Whether you have been investing for a while or are just starting out, the fluctuations of the stock market can be a frightening thing. Cash can be comforting in comparison; its value is somewhat predictable. Yet in today’s world of low-interest rates, you’d be lucky if your cash managed to beat inflation. Realistically, to generate any meaningful investment returns in 2020 you need to look beyond cash to other asset types, which inevitably carry greater risk.
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us.
Even the very best, most experienced investors make mistakes. The great Warren Buffett, for instance, claims that he regrets some of the decisions he made over the years. A case in point was his purchase of Berkshire Hathaway stocks in the 1960s, a self-described “vindictive mistake” which he estimates cost him $200bn.
It’s important to recognise that if you invest in the markets for any length of time, you’re likely to make some mistakes. The point is to try to identify the ones that can be prevented, especially those which require the extra, impartial eyes of an experienced financial planner. In this short guide, our financial planning team here at WMM will be sharing six common investor mistakes, and what you can do about them:
It’s unlikely that any of us can ever fully understand every investment in our portfolio. Each fund comprises multiple companies, for instance, each of which has multiple dimensions to it; profiles of business owners, cash flow forecasting, profit and loss, operational differences, distinct customer bases and different stages of product development/maturity. Understandably, few ordinary investors have the time to get their heads around all of this.
With that said, it’s important to have at least a basic understanding of your investments. Which sectors do the companies within your funds operate in, for instance, and how do they make their money? Do you know the primary differences between investing in bonds and equities? Perhaps your current financial adviser has recommended you invest in something, and you feel uneasy as you don’t quite understand what it is they’re suggesting?
If you look at your investment portfolio and notice one of your ‘Index’ funds starting to plummet, how do you react? Typically, many people start to panic and some even try to pull their money out before they “lose any more”. This kind of reactive investment approach is one of the worst things you can do, however.
Quite often, pulling money out during these moments can cause more harm than simply staying in the market to ride out the storm. If you feel yourself getting nervous during this kind of market volatility, take a deep breath and take a step back. Have these sorts of movement happened before? Did the markets eventually climb back up again? Quite often, the answer is yes.
On the other side of the coin, another common investment mistake we often see is “pre-empting the market.” Here, you might pull money out of a stock before you think it’s about to fall in price. Or, you might commit capital towards a stock which you anticipate will imminently rise. This is essentially what professional active fund managers do on behalf of their clients. Unfortunately, it is notoriously difficult to do consistently well. Even experienced fund managers typically fail to time the market effectively over the course of many years. Again, stay in the market. Don’t try to time it.
Earlier in 2019, many investors were unfortunately hit by the decline and eventual closure of Neil Woodford’s flagship UK Equity Fund. At its peak, it was valued at £10bn, and eventually fell to about £2.9bn before investors’ money was locked due to the fund’s suspension. Those who put most or all of their eggs into this basket would have felt the financial pain very acutely. Those who had their capital spread out across multiple asset classes and funds, however, would have been shielded from significant damage. It’s a reminder that diversification is key to a long term, successful investment strategy. Putting your faith into one “hot stock” or fund is a big risk.
It’s important to consider how successfully different funds and investment opportunities have delivered strong returns for their investors in the past. However, it’s a common mistake to assume that good past results will determine what happens in the future. Other factors are also important to consider with your financial planner, such as a fund’s fundamentals. Again, the Neil Woodford fund is a good example. Despite outperforming the FTSE All Share throughout the early 2000s, his UK Equity Fund is now closed. One important reason widely acknowledged for this was the fund’s high reliance on unlisted assets.
There are numerous forces which can erode your investment returns if you are not careful. Inflation, for instance, erodes the real value of the money in your investments. This is one reason why regular savings accounts in 2019 tend to offer such poor value for those looking to grow their wealth. After all, if you have a 1% return from interest but are facing a 2% inflation rate, you are actually losing money. A lot of investors fail to take inflation into account when analysing the preservation and growth of their wealth. Be careful not to neglect this yourself.
Investment management fees are another area where investors can sometimes fail to notice the erosion of their returns. Actively-managed funds can be particularly expensive since they need to employ an active fund manager who regularly buys and sells investments (transactions which, themselves, are often taxed and these costs are passed on to the investor). Again, speak to your financial planner to ensure that you are not paying more than is absolutely necessary when it comes to managing your investments.
If you are interested in starting a conversation about your portfolio, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Reach us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us.
The unfortunate nature of money and investing is that they are always at risk. Cash stored under your bed might be caught in a house fire. Property investments might fall in value, and equity investments might go down. The point is this: risk is tied up with all kinds of capital. The crucial task of the investor, however, is to learn how to mitigate these risks and live with them.
One of the great advantages of constructing a strong investment portfolio is that it helps to spread out your risk. Yes, your equities might go down in value during a bear market. Yet until you actually sell your shares, you haven’t actually “lost” anything. In the meantime, if you hold fixed-income securities (e.g. government bonds), cash investments and other “low-risk assets” then these can also help your portfolio to ride out the storm.
With that said, it would be a mistake to claim that simply putting your money into an investment portfolio effectively “shields” your money from all disasters. Many people make costly decisions about their investments – possibly out of fear or panic – and often come to regret them later. Here in this article, our financial planning team here at WMM will be sharing six common mistakes made by modern investors and some thoughts on how to avoid or minimise them.
Within particular circles of friends, family and colleagues, it is easy to become tempted by talk of the latest “hot stock” which everyone seems to be piling onto. Whilst human beings naturally want to follow the crowd due to herd mentality, it’s important to tell yourself during moments of rush like these: “Just because everyone is doing it, doesn’t make it a good idea.” Remember the bursting of the Dot Com Tech Bubble, where thousands of investors speculated on tech firms during the 1990s and $5 trillion in market capitalization was lost by 2002.
This might sound like a strange point. After all, shouldn’t you keep an eye on how your portfolio is performing? Yes, of course, you should. Yet most people find it unhelpful to regularly watch their investments as they go up and down. Logging into your portfolio obsessively is likely to cause you to focus on short-term performance rather than long-term growth, which can lead to impulsive and costly decisions. Log in every month or so, some even say annually is a good option, but just try to avoid compulsive checking.
An age-old maxim amongst financial planners, but an important one regardless: “Don’t put all of your investment eggs in one basket.” As great as property might look at a given moment as an investment, resist the urge to commit all of your capital to that one market. Gold might look good at various points in time, but think carefully before committing vast sums to that one asset. The same applies to equities and cash. Speak to your financial planner about how to appropriately diversify and avoid unnecessary risk exposure.
If you plan to invest for less than five years, then you risk crossing the barrier from investing into speculating or even gambling. Only in very specific circumstances might it be appropriate to consider investing some of your money over a shorter time frame (e.g. sophisticated investors weighing up an asset-backed, time limited opportunity). Always seek professional financial advice about how to build an effective, balanced portfolio for long-term wealth preservative and growth.
Whilst it is generally unwise to obsess daily over your investment performance, it is a good idea to check your portfolio at least once a year to make sure you are still on track towards your financial goals. It might be that your equities have performed particularly well, for instance, and you need to rebalance your portfolio so that it is not sitting outside of your established risk tolerance. Or, perhaps your financial planner has identified poor fundamentals in one or more of your funds, placing your equities at unnecessary risk. Here, you might speak to them about moving your capital across into alternative funds which offer similar potential for generating returns.
One of the investor’s biggest enemies is their own emotions. Fears over a dreaded, imminent market fall can lead people to “panic selling”, which can lead them to miss out on vital growth opportunities for their wealth should these not transpire. The excitement that a particular stock is about to “rocket upwards” can lead to impulsive buying, which might not later pick up and could even take a nosedive. In moments when you read headlines about the markets which cause you to start panicking or get worked up, try to breathe and gather your thoughts. Ask yourself some calm, rational questions before rushing to any investment decisions:
If you want to start a conversation about your financial plan or investment strategy, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Reach us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM in Oxford.
The environment is climbing up the agenda in 2019. During the December UK general election campaign, for instance, The Labour Party made it a core pillar of their campaign, calling for a “Green Industrial Revolution”. ITV also ran its first-ever leaders TV debate on climate change, titled “Emergency On Planet Earth”. In the financial sector, “ESG investing” (environmental, society & governance) is also moving more into mainstream discourse.
Here at WMM, it’s a particular topic of interest for our clients who are interested in making their portfolio more ethical or environmentally-friendly. Yet, it’s fair to say that many misconceptions still circulate about ESG, ethical and social impact investing. In this short guide, we’ll be tackling some of these myths head-on. If you’d like to know more about ESG investing or want to discuss your investment strategy with us, please get in touch to arrange a free consultation:
Reach us on 01869 331469
There seems to be a widespread perception that you need to be a philanthropic millionaire to be able to invest in “green opportunities”. The image is often of a young, idealistic investor with more money than sense, throwing money to the wind at individual ethical startups which have a high minimum investment barrier. The good news is that you don’t need to be super-wealthy to start diversifying your portfolio to include ESG investments. There are many “sustainability funds”, for example, which you could speak to your financial adviser about.
Just like other things in life, a fund or other investment is not necessarily “green” or “ethical” simply because it has these labels in their name. This is where working with an experienced financial adviser can offer great value. They can help you dig under the surface and look at the real composition of the fund sitting under the label.
Remember, people also have different opinions about what qualifies as an ESG investment. For some, it will be important to not just avoid certain markets or sectors (e.g. tobacco, arms or oil), but choose funds or companies which are actively combating climate change. Other people will be happy to simply invest in funds where companies are limiting their carbon footprint. The important thing is to do your due diligence and build a portfolio which you are comfortable with.
Whilst we do not wish to diminish the importance of protecting the environment, it’s crucial to make the point that ESG investing is not about charity. Profits and investment returns matter. The common perception that “values beat profits” often feeds into the widespread belief that ESG investing provides lower returns compared to non-environmental funds. In other words: “To do the right thing with your money, you need to sacrifice your opportunities for wealth growth.”
Whilst past performance is not a guarantee of future returns, we should note that many ESG and other environmental funds have matched other ‘Non-ESG funds’ performance and often surpassed them. Indeed, investment platform AJ Bell researched some of the top ethical funds earlier in 2019 and found that nearly three-quarters outperformed their non-ethical counterparts.
Many people believe that most if not all of the ESG and environmental funds on the market essentially contain the same investment opportunities. This perception is often accompanied by the impression that there simply aren’t many successful, growing companies with an ESG agenda which these funds can choose from.
Quite often these beliefs are rooted in a particular idea about ethical investing – i.e. it is mostly concerned with protecting the environment. However, ethical investing goes much further than that. There are companies which pursue ethical values in areas such as pornography, gambling and alcohol, for instance. ESG investing, in particular, broadens the agenda from a narrow focus on the environment to also include companies which try to make a positive impact on their staff, local communities and industry practices.
There is often an impression that it takes more effort to invest in ethical companies and funds, since you need to check their credentials to ensure they reflect your values. Whilst this does add a bit more due diligence, investing in ethical funds is very similar to investing in non-ESG funds. Your financial planner can help you check the fundamentals of the fund, as well as the individual companies which it comprises. Unless you are a sophisticated investor interested in “Dragon’s Den-style” investing in individual companies, working with ESG and other social impact funds should not add a significant burden of due diligence.
Some people look down on ethical investing, seeing it as an option for less serious investors. For them, this investing style is more of a fringe activity often done by those with over-sensitive consciences. Yet this view is increasingly becoming untenable. Ethical investing is moving into the mainstream with each passing month. Just this year in 2019, for instance, the National Trust told the public that it would move its investments out of fossil fuels. More and more people care not just about their investment returns, but the ethical credentials of those investments too.
If you want to start a conversation about your financial plan or investment strategy, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
Reach us on 01869 331469
One of the cardinal sins of financial planning is to put all of your investment eggs into one basket. No matter how compelling the asset or how high the potential returns, investing always carries a degree of risk. If your investment were to fail, therefore, then you risk losing everything.
Investors are understandably concerned about the impact of Brexit, regardless of the form or timing it might take. There is enough negativity and scaremongering in the press, and we can’t control the impact of Brexit over the coming years. Understanding what we can’t control and building in contingencies, however, are part of financial planning.
In this guide, we look at how your investments interact with your financial plan, and why you probably shouldn’t worry too much.
The market may experience some short-term volatility as any Brexit plan plays out. This is one of the factors we can’t control. However, a strong investment portfolio invests across the globe in different industries and sectors. Some of these may thrive in the event of Brexit. Some companies may struggle and ultimately go out of business. Others may not be affected at all.
The idea behind diversification is that you should invest in multiple assets that are not correlated with each other. In simple terms, equities and bonds often move in opposite directions depending on the economic situation at the time. This means that if share prices fall, the fixed interest element of the portfolio should provide a baseline of security and compensate for some of the losses.
In an investment portfolio, the strategy is a little more complex, but works on the same principle. Your portfolio may invest in thousands of different companies (either directly or through funds), all of which may be affected differently.
A diverse portfolio is well-positioned to absorb the worst of any volatility.
After the Brexit vote in 2016, many investment portfolios thrived despite the uncertainty. While this was a positive development for many investors, it was partly due to the pound’s fall in value. This meant that overseas assets were valued higher, simply due to foreign currencies being worth more relative to Sterling.
Returns were further boosted, as UK companies trading overseas benefited from a weak pound.
There are gains and losses in every major political or economic shift. Even inherently negative events (such as a drop in the value of the pound) can have some benefits.
There may be some tactical advantage to be gained by skilled investment managers, particularly in the more specialist asset sectors. However, investing all of your money in these areas is incredibly risky as they do not always get it right.
A typical, well-diversified investment portfolio may have some holdings in these funds. They will receive modest benefits from the gains, but be protected from large losses.
At the portfolio level, investors don’t really benefit from tactical decisions or attempts to time the market. It may seem like a good idea to sell your investments or switch funds, but chances are that several thousand other investors have also had the same idea.
Information is so readily available today, that any data that may influence your decision to buy, sell or hold is already priced into the market.
This means that any decision taken now, with the aim of benefiting (or at least not losing money) from Brexit, is likely to be detrimental in the long term.
There were times between 2008 and 2010 that it seemed like the world was ending. Funds, companies, banks and economies collapsed. Investors lost millions, and years of austerity followed, with many people still feeling the impact.
When we look at fund performance charts ten years on, this devastation is reflected as a small blip in an otherwise upwards trajectory. Most investors are vastly better off having had faith in their investment strategy and not panicking.
A feature of an efficient market is that it is impossible to know when to buy and sell. An investor could, in theory, sell their assets at the high point just before the crash, before reinvesting at the lowest point to benefit from the low prices and subsequent recovery. The problem is that no one actually knows when the high and low point will occur.
For most investors, it is far more beneficial to trust the markets than to try and make these decisions.
Your Risk Capacity
Of course, there may be some losses in the short term, and some investors simply cannot cope with that. Personal tolerance and capacity for risk is a key discussion point at our meetings with clients.
Keeping calm and staying the course is the best advice for most clients.
But for others, the idea of losing even a small amount in the short term is a worry. The idea of long term returns and keeping pace with inflation does not really help when someone has just retired, as early losses could throw their plans off-track.
This is why we take the time to get to know our clients and understand their worries as well as their financial situation.
Investment decisions should be taken as part of a wider financial plan, rather than in isolation.
A young investor with high earning potential can afford to take significantly more risk than a retired person living on their pension. There are numerous other factors to take into account, and every client is unique.
Part of financial planning involves planning for the worst. For example, keeping an easily accessible cash reserve means that you can cope with any emergencies and will not need early access to your investments. Any investment withdrawals should be planned in advance as far as possible.
When we create a financial plan, we do not aim to avoid difficult events as this would be impossible. Instead, we plan for the risks, and ensure that even if the worst happens that you can still achieve your goals.
Please do not hesitate to contact a member of the team if you would like to find out more about our investment proposition and how we manage volatility.
This is a huge question and an important one. Many of us want to put our capital to good use whilst also reaping financial rewards along the way, and several voices in the financial world claim this is possible. Yet many people would argue that investing, by its nature, works against the cause of equality. Who is right?
At WMM, many of our clients have expressed a desire to know more about the relationship between investing and equality. As financial planners covering Oxford (a University city), we understand this subject is important to many people who live here; as well as across the UK. Here is our brief attempt to articulate our perspective.
Please note that this content is for information purposes only, and should not be taken as financial advice. To receive such advice please contact one of our independent financial planners here in Oxfordshire.
Of course, before we can judge whether investing broadly helps or hinders equality, we need to agree on what “equality” means. This is by no means an easy task; indeed, entire PhDs and academic careers have been built on answering this question!
For instance, does equality primarily refer to individual income equality, or equality of employee influence over strategic decisions in the workplace? Does it refer to gender equality in the company boardroom, or to ensuring that no single company can dominate a particular market and so prevent other companies from realistically getting a look-in (e.g. think of Google and the UK search engine market, where in 2019 no other business comes close)?
Moreover, does equality mainly refer to equality of outcome or equality of opportunity? The university debate is a classic example here. For instance, should everyone realistically have the same opportunity to go to university if they so choose, or should the decision be governed by academic ability or wealth?
Rather than try to answer all of this definitively, here we will be focusing primarily on investing regarding two main “equality of outcome” areas: income equality and gender equality.
It’s worth noting at this point that some people will simply never see investing as compatible, or helpful, with regards to equality. For instance, Marxist thinking typically perceives investing as inherent to the capitalist system, which is fundamentally incapable of creating a fair society. We understand these views, but assume that if you are reading the thoughts of an Oxford financial adviser, then your political-economic views fall at least somewhere more towards the centre ground! Certainly, we at WMM believe that in many cases investing can be leveraged to achieve moral principles whilst providing a strong return for the individual investor.
Consider gender equality as an example. Broadly speaking, in 2019 company boards across the western world are still largely dominated by men. This is clearly an area where more progress needs to be made, at least in line with other spheres where women have climbed hierarchies to achieve top executive positions (e.g. media and entertainment). In fact, investment firms can be some of the worst performers here, with women comprising about 4% of the top jobs.
Yet there is strong evidence to show that gender diversity in the boardroom is strongly correlated with higher investment returns. This naturally puts internal pressure on such firms to bring more women into senior positions; after all, the more money investment firms can make for their clients, the more successful they’re likely to be! At the same time, clients of investment firms can apply moral pressure by demanding greater gender diversity from such companies.
This can be quite a complex and emotional topic, and on the surface it can seem like investing naturally creates large income disparities. After all, we’ve all seen the headlines about UK banker CEOs who earn as much as 120 times that of their average employee.
Of course, here we start to enter the classic debate: “Should such CEOs earn more than their employees due to their role and responsibilities, and if so, how much more is acceptable?” Most people we speak to seem to take a balanced view, which we would broadly agree with. People in higher positions who deliver more value should be paid more, but their employees should be paid a good living wage, and efforts should be made to close excessive, unnecessary income disparities between the “top and bottom” of the business (e.g. lavish, undeserved bonuses).
In this respect, investing can make a positive difference; moving companies towards income equality without achieving an unrealistic goal of complete income parity. Again, a big part of this change can come from clients of investment businesses, who can increasingly expect such companies to promote fair wages internally, to set an example regarding director bonuses, and bring employees more into the business as stakeholders (e.g. think of John Lewis’s “Employee Ownership” approach). Clients can also apply more pressure on these investment companies to prioritise investments into companies and funds which also take a similar approach to their internal structure, as well as to the businesses and individuals involved in their supply chains.
At this point you have likely noticed that this is a huge topic, and we’ve barely been able to scratch the surface here in this article! The good news is, individual investors can make a positive difference to address the numerous risks associated with inequality, and also benefit from the advantages of doing so.
If you are interested in finding out more about sustainable, ethical or environmental investing or would like to develop your portfolio, then we invite you to get in touch. At WMM, we can offer a free, no-obligation consultation to get to know each other, and bring some clarity to your financial situation and goals. You can reach us on 01869 331469
If you’re new to investing then you might be confused about how it exactly works. Perhaps you’re vaguely aware that it involves setting money aside regularly over a long period (e.g. 10+ years) into companies, funds and other assets which causes your net worth to grow. You’d be right, but how does investing lead to wealth growth?
Broadly speaking, there are two main approaches to investing, often referred to as ‘active’ and ‘passive’. In this short guide, we will be explaining the difference between the two, and outlining WMM’s reasons for primarily advocating the latter approach when it comes to constructing an investment portfolio for our clients.
We hope you find this guide helpful, and if you have any questions about your investments then we invite you to get in touch to arrange a free, no-commitment consultation with one of our financial advisers here at WMM.
When you put your money into a UK deposit account, it wasn’t too long ago when you used to be able to expect a reasonable return earned via interest; in some cases as high as 6%. Today in 2019, however, you’re lucky if you can find anything close to a 2% interest return. When you factor in the fact that inflation, at the time of writing, sits at around 1.7%, making any money at all on cash investments is difficult. Most people are losing money in real terms.
This situation has encouraged many people to consider investing, to increase their prospects of growing their wealth and retirement savings over the long term. However, most people do not have the confidence, experience, risk appetite or resources to invest “Dragon’s-Den-style” into individual companies. So what are your options?
For most people, the primary route available to you is to consider investing in “funds”. This essentially involves pooling your money together with other investors, which is then invested into multiple companies or assets. The investment returns are then distributed amongst the investors according to the amount committed as well as the performance of the investments.
For instance, suppose you invest some of your money in a FTSE 100 tracker fund (along with other investors). This fund follows the performance of the UK’s biggest 100 companies, and averages the shares of all of these companies to produce an index. If the index goes up, then your investment produces a higher return. If it goes down, then so does your investment.
This is the essence of “passive investing”, since it involves committing your money and “holding” it there to follow the index(es) you have chosen. It’s worth noting that a portfolio containing passive investments should really involve multiple tracker funds to spread out the investment risk (i.e. “diversification”), and the investor is in essence seeking to capture the ‘Market Return less costs’.
The passive approach to investing is quite different to the image many people have in their minds, when they think about investments. Quite often, the popular image is of a fund manager who spends every day investing in certain companies and pulling money out of others, to try to “beat the market” for clients. This is known as active investing.
Depending on your experiences, beliefs and background you might be more inclined towards active or passive investing. At WMM, we want to be fair in outlining the advantages and disadvantages of both approaches, but also put our cards on the table and state that, in general, passive investing tends to offer a higher likelihood of increasing a client’s net worth over the long term.
Here are some of the points in favour and against active investing:
Let’s now consider some of the pros and cons of passive investing:
This article is for education, inspiration and information purposes only. It was intended to explain common Investment approaches in a very simple light. In fact, the term ‘passive’ is an often misused term covering certain investment funds which are to an extent actually ‘active’ but for specific reasons. Therefore this basic content should not be taken as investment or financial advice. To receive regulated, tailored financial advice regarding your situation, or to find out more about WMM’s investment philosophy then please contact one of our financial planners.
In previous posts here at WMM, we have discussed (in broad terms) what environmental investing is, how it has developed in recent years and how people can get started with social impact investing or “ESG investing” (Environment, Society & Governance).
As clients and readers of our blog have expressed more interest in this subject, we thought it would be helpful to go into a bit more detail. Here, we’ll be sharing five broad strategies when it comes to ESG investing, which you may want to consider with your financial adviser.
Please note that this content is for information and inspiration purposes only. It should not be taken as financial advice or investment advice. To receive such advice, please consult an independent financial planner here at WMM (in Oxford) or closer to your location.
This approach can probably be described as the “purist” approach to ethical and environmental investing. Under this strategy, you work with your investment manager to “rule out” specific industries or sectors (e.g. oil extraction), countries or businesses (e.g. those producing high levels of CO2 emissions) from your investment portfolio, using ESG principles are your guide.
The advantage of this approach is that it allows many investors to align their ESG values firmly with their investment strategy. The potential drawback, however, is that this approach can limit your options when it comes to building a balanced portfolio which not only appropriately diversifies (in order to mitigate risk) but also holds the potential for strong returns.
Some investors might be comfortable committing their money towards companies in industries which the former strategy would exclude, on the basis that these businesses are showing a high ESG performance in relation to others in their sector. For instance, under this approach, an investor might be happy to invest in car manufacturers which are leading the marketing in electric car manufacturing, relative to others in the automobile industry.
The advantage of this strategy is that is can help incentivise companies in a wider range of industries to pursue ESG principles. The drawback, however, is that this approach might not fit as neatly with an investor’s ESG values compared to the first approach.
Under this strategy, ESG investments are gradually incorporated into an investor’s portfolio alongside more traditional, non-ESG investments. The exact balance between the two types of investment might vary from person to person, depending on their distinct investment goals and their personal tolerance to investment risk.
This approach can be attractive to investors who wish to start exploring the world of ESG investing, without necessarily going “all in” (which might feel too risky or uncomfortable). It also gives the opportunity to learn more about ESG investing via direct experience, in an investor’ portfolio. On the other hand, this approach to ESG can feel too “watered down” to some people.
There are certain companies in the world which exist specifically to address certain issues pertaining to the environment or society. Examples include firms which offer storage for renewable energy sources, such as wind or solar power. Through an impact investing approach, an investor can focus their money on these types of companies to generate a positive return, whilst making a positive difference.
The attraction of this approach to ESG investing is that it is not simply about “damage limitation” regarding the environment. Rather than just investing in companies which are trying to reduce their carbon footprint, this strategy involves focusing investments on businesses which are actively trying to reverse the problem. This can feel tremendously exciting.
However, this type of investing needs to be navigated carefully with your investment adviser or financial adviser. This is particularly because many companies which qualify as impact investments are also innovative startups, which tends to carry higher investment risk.
Another way to influence different companies towards adopting an ESG approach is to directly engage with them. This doesn’t necessarily mean standing outside of their offices with a placard, by the way! Rather, it involves using tools such as shareholder power to bring ESG principles more onto the board’s agenda, and influence positive change.
If you are a company shareholder yourself, then you might consider doing this in consultation with a professional adviser. On a wider scale, however, you could adopt this approach by investing in funds and financial products which apply this influence to companies, on your behalf, at the executive and board levels. This approach can be attractive to many investors. Its drawbacks include limits to the range of products and funds which currently do this, although it would be fair to say that the direction of travel is towards growth in these opportunities.
As you can see, there is a range of approaches to ESG investing. Each strategy holds out its own respective pros and cons, and will likely vary in appeal depending on each investor’s distinct goals, circumstances, values and attitude to risk.
Many people might be interested to have learned the difference between “ESG investing” and “social impact investing”, after reading the above. The former can be described as an “umbrella” term, which refers to investment approaches which factor ESG principles into their portfolio to varying degrees. The latter goes further than this by actively investing in companies which seek to not only reduce their own negative impact on society and the environment but also make a positive difference via their products, services or solutions.
If you are interested in learning more about how you could integrate an ESG approach into your own investment portfolio, then we’d be delighted to hear from you. Get in touch today to arrange a free, no-commitment financial consultation with a member of our team:
01869 331469
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Ethical investing has become more mainstream in recent years, particularly with the rise of millennial investors – many of whom are concerned about how their finances impact the planet.
Here at WMM, some of our own clients have approached us to ask if there are any good books, resources or articles which could help them educate themselves further on the topic of “Social Impact Investing”. In this post, we intend to offer some suggestions.
Please note that this content is for information and inspiration purposes only, and should not be taken as financial advice. To receive regulated, personalised financial advice into your own financial affairs and goals, please consult an independent financial adviser.
If you’re interested in knowing more about the history and evolution of social impact investing, then this book by Bugg-Levine and Emerson comes generally well-recommended. The language is not too laden with jargon, allowing it to be fairly accessible to readers who perhaps are not so confident with investment terminology.
Moreover, the book is broken up quite nicely into quite manageable chunks, which helps make it enjoyable to read (as you feel that you are progressing through it). There are also some fascinating topics within the book which are very much worth looking at, including “Impact Investing and International Development” and “How Will We Save The Forest And The Trees?”.
This work by Jeremy Balkin takes a slightly different line to the one above. Rather than focusing on the history of social impact investing, it rather addresses, head-on, the common popular perception of the financial sector as a primarily negative force when it comes to social, ethical and environmental change.
Standing at around 136 pages, this book is quite quick to read and is nicely broken up into 6 short chapters – each with a compelling title such as “The Blame Game” and “Reimagining Prosperity”. If you are interested in finding out more about how money can be used positively to impact the world, then this is a good resource to consider.
If you’re looking for something much more “meaty” and academic on the subject of social impact investing, then this book by Clark, Emerson and Thornley might be worth a look. Be aware, however, that with 291 pages of fairly technical writing, this is not for the faint of heart!
This book puts more of its attention on the strategy and organisation of companies, funds and investment managers who work in the field of social impact investing – suggesting ways to make improvements to the overall system. It is split into three main sections: “Part I: Key Practices and Drivers Underlying Impact Investing”; “Part II: Four Key Elements to Social Impact Investing”; and “Part III: Looking Ahead: Trends and Challenges”.
If you’re looking for a book about social impact investing which contain more stories, dialogue and experiences of investors actively working in this field, then this book by Mobius, Hardenberg and Konieczny is quite an entertaining read.
The book contains many anecdotes which can, at times, be amusing whilst also revealing some compelling points about ESG investing. One interesting theme throughout is the authors’ notion that the future of all investing, they argue, lies in socially-responsible investing. So if you’re on board with that idea, this book might be for you!
Muhammad Yunus (the author of this book) is a fascinating person in his own right. A social entrepreneur from Bangladesh, he received the Nobel Peace Prize for his work in establishing the Grameen Bank – a microfinance initiative which issues small business loans to people in Bangladesh, without demanding collateral (e.g. securing against the borrower’s house).
This work is a fascinating and inspiring vision of what the world could be like if capitalism was reformed to focus on the idea of “social business”. This vision outlines a way to build enterprises which are profitable and which produce economic growth, on the one hand, whilst meeting essential human needs on the other.
Standing at just under 200 pages and written in quite an accessible style from a first-person narrative perspective, this offers a unique and interesting read. We’d love to hear your thoughts on it if you decide to read it!
ESG and social impact investing are fascinating subjects, containing much to explore from a range of different angles. It’s worth stating that we do not necessarily endorse everything contained in the books we’ve suggested to you above, but believe they can help inform and inspire you as you develop your own thinking on these fascinating subjects.
As always, here at WMM we would love to speak with you if you are interested in social impact investing, whether that’s starting a new investment portfolio or developing an existing one which you already possess. If you’d like to get in touch, then contact us via phone or via this website to arrange a free, no-commitment financial consultation with a member of our team today.
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