How Should We Invest Our Money?

It is healthy in life to presume that people:

1. Want to do well; and

2. Want to do good.

   
   

I just don’t think the majority of folk view life as a “zero sum game”. That for every winner, there must be a loser.

Obviously, there are those that do think this way - that is the way the world works unfortunately. And there is a special place for those individuals.

One of the best things about money is that we can deploy it in any which way we choose. There is no right answer.

Use it to support people and causes you care deeply about, blow it all on a Lamborghini - or maybe just go to a World Cup game and try to buy a beer.

These aren’t either/or activities by the way. I absolutely believe people should use their money to provide themselves with maximum utility. That could mean creating experiences that generate life-long memories, both for ourselves and others. Maybe for others we have never even met.

But the well-intentioned person may wish to go further than this. They may feel they have a duty to invest their hard-earned in a way which they feel aligns with their personal values, focussing on investment opportunities that “do good” while avoiding companies that exhibit the sort of characteristics that they feel represent the worst of capitalism.

These feelings are entirely understandable. Although there has never been a greater time to be alive than today, the “system” does have its downsides. The kind of extreme wealth we see in a handful of individuals is ultimately not a great look for society.

I’ll declare my interest from the get go. From a professional standpoint I see myself as having a duty of care to get the client to get the best financial outcome they can. Full stop.

This being the case, the next logical next step is to re-examine my own personal investing principles - the ones that jump out to me in this context are:

1. “Diversification is a must”;

2. “Keep costs low”; and

3. “Minimise decisions”.

   
   

Taking each of these in turn…

Diversification is a must

The typical ethical/sustainable portfolio will overweight allocations to “good” stocks and underweight or exclude allocations to “bad” ones.

Source: MSCI

From the end of 2019, the MSCI ACWI ESG Leaders index has underperformed the broad global equity index (as defined by the MSCI ACWI). But it is a close run thing and there have been plenty of periods where the ESG index has been ahead.

Nonetheless we must always be aware, that any time we exclude anything from our investment strategy we reduce diversification - increasing both the risk inherent in our portfolio and the chances that we will hold the future winners of tomorrow.

Keep costs low

Great strides have been made in the past few years to bring costs of sustainable index tracking strategies more in line with their “standard” counterparts, primarily as ESG equivalents have grown and achieved more scale. But there is still often a modest premium.

And it is sensible to assume that the more nuance (complication) we introduce to our investment strategy, the more we should expect costs to rise. And cost is one of the few things we can control when we invest - so we should keep a keen eye on it.

In 2021 there was a flood of supply of ESG products onto the market. This was post COVID, a time of heightened social awareness and a rampant stock market powered by the kind of “new economy” companies which scored highly on an ESG screen.

The ducks were quacking, and the investment industry was more than happy to feed them.

But then, as markets have a habit of doing, the trend completely reversed. In 2022 the best performers were energy (oil) stocks - the kind of holdings which score very low on a sustainability assessment. The average ethical strategy underperformed materially.

We need to have our eyes open from the get go that this can happen.

Minimise Decisions

This is kind of the big one I think. A few weeks ago, we talked about how decision fatigue can create its own tax on returns and once we decide we would like to adjust our investments to take account of our own personal values - we enter into a minefield of decisions.

• What is it I actually believe?

• How strict do I want my self-imposed rules to be?

• How much extra am I prepared to pay?

• If these restrictions lead to underperformance or create more risk, will I be able to stick with this strategy?

• Can I even afford to go down this road?

  
  

Here’s another interesting question we have to ask ourselves. What makes a company inherently good or bad?

Companies are inanimate shells, surely then they can be neither good nor bad.

All a company can be is a vehicle for the individuals that comprise them. So the question then would seem to be - are these people good or bad, which is a whole other kettle of eels.

A quick look at the top holdings within some of the highest profile ESG indices demonstrates the difficulties there can be in making such assessments.

Source: Blackrock

Above are the top ten holdings in the iShares MSCI World ESG Screened ETF. I’m sure all of us would have some serious questions about the ethics of some of the companies on that list. We could legitimately question them all in some way!

Where I’ve landed on this I think, is that the best way for us to do good is to ensure we do it on a granular level.

Do the right thing in our day to day lives, be the kind of person we would want to encounter - and support the causes we feel most passionately about as directly as possible through charitable giving, “impact investing” or similar philanthropic endeavours.

I can understand why people would like their investment portfolio to mirror their values, I really do - but I think that doing so leaves too much to chance. For what else is investing than outsourcing our capital to companies and institutions and letting them get on with it? We may not always agree with how this money is used, but that is kind of the deal we make.

Better to my mind to leave your money doing its thing, and ensure it is spent in whatever you feel is the “right way” when the time comes.

Past performance is not indicative of future returns. These are my own personal views, and none of the above is intended to represent advice to any individual. If you have questions regarding your specific situation - feel free to contact me at david@beechgrovefinancialplanning.co.uk, or another regulated financial adviser.