3 Strategies for Sustainable Investing

strategies for sustainable investing

As climate change disasters such as wildfires, floods, and intensifying storms seem to be increasingly common, many people are looking for a way to encourage companies to enact positive change, while casting a “vote” against the worst offenders. Enter the world of sustainable investing options, which have steadily grown in popularity over the last decade.

According to Barron’s, U.S. ESG mutual fund and ETF assets have soared to a record $400 billion in 2021, up 33% from the year before. Despite this strong growth, the overall market share is still small, at just 1.4% of total U.S. mutual fund and ETF assets. 

With the huge market potential, it’s hard to know where to start. Here are three things we have incorporated in building a sustainable investment option for Uplevel clients. 

 

Prioritize and Focus  

There is no one true, universal definition of ethical investing. This is why it can be so confusing to understand and interpret. There are still many gray areas. 

Environmental, Social and Governance (ESG) investing is a framework you can use within ethical investing to evaluate investments and put your money to work with companies that strive to make the world a better place. In addition to financial factors, ESG investing also considers non-financial factors to measure an investment or company’s sustainability.

Here are some of the things each category may incorporate:

 

Environmental

Social

Governance

  • Carbon emissions
  • Air and water pollution
  • Deforestation
  • Green energy initiatives
  • Waste management
  • Water usage
  • Company gender parity
  • Diversity and inclusion efforts
  • Company sexual harassment policies
  • Human rights and fair labor practices
  • Diversity of board members
  • Executive pay
  • Internal corruption
  • Lobbying
  • Transparent accounting practices

ESG investing relies on independent ratings that assess a company’s behavior and policies in these various categories. Currently, there is no standardized approach to these measurements. ESG metrics are also not part of a company’s mandatory financial reporting, although many companies are voluntarily making disclosures or creating standalone sustainability reports. 

Designing a sustainable portfolio for Uplevel clients starts with values. We let our clients, prospective clients and combined 35+ years of experience guide us in defining the sustainable problem we are trying to solve: Climate change. Without this focus, it’s hard to have transparent reporting and results. 

“If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution.” Likely said by a Yale professor but often attributed to Einstein. 

Given our location in Portland, Oregon, it’s common to have clients who are interested in a sustainable way to invest. What we like about focusing within the “E” bucket and climate change specifically, is that we can rely on science to identify and pinpoint the primary contributor to climate change–greenhouse gas emissions. Also, the data on greenhouse gas emissions are widely available for public companies. 

 

Look Under the Hood  

It’s imperative to look beyond ESG branding when evaluating the viability and quality of various funds. Worth mentioning again is the absence of a universally accepted definition of sustainable investing, which gives way to broad interpretations and approaches to ESG investing. The components of ESG considered in an investment strategy, variables by which they are measured, and the method of incorporation can lead to a range of investment outcomes. 

Put another way, a company’s ESG rating is very subjective and there is often a lack of focus on what’s actually being measured. Even the ratings providers themselves can’t seem to agree with one another. The OECD assessed different rating providers and found ESG scores to vary widely.

From the graph below, we can see the variability of ratings. Take Johnson & Johnson, which is given a score in the low 40s by one provider and 90 by another. Not only is this significant difference hard to decipher, but it  raises important questions about reliance on any one rating and can lead investors to wonder if they are having the impact they think they are.  


 

 

 

 

 

 

 

 

 

Source: The OECD

 

Rather than rely on generic, and heavily opinion-based ESG ratings for building our clients’ sustainable portfolios, we turn instead to assessing the availability, quality and objectivity of data and transparent reporting. 

In our analysis, we found Dimensional Fund Advisors’ (DFA) approach to be the most robust. Their sustainability strategies are designed to have a clear focus on climate change. 

The process begins by screening out the worst emitters of greenhouse gasses–including “in the air” and “in the ground” emissions–from the portfolio. DFA utilizes carbon emissions data and scales it by a company’s sales to determine how much carbon is emitted to produce a dollar of sales. This carbon emissions intensity represents 85% of the score. 

DFA is mindful to not exclude certain sectors, as they all need to decarbonize. Instead, they go sector by sector and overweight the companies that are the most sustainable, and underweight the companies that are the least. This is important, as removing sectors entirely is shortsided. It takes the entire economy to run the world, and removing components would decrease the diversity of the fund.

Eventually, kicking out sectors could also leave you with an overweight of large cap technology companies. Their practices are to exclude or reweight, but not concentrate. The remaining 15% of the score screens out companies for other considerations, including palm oil, child labor, factory farming, etc. 

 

Set and Manage Expectations 

While it’s important to note there currently isn’t a known or evidenced based return premium for investing in a sustainable fashion, it also doesn’t need to cause underperformance. The evidence shows we can still own high-quality investments with returns similar to a non-ESG fund, provided we do it right and stick to sound investment principles like diversification, lost cost, low turnover, etc. 

Over 13 years, this type of sustainable approach has had very similar performance to a more traditional DFA portfolio. As the data provided by DFA below demonstrates, returns of their US Sustainability Core 1 Portfolio have been remarkably similar to their “traditional” US Core Equity 1 Portfolio going back to 2008, illustrating that investing sustainably doesn’t have to mean sacrificing long-term performance. 

Source: Dimensional Fund Advisors

We also make sure clients understand that it’s imperfect to compare “traditional” portfolio performance to “sustainable” investment performance by using the same indices as benchmarks. By intentionally screening out the worst offenders from our sustainable portfolio, there will be periods of time when the portfolio deviates from the market by design.  

For example, in the first quarter of 2022, the energy sector did remarkably well. Oil prices spiked to record highs due to supply chain issues and geopolitical events. Exxon Mobil Corp stock, the biggest public energy company in the world, was up over 30% year to date. At the same time, big tech companies were approaching a market correction. Given the underweight of energy companies relative to technology companies in an Uplevel sustainable portfolio, it has faced some headwinds so far this year. 

Regardless, we believe long-term sustainable investors have many reasons to be optimistic about the future. Seven out of the ten largest pension funds in the world invest in sustainable funds, which will continue to pressure big corporations to make positive changes.

Additionally, the Securities and Exchange Commission just proposed new rule changes requiring companies to report their greenhouse gas emissions and details of how climate change is affecting their businesses. We’re confident markets will work better with more standardized information, and the new SEC disclosure should help drive better outcomes. 

While it’s not always easy, our message remains consistent—much of investing requires taking the good with the bad. Remaining focused and disciplined, regardless of ESG strategy, is what leads towards future rewards in the long run. 

Do you need help understanding sustainable investment options? Reach out to us at Upevel. We’re here to help. 

 

Is Your Concentrated Stock Holding Worth the Risk?

concentrated stock holding

 

Earlier this month, stock of Facebook’s parent company Meta dropped a whopping 26%, its biggest one-day decline ever. Mark Zuckerberg, Meta’s chief executive, saw his personal “paper wealth” decline by a staggering $31 billion, more than the entire market capitalization of companies like Twitter ($30 billion) and Delta Airlines ($26 billion). 

Even after this precipitous drop in wealth, he’s still the tenth richest person in the world and it’s unlikely he’s had to make any concessions to his lifestyle. Still, he provides a valuable lesson for us all. 

At Uplevel Wealth, we’ve encountered our fair share of clients whose wealth is heavily concentrated in a single company’s stock. If you find yourself in the same position, here are three things you should consider.

 

1. What’s the Risk?

Investing in a one company’s stock is tremendously risky, as you are concentrating your wealth in the future success of a single company or industry. It can be challenging to see this risk, especially when a company’s stock has performed well recently.

The stock market’s past is littered with former “heros” turned “zeros” – Enron and WorldCom being two of the most famous. While these calamitous crashes garner lots of attention, a more common risk of a concentrated holding is poor performance for a prolonged period of time. 

Henrik Bessembinder, a professor at Arizona State University, looked at stock market performance going back to 1926. His research found that only 86 stocks, or 4% of companies were responsible for half the stock market’s wealth creation over 90 years. 

The other 96%? Their performance was no better than 1-month Treasury Bills, a government-backed investment whose return is only slightly higher than cash. 

As seen in the recent Meta example, individual stocks can also be incredibly volatile, losing significant value over a single earnings report, change in government regulation, or company scandal. 

This volatility is especially dangerous for investors who rely on their portfolios for income, expenses like college tuition or a home purchase, or are making future life decisions based on their current net worth. 

High volatility greatly increases the risk that stock will need to be sold at some point in the future when its price is depressed, and that the value is not there when it’s needed most. 

 

2. How Much is Too Much?

Common rules of thumb suggest limiting a single stock position to no more than 10 or 20% of your investable assets, but the “right” amount is very specific to your unique circumstances.

Like many clients we encounter, a concentrated stock position has often been amassed while working as an employee for the company in question. Stock options, RSU grants, and discounted employee stock purchase plans are common compensation vehicles and can quickly grow to a sizable portion of your net worth. 

Employees also have to be mindful of their own “human capital” investment and the degree to which it, too, is tied to your current employer. This may further reduce the stock exposure you should prudently have.

Rather than relying on one-size-fits-all percentages, we instead evaluate the amount of a single stock position, if any, that makes sense for our clients’ unique circumstances. If the future performance of the stock holding in question is sizable enough to sway the success or failure of a client’s future plans and goals, we often advise a significant reduction. 

For someone like Mark Zuckerberg, his astronomical wealth affords him the ability to assume greater stock risk without threatening financial ruin – a position most of us aren’t lucky enough to find ourselves in.

 

3. What’s the Best Way to Start?

Reducing a concentrated stock position can present its challenges, both on a financial and emotional level. 

One of the main hesitations of selling stock, presuming it has appreciated considerably, is the potential tax bill for doing so. Though long term capital gains rates are at historic lows, with the top Federal rate at 23.8% and state rates varying, many investors see taxes as the primary obstacle to diversification. 

In reality, however, reducing the inherent risks of holding a concentrated position should far outweigh the tax implications of selling. Afterall, isn’t it better to pay taxes because of investment gains rather than no taxes because of losses? 

It’s also common for investors to have emotional ties to their stock holding. Perhaps you have been an employee of the company for many years and have great confidence in its future direction. Or, you were gifted the stock by a beloved family member and feel a sense of duty to keep it. 

While both are understandable from an emotional perspective, mixing emotions and investing rarely turns out well. Recognizing this, or working with a competent advisor who can help you work through your hesitation, provides the best probability of financial success.

From a mechanics perspective, the fastest way to reduce the risk and volatility associated with a large stock holding is to sell it all at once. As discussed above, this can often be impractical. 

At Uplevel, we work with our clients to create a plan for diversification. Whether that means spreading gains over several tax years, picking monthly or quarterly dates to sell a specified amount, or setting price targets at which trades will execute, creating a disciplined plan is key.   

 

Protect Your Wealth

While concentrated stock holdings can be a great way to build wealth, diversification is the best way to maintain it. 

Do you need help creating a plan for your concentrated stock position? Reach out to us at Upevel. We’re here to help. 

 

Three Tips for Surviving Stock Market Volatility

As we close out the year, you’ve probably noticed that the stock market’s been on a bit of a wild ride. Markets dropped sharply on Black Friday as news of the omicron variant emerged and have continued to seesaw as markets try to decipher how this new development will impact travel, consumer spending, interest rates, and more. 

These swings have caught many investors off guard after 18 months of strong market returns. If you’re one of them, read on for three tips to survive stock market volatility:

 

1. Worrying is normal. Most of us have complex emotions surrounding money and investing, and it’s especially common to feel concern when the money we’ve worked so hard to earn and save may be at risk. Our brain’s “fight or flight” reaction, which served us well in the days of animal predators, often leads to panic when the news appears bad or our investment portfolio takes a downturn. 

Instead of the sabre-toothed tiger, many investors fall prey to common behavioral biases like loss aversion and anchoring, two phenomena popularized by economist and Nobel Prize winner Richard Thaler. His study of loss aversion showed that people feel the pain of losses twice as acutely as the pleasure of wins, meaning a day in which your portfolio falls two percent, for example, likely feels much more traumatic than the happiness experienced on a day in which your portfolio rises by the same amount. 

Another common cognitive bias is the concept of anchoring, which occurs when we have a particular value or number in mind. Perhaps you reached a milestone in the balance of your investment portfolio, only to see it slip backwards during this most recent volatility. That decline may feel like a “loss,” even though your portfolio is still likely higher than it was a year ago. 

The temptation to react in stressful times and “do something” is a very human behavior. The best thing we can do as investors is remind ourselves that choosing to “do nothing” and sticking with the long-term plan is also taking action.

 

2. Have a little perspective. While we all enjoy seeing positive returns and growing portfolios, the less pleasant reality of investing is that markets are volatile in the short term. 

It’s not uncommon to experience a market correction, which is a decline from a previous peak of 10%, or a bear market, which is a decline of 20%, in any given year. In fact, even years with positive stock market returns experience intra-year declines. Looking back at the past 20 years, the US stock market had positive returns in 16 of those years, despite intra-year declines ranging from 3% to 49%. 

US Market Intra-Year Declines vs. Calendar Year Returns, January 2001 – December 2020

 

US Market Intra-Year Declines vs. Calendar Year Returns

Chart courtesy Dimensional Fund Advisors. January 2001–December 2020, in US dollars. Data is calculated off rounded daily returns. US Market is represented by the Russell 3000 Index. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year.

 

While we don’t know how 2021 will end, investors have enjoyed another year of strong returns, despite recent volatility. US stocks, represented by the Russell 3000 Index, have returned over 24% year to date, well above historical averages. International stocks, represented by the MSCI All Country World Index Ex-US haven’t fared quite as well, but have still enjoyed returns north of 7% year to date. 

As unpleasant as volatility can be, it’s a normal part of investing. Having a long-term focus and a little perspective can help us all get through the inevitable tumbles along the way.

 

3. Take a look at how your portfolio is allocated. If stock market volatility is causing you to lose sleep, perhaps that’s a sign it’s time to revisit your asset allocation, or mix between stocks and bonds.

A healthy allocation towards stocks is needed for most long-term investors, especially to keep pace with inflation like we’re seeing today. Stocks also experience greater volatility than safe government bonds like US Treasurys. If fluctuations in your portfolio are a cause of great concern, that may be a sign that a permanent shift to a more conservative portfolio is due. 

The right asset allocation is unique to each investor and depends on a number of factors. At Uplevel Wealth, we like to say that choosing the mix between stocks and bonds is as much art as science. While ensuring our clients have enough growth via stocks to achieve their future goals, equally important is creating a portfolio mix they can stick with in good times and bad. 

Having a comfortable cushion of cash for emergencies or access to low interest rate funds like a home equity line of credit (HELOC) is also a vital part of a healthy investment plan. As mentioned earlier, market volatility is nothing unusual. What investors should avoid is being forced to sell investments for cash needs at the same time markets are struggling. 

Lastly, do your best to tune out the noise. Whether it’s the news, social media, or your brother-in-law at the holiday get together, remember that nothing grabs our attention like scary headlines. If you find yourself worrying about recent volatility, a good first step is to take a much-needed break from the “noise.” Read a book, take a walk, or turn on some cheerful holiday music. 

Or, give us a call at Uplevel. We’re here to help.

 

 

 

Five Ways to Uplevel Your End-of-Year Finances

End of Year To-Do's

Visit any Costco or Target (two of our favorites!) and you’ll see that fall is officially over and the holiday season is upon us. Not to despair, however. With a solid nine weeks left in 2021, now’s a great time to run through some important “to-do’s” and finish the year with your finances in good order.

To keep things easy, we broke it into our top five categories:

 

Be Mindful of Deadlines Ahead

With only a few pay periods remaining in 2021, make sure you’re on track to maximize your retirement plan contributions, especially if your employer offers a match. You can contribute up to $19,500 this calendar year to a 401(k) or 403(b), plus an additional $6,500 if you’re over age 50. 

If you want to increase contributions before the December 31st deadline, reach out to your HR department or payroll provider ASAP. It’s also a great opportunity to get next year’s contributions set up, as the maximum contribution amount jumps to $20,500 in 2022, for a total of $27,000 if you’re over 50. 

 

Use It or Lose It

A Flexible Spending Account (FSA) or Dependent Care FSA allows you to save pre-tax dollars throughout the year and use those funds to reimburse yourself for out-of-pocket expenses like copays, prescriptions, or child care expenses. While these accounts are a great way to save on taxes, typical FSA accounts have a “use it or lose it” provision whereby the balance in the account needs to be depleted by the end of the year. 

Employers do have the discretion to offer wiggle room and allow for some money to be carried over, usually $550. Due to the pandemic, the government is giving employers even more leeway, allowing for deadline extensions and larger balance carryforwards, including up to the total balance in an FSA. 

Be sure to find out what deadlines and limits apply to your plan, as you may want to contribute less money next year if you can carry-over an existing balance. If not, now’s the time to use up remaining funds and schedule doctor visits or stock up on FSA-eligible items, a handy list of which can be found here

 

Tax Planning Isn’t Just for April

While impending tax changes have been rumored since President Biden took office (check out our past blog posts on proposed tax changes) nothing has officially passed as of this post. Despite the uncertainty, it’s still a good idea to take a look at your income and deductions in 2021 and how they might compare to 2022 and beyond. 

If you were part of 2021’s Great Resignation and left your job, a Roth conversion in a lower-income year could be of great benefit. Conversely, if you were fortunate enough to receive a significant windfall, such as Restricted Stock Units (RSUs) vesting, other stock options, or a large bonus, make sure you are paying enough in estimated tax payments to avoid penalties come tax time. 

 

Double Check Your Portfolio

Though stocks have been on a winning streak for the last year or more, it’s worth taking a peek at your portfolio to see if any holdings are currently at a loss. Those investments can be sold and their losses used to offset capital gains realized this tax year or carried forward to a future tax year until depleted. 

If you don’t already have capital gains, you can offset up to $3,000 in ordinary income with realized capital losses. A word of caution however – be sure to familiarize yourself with wash sale rules before repurchasing a security sold at a loss, or you may find yourself in a bit of hot water with the IRS.

 

Make a Difference

Helping friends and family or supporting beloved charitable organizations can happen any time during the year, but there are some timing considerations if you’re looking to maximize your giving. 

This year, you can give up to $15,000 to another individual without making a dent in your lifetime estate and gift exclusion. If you are married and file jointly, that amount doubles to $30,000. Limits for 2022 have yet to be announced, but there is speculation that this amount will increase to $16,000 for single tax filers and $32,000 for married couples. 

Giving to charities has its own set of financial benefits and strategies vary depending on your circumstances. If you find a bit of excess cash in your bank account, here are a few options to consider:

  • Cash donations – Congress extended a provision of the CARES Act that gives single taxpayers a deduction of up to $300 for cash donations to some charities and $600 for married filing jointly. This applies even if you claim the standard deduction.
  • Strategic Donations – In addition to outright cash contributions, there are other options available such as donating appreciated stock, funding a donor advised fund, or a qualified charitable distribution (for those ages 70.5 or older). We can help determine which option is best for you. 

 

Reach Out

In the coming weeks, as you trade Pumpkin Spice Lattes for Peppermint Mochas, don’t forget to take a few moments to check-in on your financial position to make sure you’re taking full advantage of all the options available to you. We’re here to help.

 

Cryptocurrencies – Four Things To Know Before You Invest  

Cryptocurrency

Cryptocurrencies have made a lot of headlines recently, from minting overnight millionaires to Elon Musk’s tweets about bitcoin. Many people are left to wonder if — and how — they should be thinking about crypto.

The comedian John Oliver offers one way to think about it: “Everything you don’t understand about money combined with everything you don’t understand about computers.”

With over 4,000 types of cryptocurrencies in circulation, it’s hard to know where to start. We wish all of our clients knew these four things……….

Our article continues in Business Insider, where it was originally published.

Women Have What It Takes to Buy a Home in Today’s Hot Market

In today’s competitive real estate market, it takes more than just money to claim the keys to the hot property everyone wants.

“From understanding purchaser responsibilities to realistically assessing risk tolerance, savvy buyers best navigate fast-paced bidding wars,” says Carey Hughes, principal broker with Keller Williams Realty Professionals in Portland, Oregon.

This holds true for would-be homeowners across the board.

But as more women take the lead in purchasing homes, they face an uphill battle getting there.

To read more, check out Anika’s full Business Insider article.

Trek to Retirement

In late March, I set out into the backcountry of central Oregon with eight other women, all on snowshoes or cross-country skis. We traversed more than 22 miles in the heart of the Oregon Cascades, breaking trail and staying in huts. The terrain was steep, the visibility was poor, the snow was deep and there was a stiff wind.

What does this have to do with investing? The trek was reminiscent in three ways:

Feeling inferior. I was among incredibly fit and experienced outdoors women. This was my first trip of this kind. The others were triathletes, competitive cyclists and expert mountaineers. If we were a sports team, I’d have been keeping the bench warm.

I suspect I saw myself as more amateur than my companions did. I can’t tell you how many competent, educated and bright women I meet who are reluctant to acknowledge all that they’ve done for their financial future or voice the insightful questions they have. They downplay their knowledge because they aren’t “experts.”

One of the best things about investing is that it doesn’t require expertise to begin. In fact, the quote of “80% of success is showing up” couldn’t be truer. Just getting started, by putting your money to work in the market, can be one of the best decisions you make. From there, you can always improve and adjust your portfolio, as you learn and grow along the way.

Constraints work. Our Oregon Cascades adventure was a last-minute trip, so I didn’t have time to do a ton of research or prep beforehand. This worked in my favor. I could only concentrate on what gear to pack, food to bring and the correct mapping software to download. I couldn’t overthink it.

The same approach can be helpful with investing. You can easily get sucked into the latest articles on bitcoin, the “next Amazon,” why you ought to buy gold and how to invest in today’s economy. But in all likelihood, you’ll fare far better if you stick with the essentials—a handful of mutual funds that give you broad diversification at low cost.

Start small. A few hours into the trek, we lost some gear and our physical map. The visibility was poor and it was snowing hard. An hour of backtracking failed to locate our lost items. Our 25-pound backpacks became heavier and our pace slower. We became concerned we wouldn’t make it to the first hut in eight hours, let alone by dark.

The experience gave new meaning to putting one foot—or snowshoe—in front of another. Our success depended on this simple approach.

Retirement can seem like an incredibly daunting and distant goal. There may be a house that needs work, daycare and education costs that seem to go nowhere but up, and aging parents to comfort and care for. There will be days when getting out of bed and dressing yourself seem like an accomplishment. And they are. Every action you take, every decision you make, toward your long-term goals are a step in the right direction, no matter what your pace. Remember, you’re human.

Taking action builds momentum. Before you know it, your regular savings toward retirement will compound and grow. Your eight-hour trek will seem like six hours. Conditions will improve and the wind will be at your back—and all that was made possible by taking those initial steps.

This article first appeared in HumbleDollar.