choosing the right investments.
Jessie Doll, a wealth management advisor at TIAA in Fairfax, Virginia, says younger investors should evaluate their current IRA options to see if investing in socially responsible funds is possible. At the same time, millennials should consider if those investments are suitable for their short- and long-term objectives. If a sustainable IRA inhibits you from achieving your goals, you may need to reconsider your position, Doll says.
Diversification is also important to prevent overweighting your retirement accounts. Andy Whitaker, vice president of Gold Tree Financial in Jacksonville, Florida, says diversification requires exposure to many asset classes, which could be lost when socially responsible investments are concentrated in a portfolio.
“Having sustainable asset classes within a client’s portfolio makes sense, but [balancing] across all asset classes will likely lead to more favorable results,” Whitaker says.
Pick a theme. Automated ETF portfolios allow you to invest for impact by theme, taking the guesswork out of choosing individual funds.
For example, Motif offers automated portfolios with three distinct themes: a sustainable planet, fair labor and good corporate behavior. You pick one of the three themes and identify your risk tolerance. Motif then molds your portfolio to include companies that reflect your values and investing goals.
That’s attractive for younger investors who prefer a streamlined approach to portfolio management, but there are a few caveats.
An automated portfolio could encourage investors to become too complacent and not bother managing their investments at all. A forced savings vehicle doesn’t always work, even for an investor using dollar-cost averaging, says Will Ashworth, an analyst and contributor at InvestorPlace.com.
“Say you’re investing $500 per month in an automated impact investing plan. That’s $6,000 annually bought over 12 different investment periods,” Ashworth says.
If your portfolio drops 10 percent one month but rises the other 11 months, your portfolio would have a higher average cost over the course of a year. Ashworth says by putting that same $6,000 into the portfolio at the end of the month with the 10 percent drop, “you’d get more bang for your buck.”
Greenwashing is something else investors should consider. This means calling an automated portfolio sustainable even when the underlying companies aren’t committed to socially responsible practices.
[See: 7 of the Best Socially Responsible Funds.]
“Don’t assume a particular offering is sustainable or socially responsible beyond the label,” Silapachai says. “Always look under the hood.”
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3 Ways Millennials Can Build a Socially Responsible Portfolio originally appeared on usnews.com
