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3 Steps to a Socially Conscious Portfolio

When the Justice Department announced this week that it was charging several members of the Chinese Army over the Equifax hack, it was all too easy to forget that the company’s sloppy practices had left the door open to thieves seeking leverage over American citizens.

So how can it be, then, that Equifax can show up on the roster of companies that so-called E.S.G. funds purchase for investors?

The G, after all, stands for governance (E is for environmental and S for social). Companies with good governance embrace the kinds of controls that could have kept such a problem from happening in the first place. So what kind of governance filter could Equifax credibly pass through?

That’s the kind of question that investors need to ask if they’re looking to overhaul their portfolio to make it more … well, what exactly? There are lots of names for this — E.S.G., socially responsible investing, sustainable investing.

Whether you’re interested in trying to use your money to make the world a little better, or simply betting that climate change will be ruinous for some companies or entire industries, there are three main questions you ought to answer. Why are you doing this? How, exactly, do you want to invest? And what funds will you choose?

Let’s take them in order.

The home page of Horizons Sustainable Financial Services in Santa Fe, N.M., greets visitors with an imperative: Invest like you give a damn. But that raises an equally important and unwritten question: About what?

The investment advisory firm’s chief executive, Kimberly Griego-Kiel, has new clients fill out a financial values worksheet and a social policy questionnaire, both of which anyone can download from the firm’s website. The policy questionnaire lays out some of the basic screens the firm employs: alcohol, firearms and military weapons, fossil fuels.

But there are other possible screens that are more complex, like a social-issue exclusion for genocide. (That one tries to keep clients from owning shares in companies that do business with, say, Myanmar’s military leaders, given that the United Nations has taken action to prevent its alleged crimes against humanity.)

These exercises help the firm take clients’ temperature. But they may be even more helpful for investors themselves, especially a couple who may not realize that they don’t have the same priorities.

So now you know your principles. This is where things start getting complicated, and it’s how vegans can end up investing in companies that use leather.

If you want to avoid all stocks that pull sources of energy from the ground, it’s easy enough to find funds that don’t invest in companies that extract oil, gas and coal.

But what about shipping companies that use lots of fuel? Auto companies that make most of their profits from large vehicles? Tech companies with data centers that consume electricity like it’s going out of style?

The difference here is one of shunning versus screening.

Ric Marshall, senior corporate governance analyst at MSCI, which licenses E.S.G. indexes to fund managers, has been watching socially responsible investing for the better part of a quarter-century. More investors these days, instead of shunning entire industries, are demanding that companies undergo careful screening, he said.

In practice, that means a fund manager might decide to invest in every industry but buy stocks only in companies that are the best of breed, even in oil and gas. Or perhaps a fund owns everything in a particular market segment but just a wee bit of the bad stuff — all the better to retain the right to jawbone management and vote in favor of E.S.G.-related shareholder resolutions.

“The prevailing theory is that it’s better to be invested at a lower level but still be able to engage,” Mr. Marshall said.

I didn’t like that answer much, given my past attempts at punishing Equifax by encouraging my employer to fire the company and trying (and failing) to replace Wells Fargo as my mortgage servicer. But Mr. Marshall made a counterpoint: Aren’t we all better off if we retain at least a bit of whatever leverage we have over powerful companies like these?

Once you decide on your approach, you have another choice: active management, where fund managers handpick the contents of a portfolio company by company, or passive management, where they might license an index. Active funds tend to have higher fees, particularly for international funds where more expensive research may be necessary. And high fees can hurt returns.

Now for some nitty-gritty.

First, the funds you’re considering. What, exactly, is in them? You can ask for the full list of companies, even though a fund’s fact sheet might list only the top 10 holdings. It can be an illuminating exercise.

Next, consider the fund managers themselves. How long have they been running this fund or ones like it — particularly if they are handpicking stocks and not just renting an index to use? Investment advisers and people who pick funds for 401(k) plans usually want to see at least a three-year track record and tens of millions of dollars under management.

Both are barriers to entry. One leaves out fund managers using new strategies, like animal welfare funds. And if few people will give a new fund money without a track record, wealthy fund managers have a built-in advantage: They can gather money from family.

“As a queer woman of color, I came from extreme rural poverty,” said Rachel Robasciotti, whose San Francisco investment advisory firm uses some of the most rigorous E.S.G. criteria that I’ve ever seen. “I’m well connected now, but I don’t have that treasure trove of assets.”

Another question that doesn’t come up as much but should: How do the fund companies vote on shareholder resolutions? This usually isn’t easy to figure out, and some fund companies are better about sharing it than others.

On Thursday, Morningstar released a report on five years of E.S.G. voting records from 50 large fund companies, although it excluded governance resolutions and shareholder rights initiatives that did not specifically include social or environmental factors. It found that in 2019, Allianz Global Investors, Blackstone, Eaton Vance and PIMCO were most likely to vote in favor of E.S.G.-related resolutions. The least likely list included five of the 10 largest fund companies: American Funds, Dimensional Funds, T. Rowe Price, Vanguard and BlackRock, which shouted from the rooftops last month that it really, truly intends to care more about these sorts of things from this point forward.

Vanguard has a good primer to E.S.G. investing. Morningstar has its own plus a proprietary rating system (from one to five “globes”). It also created some ready-made model portfolios recently, some with active management and some using indexes. Sonya Dreizler, a consultant who helps investment advisers and companies get up to speed on E.S.G. strategies, said she always pointed people to the postings on Medium by Jon Hale, Morningstar’s head of sustainability research.

And if you want a robo-adviser to pick your funds and put them on autopilot, companies like Betterment, EarthFolio, Ellevest, Motif and Wealthsimple are doing some E.S.G. investing now, too.

This is a lot to take in, but there’s no need to move your entire net worth all at once. Start small, maybe with your workplace 401(k), before you tackle any other accounts.

And if the fluid definition of E.S.G. starts to make you feel paralyzed or even cynical, as if this is all just so much green-washed pablum, that’s understandable. There is no perfect company, and every fund manager must make trade-offs.

But try thinking about it this way: Living your values in every way, as best as you can, often delivers a positive emotional return. So any realignment of your portfolio can offer more value than you think.

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Got a Raise? It’s Time to Bump Up Your Savings, Too

Getting a raise is a good thing, right? It is unless you increase your spending each time you get a bump in pay. The result may be that you’ll fall short of what you need for retirement.

Raises, oddly, “can actually make it harder to achieve a comfortable retirement,” according to a new analysis from the investment research firm Morningstar.

The prime culprit is lifestyle “creep.” A fatter paycheck makes people feel richer, so they feel empowered to buy that fancy car or bigger house, said Steve Wendel, head of behavioral science at Morningstar. But as their expenses grow, they risk falling behind on retirement savings if they stick to saving the same proportion of their income.

If your salary goes to $120,000 from $100,000 and you keep saving 10 percent of your income, you’ll be saving more in absolute terms — an extra $2,000. But you really need to save even more if you want to keep that fancier lifestyle in retirement — and many people don’t, the research found.

Morningstar analyzed data from a big retirement plan manager to compare the average change in savings rates for people who got a raise and those who didn’t. It turns out that there was little difference between the two groups. People tend to save about the same, in percentage terms, regardless of whether they got a boost in pay.

“When people get a raise, they’re not putting it aside,” Mr. Wendel said.

Other sources of retirement income, like Social Security, are relatively fixed, the report noted. (Social Security payments do increase with wages, but only up to certain limits.) So people living more lavishly need to save more. Older people, in particular, need to save more — even if they’ve been diligent savers — because they have less time to catch up before retirement.

Just how much more should people save? Morningstar suggested a simple rule of thumb: Each time you get a raise, spend a percentage of it that’s twice the number of years to retirement — and save the rest. That means if you expect to retire in 10 years, you can spend 20 percent of the raise, guilt free.

Younger people can safely spend more of the raise because they have more time for their investments to grow. Those with 30 years to retirement could spend about 60 percent of their raise, under the rule.

(To arrive at its guidance, Morningstar analyzed data from the Federal Reserve’s 2016 Survey of Consumer Finances, focusing on 1,619 households that were participating in a workplace retirement plan. The analysis calculated how much of a theoretical 5 percent raise would need to be saved to match retirement with the higher standard of living the raise brings.)

The rule’s focus on how much of a raise could be spent, rather than how much should be saved, helps keep people from feeling deprived, Mr. Wendel said.

It also helps people commit in advance to set aside a certain proportion of their raise to ease the sting of not spending it all. “It doesn’t hurt as much to save a future raise,” he said.

Many employers, drawing on behavioral economics research, now include automatic annual increases in paycheck contributions — sometimes called “automatic escalation” — in their retirement savings plans. But the option to automatically save a certain amount of a raise is less common, Morningstar said. The Plan Sponsor Council of America, an industry group, said it did not yet track whether companies offered such a feature.

Rules of thumb can help simplify complex calculations for savers, Mr. Wendel said, but for a detailed analysis of your retirement finances, it may help to seek professional advice.

Here are some questions and answers about saving for retirement:

What if this rule of thumb for saving a portion of my raise is a stretch for me?

Other guidelines can be helpful, if less than ideal, Morningstar found. One is to “save your age,” as a percentage of the raise. If you’re 30, you should save 30 percent of the raise; if you’re 50, save half.

Alternatively, save at least 33 percent of your raise. If your take-home pay increased by $1,000, you should save at least $333.

These two options, however, work best for savers in their 20s, 30s and 40s and become less effective as people age. The “spend twice your years to retirement” rule works across all age groups, the report said, because it usually involves saving the most money. Still, it may be financially difficult for some people to put into action.

What if I don’t have a workplace retirement plan?

The rule works if you have an individual retirement account but may require more attention on your part. Ideally, if you save in an I.R.A., you should establish regular transfers from your checking account — or even a split deposit of your paycheck — into the I.R.A., timed to your paycheck deposits, to reduce the temptation to spend the money.

“If your paycheck hits on the 15th, set up a transfer for the 17th,” said Cheryl A. Costa, a financial planner in Framingham, Mass.

When you get a raise, increase the size of your transfers accordingly.

The message people should internalize, Mr. Wendel said, remains the same: “I always save part of my raise.”

Money is tight, and I don’t get regular raises. What can I do?

Save as much as you reasonably can, and don’t worry if you have to start small, said Gary Koenig, vice president for economic and consumer security at the AARP Public Policy Institute, which focuses on issues related to older Americans.

Some people may be discouraged by oft-cited guidelines, like saving 10 or 15 percent of your paycheck, so they don’t even try, he said. But a big barrier to retirement saving is just getting started. Enrolling in a retirement plan or opening an I.R.A. and saving just 1 percent of your paycheck can get things rolling, and you can build from there.

“It’s actually a big step,” Mr. Koenig said.

When you get extra cash — like a bonus, an income tax refund or even reimbursements from a workplace flexible spending account — put the money toward retirement, suggests the National Association of Personal Financial Advisors, a group for fee-only financial planners.

“Have a policy that when you get money you weren’t expecting, a certain percentage goes into some form of savings,” said Tyler Reeves, a financial planner in Birmingham, Ala.

A part-time job can help generate extra cash for savings, Ms. Costa said. The new gig economy offers more flexibility, she said. You could sign up through an online service for, say, a few hours of dog walking on the weekend, when it may be less likely to conflict with your main job.

If you’re disciplined, consider a cash-back credit card, like one from Fidelity or Schwab, that automatically contributes a percentage of your spending into a linked retirement account. But pay off your card balance in full each month, Ms. Costa warned. Otherwise, interest paid on the card will torpedo any savings.

And treat yourself — within reason. If you meet a savings goal, Mr. Reeves said, allow yourself a small reward, like dinner at a nice restaurant.

“Carve out a little,” he said, “to enjoy life in the moment.”


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