Most conservative Americans would prefer to invest in companies whose ethical and political behavior is consistent with their own values. After all, most of their friends and organizations are aligned with their values. It’s only natural.
So, every conservative should align their investment portfolio with their values right? Well, one hesitation we’ve seen revolves around this question: Will investing in my values mean I have less money in the future?
Let’s explore that question. Right off the bat, do we, or can we know future investment returns? No. So the short answer is no, we don’t know if socially conscious investing will lower or raise future returns.
We can, however, calculate expected returns from an investment portfolio. Let’s take the stock portion of the portfolio first. Assuming you have broady diversified exposure to the stock market, your expected return should be similar to the long term return of the market (Somewhere around 10%); regardless of whether you are being selective about the ethics of the firms you own.
There are two other important factors in evaluating expected return that may be impacted by using conservative environmental social and governance filters to build your strategy. The largest, most offensive woke companies in the marketplace are often associated with big tech and hollywood. You know who they are. Eliminating or reducing your investment in these massive segments of the market will make the companies you own both smaller and less growth oriented. That’s because the biggest, fastest growing companies tend to be in this sector.
As it turns out, small and value companies, the opposite of big tech, have higher expected and measured returns over long periods. So, your stock portfolio may very well have HIGHER expected returns if you eliminate big tech.
The factors that affect expected returns the most in the bond portion of your strategy are diversified exposure to the bond market itself. Historically this has meant around 6%. The two other factors impacting expected returns in the bond portion of your portfolio are term and credit.
Term means the length of time the bond is making your capital available to the debtor. Generally, long term means higher expected return. This decision should not be affected by an investor’s value screen.
The creditworthiness of the debtor may be impacted by the decision to reduce or eliminate investment in big tech/large growth companies. The best credit is more likely to be associated with the big growth companies. Therefore, the corporate bond portfolio may have a higher expected return related to higher credit risk.
On the government bond side, the same may be true. First world governments tend to be the most woke, and therefore the lowest credit risks. Since ethically aware conservative investors would tend to avoid investing in these governments’ debt, expected return should be higher in this asset class.
So, assuming a conservative investor will generally avoid investing in big tech and woke governments, there may be a higher expected return in a socially aware investment strategy due to the size and valuation preferred stocks and the lower credit worthiness on the bond side. But, like we mentioned at the start, we don’t know future returns. In short, returns should be similar in a diversified portfolio whether it has ethical considerations or not.
What we do know is the ethical behavior of companies today. Every day we see stories in the news about companies taking woke positions on issues that are highly offensive to traditional Americans. We also have a pretty good notion that refusing to invest in them will help shape behavior of companies with regard to social, political, and religious issues like abortion, energy security, religeous freedom, immigration, national sovereignty, family values, and racial politics.
This action will make the cost of raising capital higher for these firms; thus lowering the rate of return for the existing owners. Additionally, the more investors refuse to tolerate anti-American behavior, the more negative publicity accrues to these businesses. That’s bad for business and many firms will want to avoid negative attention.
So, don’t let concerns about sacrificing returns stop you from exercising stewardship over your investment capital. Invest in your values today.
