Investing in Sustainable and Responsible Funds: Aligning Your Values with Your Portfolio
Socially responsible investing (SRI) is an investing approach that focuses on investing in companies that are considered to be socially responsible in the way that they conduct business. This may be in terms of their focus on the environment or on doing business in a way that promotes the well-being of customers and society in general. Sustainability is a popular theme in the SRI world. Companies that adhere to policies and business practices that help promote the environment are an example of an SRI friendly investment. The Rise of ESG Investing Environmental, social and governance (ESG) investing is an outgrowth of SRI investing. ESG investing has gained in popularity in recent years among investors who are socially conscious. Investing in firms that adhere to the principles of ESG can be a way to screen well-run companies. For example, companies that avoid environmental issues will generally not face fines from the government for violating pollution and other standards. This is money that can be put back into the business to help fuel future growth. This applies to all aspects of ESG. Companies that manage in a socially responsible fashion will tend not to discriminate in their hiring practices. This not only helps avoid any lawsuits regarding discrimination, but it also helps them find the best employees regardless of their demographic standing. Identifying Your Values and Objectives As part of your overall investing strategy, it is a good idea to identify values that are important to you in terms of where you invest your money. There are a number of factors to consider when investing. These include your financial goals, your risk tolerance and your time horizon or the funds. You will also want to consider the financial merits of any investments you are considering. SRI and ESG factors can certainly be a part of this analysis. Investing in ESG and SRI oriented companies can be profitable if you do your research. Studies have shown that many ESG funds have experienced lower than average downside risk and a significant number have experienced solid relative performance compared to peers in recent years. Researching Sustainable and Responsible Funds With the popularity of socially responsible investing, including ESG investing, in recent years, there are several places to research these types of investments. MSCI has developed a rating system for over 8,500 companies worldwide providing grades on their compliance with various ESG standards. Morningstar has added sustainability ratings to their analysis pages for individual stocks, mutual funds and ETFs. The rankings take ESG factors into account as well as other metrics. Diversification and Risk Management In selecting SRI and ESG oriented investments, consideration still needs to be given to factors such as diversification and risk management. SRI and ESG investments can be spread over a variety of asset classes such as stocks and bonds and various sub-asset classes within those broader categories. Additionally, these socially responsible investments can fall within a variety of sectors and industries. Investors who feel that social responsibility is an important part of their process should still be concerned about the basics of implementing their investment strategy. Performance and Returns Contrary to what some might believe, investors do not have to sacrifice investment performance to adhere to their SRI or ESG principles. Over time, several studies have shown that ESG and related investing criteria do not hurt investment performance, and instead, these factors can also enhance performance. The consulting firm McKinsey says that studies show that strong ESG performance is closely correlated with higher returns on equity investments and less downside risk on these investments. The NYU Center for Sustainable Business analyzed over 1,000 studies and they have shown that strong corporate ESG management is linked to higher returns on equity and returns on assets. Choosing the Right SRI Fund Part of the process is deciding what criteria in the SRI and/or ESG space are important to you. These criteria can vary from looking for funds that adhere to beliefs tied to your religious beliefs or that perhaps focus on firms whose business operations are environmentally friendly. Doing your research on funds and ETFs is important. Use sites like Morningstar and be sure to read and understand the fund’s prospectus and other literature if doing this yourself. If you are working with an advisor, be sure to let them know what is important to you as far as socially responsible investing, as well as your overall financial goals and objectives. Your Wedbush Financial Advisor can be a valuable resource if SRI and ESG factors are important to you. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Establishing a SIMPLE IRA for Your Small Business
A SIMPLE IRA is a small business retirement plan that is limited to employers with 100 or fewer employees. This includes those who are self-employed. The acronym SIMPLE stands for Savings Incentive Match Plan for Employees. Understanding the SIMPLE IRA In exchange for minimal paperwork and administrative requirements, there are some requirements that employers must follow in offering a SIMPLE IRA. However, these plans require virtually no reporting or regulatory red tape that is often present in other types of business retirement plans such as a 401(k). Employers can choose the financial institution where the employee accounts are housed, or they may be able to allow the employees to open their accounts at the financial institution of their choice. There are two required disclosure documents from the employer that must be given to the employees. The summary description of the plan provides a number of details about the plan. The annual election notice describes their right to make salary deferral contributions and the employer’s decision to make matching or nonelective contributions. Employees must be given the ability to change their elections for contributions at least annually. There are two potential drawbacks to a SIMPLE IRA. One is that the employee contribution limits are lower than other plans such as a 401(k) plan. This limits contributions for all employees, including the business owner. The other potential drawback is a quirky rule that prohibits money in a SIMPLE IRA from being rolled over to any other type of retirement other than another SIMPLE IRA if an employee leaves the company within two years of first participating in the SIMPLE IRA. Employee Participation and Contribution Limits Employees are eligible to participate in the plan if they received at least $5,000 in compensation from the employer in any two prior years and have the expectation of earning at least that much in the current year. Employers may exclude employees who receive compensation from their union if they wish. For 2023, employees can contribute up to $15,500. The limit increases to $19,000 for those who are 50 or older. Employer Matching and Contribution Options One aspect of the SIMPLE IRA is that employers must make contributions to the employee accounts. Employers have two choices for these matching contributions. The first is a dollar-for-dollar match of each employee’s contributions up to 3% of their compensation. This can be reduced to a little as 1% in any two years within a five-year period. Alternatively, they can make a 2% nonelective contribution to all employees, whether or not they choose to contribute to the plan on their own. Beginning in 2024, the Secure 2.0 legislation allows employers to make additional matching contributions of up to the lesser of either 10% of compensation or $5,000. The additional contributions must be made in a uniform fashion to all employees. Secure 2.0 now also allows employers to offer a Roth SIMPLE IRA which was not an option prior to this. Annual Reporting and Compliance One of the benefits of a SIMPLE IRA for employers is that there is no mandated government reporting related to the plan. This differs from other types of plans such as a 401(k) or a defined benefit pension plan. The custodian where the employee’s respective plan accounts are held is responsible for issuing a Form 1099-R covering any distributions taken by the employee participants. The financial institution holding the accounts is responsible for providing Form 5498, Individual Retirement Arrangement Contribution Information, to both the IRS and to the participants. SIMPLE IRA contributions are not reported as wages on an employee’s W-2, but the amount of the contributions, but they must be included in the section of Social Security and Medicare wages. This is something that that employer should track during the year on their own or through any sort of outside payroll service that might be used. Retirement Plan Reviews and Updates As with any retirement plan, employers will want to review if the SIMPLE IRA is performing as they had hoped. If the plan is set up with a menu of employer offered investments, these should be reviewed periodically. If the employees are left to open their own accounts this would, of course, not be applicable. They should also review the level of employee participation in the plan. Are employees participating and are they contributing significant amounts to their retirement? If these figures are lower than you may have hoped for, education and information provided to your employees about the benefit of saving for retirement through this type of plan may help. Seeking Professional Guidance When looking to establish a SIMPLE IRA or any type of retirement plan for your business, it pays to seek professional guidance. Your Wedbush financial advisor can help you establish a SIMPLE IRA or other type of retirement plan. They can also help you to evaluate an existing plan to see if it is doing what you hope for your employees. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
The Role of Bonds in your Portfolio – Diversification and Risk Management
Bonds are debt securities issued by corporations, state and local government entities, and the U.S. Treasury, among others. Bond investors are essentially loaning the issuer money and receiving interest payments during the time the bond issuer is using their money. Stocks, on the other hand represent a level of ownership in a company. Stocks generally offer a great potential for growth, but also carry more downside risk than bonds. Bonds generally have a fixed period until maturity at which time the bond issuer pays the bondholder the face value of the bond. Bonds are often sold at a face value of $1,000 each. During the period in which bonds are outstanding, they generally pay interest semi-annually. Diversification Benefits of Bonds Portfolio diversification is all about having some asset classes in your portfolio that are not highly correlated with each other. This can help provide a level of stability to an investor’s portfolio over time. For example, a portfolio that is totally invested in stocks will do well when market and economic conditions are favorable for stocks. However, in a down stock market and a down economy, this type of stock-heavy portfolio could potentially suffer heavy losses. We saw this during the financial crisis of 2007-2008. A portfolio that is diversified with other investments such as bonds will generally hold up better during rough patches in the markets and the economy. While bonds do suffer losses, these losses are often smaller in magnitude than with stocks. According to data from Morningstar: Since 1926, bonds have suffered 101 negative quarters with an average quarterly loss of 2.01%, while stocks suffered 120 negative quarters with an average quarterly loss of 7.81% over the same period. In terms of annual losses since 1926, bonds have experienced 15 periods of annual losses with an average annual loss of 2.4%; for stocks there have been 25 periods of annual losses with an average annual loss of 13.2%. Morningstar’s analysis of the correlation of stocks and bonds show the correlation rarely has risen above 0.6 and that these were periods of high inflation and/or rising interest rates. Different Types of Bonds There are a number of types of bonds. These include: Treasury securities are issued by the U.S. Treasury and are considered to be riskless. They offer bonds, bills and notes with maturities ranging from a few days out to 30 years. Corporate bonds are debt securities issued by both public and private corporations. Investment grade bonds have the highest credit rating; these ratings can range all the way to high yield bonds which have a lower credit rating but offer a higher yield to help compensate for the added risk. Municipal bonds or “Munis” are bonds issued by states, cities, counties and other governmental entities. These bonds come in several varieties and are also rated by outside credit rating agencies. With the exception of Treasurys, bonds are rated by outside credit rating agencies as to the creditworthiness of the issuer. Bonds with the highest credit ratings will likely have the lowest interest rates, as they carry the lowest risk of default. Conversely, bonds with lower credit ratings will generally carry higher interest rates to compensate bond investors for their higher risk of default. Interest Rate Considerations Once a bond is purchased, one of the biggest factors influencing the price of a bond is interest rates. Bond prices move inversely with interest rates. During periods of rising interest rates as we have experienced in recent years, the prices of existing bonds will fall. When rates are falling this will cause the price of existing bonds to increase. Another factor that can influence the level of price changes of a bond is its duration. This is a measure of the bond’s level of interest rate risk that takes into account a bond’s time to maturity, its current yield, its coupon interest rate and any call provisions the bond may have. The duration calculation yields a number expressed in years. This number provides an estimate of the impact of a 1% change in interest rates on the price of the bond. For example, if a bond’s duration is calculated to be 5 years, this means that a 1% change in interest rates would result in a 5% change in the bond’s price. This change would be positive if interest rates decline and negative if they rise. Bonds with a longer duration are more susceptible to price fluctuations due to changes in interest rates. The Role of Bonds in Retirement Planning Bonds can play a key role in retirement planning, especially in retirement income planning. One tactic is to build a bond ladder of bonds maturing at various intervals. This might be every six months or every year out for a number of years. As a bond on the ladder matures, the investor can buy another bond at the far end of the ladder if it makes good sense from an interest rate perspective. The bonds in the ladder generate periodic interest payments and provide a level of stability inside the portfolio. Bonds in general can help mitigate the risk of other investments in the retirement portfolio such as stocks. Seek Professional Advice In deciding whether bonds are a good fit for your portfolio and which ones to own, it makes sense to consult with an experienced financial advisor. Our advisors here at Wedbush understand bonds and their potential role in all types of portfolios. Contact your Wedbush advisor to discuss investing in bonds and for help with your total portfolio. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal