3 Ways to Invest with Your Values

 

In fall 1999, I stepped up to the challenge.  My high school economics teacher crafted a lesson plan that would forever shape my experience with investing.  She asked us to create a test portfolio with five individual equities and track their performance throughout the school year. 

The tech industry was booming (at the time).  I carefully selected Cisco, Hewlett Packard, and a few other stocks for my hypothetical portfolio.  But I didn’t stop there. Instead, I invested $2,000 of my hard-earned cash in the same stocks.  

The $2,000 investment portfolio declined by 50% within a few months.  I couldn’t withstand the pressure and sold each position at a deep discount.

There were two main reasons behind my early investing mistake: naivete and lack of diversification.  Nearly all of my holdings were in the tech industry.  

Now, as a more astute investor, I understand the importance of vision and values in financial decision-making.  Below are three easy ways to invest with your values.

I. Clarify Your Why

Where do you want to be five years from now?  How are you called to be a better version of yourself?  Think about the guiding principles, or values, that will bridge the gap between where you are now and where you want to be.  Define your ideal life.

Start with this overarching vision, and then design multiple goals around that vision.  Do you want to retire earlier than the traditional age of 65? Then thoughtfully research the steps you must take to get there.  Early retirement entails a longer reliance on investment income. If you are within five years of being financially independent and will be drawing down your investment portfolio to fund this lifestyle, your asset mix should be more conservative than someone who is 20 years away from financial independence.  Age is only a number. Look instead to your investing time horizon.  

Next, carefully inspect your current investment portfolio.  Do your investments align with your specific goals? Consider the purpose behind each account.  Investment accounts such as 401k plans, 403b plans, and IRAs often are earmarked for retirement.  What about 529 college saving plans? Is the investment mix in your 529 plan too conservative or aggressive for the estimated date of withdrawal?  Paying for private elementary or high school expenses out of the 529 plan is now allowed, but your investments should reflect a shorter time horizon than if you strictly plan to use the 529 account for college expenses.  For an emergency fund, focus on cash or money market funds. Equities fluctuate in value, so reserve equities for long-term goals.

Consistency is key when matching an account’s investment mix with its intended goal.  For any mismatch, find a tax-efficient way to get rid of the position. In a tax-sheltered retirement or 529 college savings plan, there is no tax consequence for selling.  However, you need to exercise caution with taxable brokerage accounts. If you want to dispose of an appreciated position in your brokerage account where the current value is much higher than the cost basis (i.e. $1,000 FMV and $400 basis = $600 gain), first calculate the federal and state tax implications.  It may be wiser to choose a different position where the value and basis are closer (e.g. $1,000 FMV and $800 basis = $200 gain).  

To summarize, start with the big picture vision and ensure that your investments are consistent with your goals.

II. Market Timing Doesn’t Win

Did you ever play with a Magic 8 Ball as a kid?  If not, I’ll jog your memory. You would ask a question, shake the ball, and turn it over for an answer.  

Trying to time the market is the equivalent of putting your investment portfolio into the hands of the Magic 8 Ball.  You tactically move in and out of positions based on whether you think the stock market will go up or down on a given day.  Market timing is more than a gamble. It’s downright exhausting. Parenthood is both enriching and tiring. Do you really want to expend more energy on investments than required?

Develop a long-term asset mix instead and adhere to that mix.  Assess the level of risk you are willing to take in your investment portfolio and determine if your existing assets accurately reflect your risk tolerance.  Take this free assessment from my sister company WorthyNest® to better understand your investing style.

Also, think about the last market downturn.  Did you check your retirement account balances every day even though you were five years or more from financial independence?  If the answer is yes, you may want to consider a conservative portfolio. An aggressive investment mix may be more appropriate if you see an economic downturn as an opportunity to buy equities “on sale.”

When defining an ideal portfolio mix, remember that the stock market is cyclical.  We are experiencing the longest U.S. bull market run in history. In a few months, we could feel the pain of a deep recession.  There is no Magic 8 Ball to tell us when the next downturn will happen. There are indicators, but economists rarely predict every market downturn.  

Furthermore, recognize that only 10 percent of your investment performance is attributable to the positions you choose.  The other 90 percent of performance is based on the asset mix, or ratio of stocks to bonds. You may want a single investment strategy for all accounts.  Or, it may be simpler to develop two strategies — one that is short-term and another that is focused on long-term goals.  

Avoid timing the market, and you’ll rest easier at night.


III. Use Your Investment Portfolio to Benefit Charities

Cash is not the only way to support charitable organizations.  Positions with high fair market value and low tax basis are known as highly appreciated positions, and these are ideal for charitable contributions -- if they are located in a taxable brokerage account.  

Do you (or possibly your spouse) have concentrated stock positions from a prior or current employer?  A very large portion of your investment portfolio may be tied to your employer if you vest in stock options or receive Restricted Stock Units.  Donating shares of stock to a charity provides several benefits: you support a meaningful cause, diversify your investment portfolio and avoid capital gains tax.

For example, suppose you want to make a $1,000 donation to church.  You’ve held $1,000 of Disney stock for more than a year, and your cost basis in the stock is only $600.  You transfer the stock directly from your brokerage account to the charity. This strategy avoids $400 of long-term capital gains because you did not sell it.  The charitable organization is a non-profit, so it is not required to pay capital gains tax. You (the donor) still receive a $1,000 charitable deduction and avoid paying capital gains tax.  It is a win-win for both of you!

Want to take your charitable giving to a new level?  Donor-advised funds are simple to establish and easy to use.  They are ideal if you have not already committed a specific dollar amount to a charity in writing and you want to give substantially to one or more charities.  A donor-advised fund typically may be opened for $5,000, and grants of $1,000 or more are suggested.

In short, consider your investment portfolio for charitable giving.

Rainy Day Savings

Many Christians falsely believe that investing is intended to help the “rich get richer.”  Rather, God wants you to live abundantly. Proverbs 6: 6-8 says it well:

“Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest.”  

When God graces you with financial gifts, do not spend the money frivolously.  Save it for another time of financial hardship (or opportunity). Also, use your investment portfolio as a tool for the greater good.

Eager to learn more about building wealth in a way that aligns with your values? Read my book, Redefining Family Wealth: A Parent’s Guide to Purposeful Living, or join our email list.