Sustainable Investing: Debunking 5 Common Myths
It began as a niche desire. Originally, sustainable investing was confined to a subset of investors who wanted their investments to match their values. In recent years, the strategy has grown dramatically: sustainable assets totaled $12 trillion in 2018.
This represents a 38% increase over 2016, with many investors now considering environmental, social, and governance (ESG) factors alongside traditional financial analysis.
Despite the strategy’s growth, lingering misconceptions remain. In today’s infographic from New York Life Investments, we address the five key myths of sustainable investing and shine a light on the realities.
|Sustainable strategies underperform conventional strategies||Sustainable strategies historically match or outperform conventional strategies|
In 2015, academics analyzed more than 2,000 studies—and found that in roughly 90% of the studies, companies with strong ESG profiles had equal or better financial performance than their non-ESG counterparts.
A recent ranking of the 100 most sustainable corporations found similar results. Between February 2005 and August 2018, the Global 100 Index made a net investment return of 127.35%, compared to 118.27% for the MSCI All Country World Index (ACWI).
The Global 100 companies show that doing what is good for the world can also be good for financial performance.
—Toby Heaps, CEO of Corporate Knights
|Sustainable investing only involves screening out “sin” stocks||Positive approaches that integrate sustainability factors are gaining traction|
In modern investing, exclusionary or “screens-based” approaches do play a large role—and tend to avoid stocks or bonds of companies in the following “sin” categories:
However, investment managers are increasingly taking an inclusive approach to sustainability, integrating ESG factors throughout the investment process. ESG integration strategies now total $17.5 trillion in global assets, a 69% increase over the past two years.
|Sustainable investing is a passing fad||Sustainable investing has been around for decades and continues to grow
Over the past decade, sustainable strategies have shown both strong AUM growth and positive asset flows. ESG funds attracted record net flows of nearly $5.5 billion in 2018 despite unfavorable market conditions, and continue to demonstrate strong growth in 2019.
Not only that, the number of sustainable offerings has increased as well. In 2018, Morningstar recognized 351 sustainable funds—a 50% increase over the prior year.
|Interest in sustainable investing is mostly confined to millennials and women||There is widespread interest in sustainable strategies, with institutional investors leading the way|
Millennials are more likely to factor in sustainability concerns than previous generations. However, institutional investors have adopted sustainable investments more than any other group—accounting for nearly 75% of the managed assets that follow an ESG approach.
In addition, over half of surveyed consumers are “values-driven”, having taken one or more of the following actions with sustainability in mind:
- Boycotted a brand
- Sold shares of a company
- Changed the types of products they used
Women and men are almost equally likely to be motivated by sustainable values, and half of “values-driven” consumers are open to ESG investing.
5. Asset Classes
|Sustainable investing only works for equities||Sustainable strategies are offered across asset classes|
This myth has a basis in history, but other asset classes are increasingly incorporating ESG analysis. For instance, 36% of today’s sustainable investments are in fixed income.
While the number of sustainable equity investments remained unchanged from 2017-2018, fixed-income and alternative assets showed remarkable growth over the same period.
Tapping into the Potential of Sustainable Investing
It’s clear that sustainable investing is not just a buzzword. Instead, this strategy is integral to many portfolios.
By staying informed, advisors and individual investors can take advantage of this growing strategy—and improve both their impact and return potential.
The 20 Most Common Investing Mistakes, in One Chart
Here are the most common investing mistakes to avoid, from emotionally-driven investing to paying too much in fees.
The 20 Most Common Investing Mistakes
No one is immune to errors, including the best investors in the world.
Fortunately, investing mistakes can provide valuable lessons over time, providing investors an opportunity to gain insights on investing—and build more resilient portfolios.
This graphic shows the top 20 most common investing mistakes to watch out for, according to the CFA Institute.
20 Investment Mistakes to Avoid
From emotionally-driven investment decisions to paying too much on fees, here are some of the most common investing mistakes:
|Top 20 Mistakes||Description|
|1. Expecting Too Much||Having reasonable return expectations helps investors keep a long-term view without reacting emotionally.
|2. No Investment Goals||Often investors focus on short-term returns or the latest investment craze instead of their long-term investment goals.
|3. Not Diversifying||Diversifying prevents a single stock from drastically impacting the value of your portfolio.
|4. Focusing on the Short Term||It’s easy to focus on the short term, but this can make investors second-guess their original strategy and make careless decisions.
|5. Buying High and Selling Low||Investor behavior during market swings often hinders overall performance.
|6. Trading Too Much||One study shows that the most active traders underperformed the U.S. stock market by 6.5% on average annually. Source: The Journal of Finance
|7. Paying Too Much in Fees||Fees can meaningfully impact your overall investment performance, especially over the long run.
|8. Focusing Too Much on Taxes||While tax-loss harvesting can boost returns, making a decision solely based on its tax consequences may not always be merited.
|9. Not Reviewing Investments Regularly||Review your portfolio quarterly or annually to make sure you’re staying on track or if your portfolio is in need of rebalancing.
|10. Misunderstanding Risk||Too much risk can take you out of your comfort zone, but too little risk may result in lower returns that do not reach your financial goals. Recognize the right balance for your personal situation.
|11. Not Knowing Your Performance||Often, investors don’t actually know the performance of their investments. Review your returns to track if you are meeting your investment goals factoring in fees and inflation.
|12. Reacting to the Media||Negative news in the short-term can trigger fear, but remember to focus on the long run.
|13. Forgetting About Inflation||Historically, inflation has averaged 4% annually.
Value of $100 at 4% Annual Inflation
After 1 Year: $96
After 20 Years: $44
|14. Trying to Time the Market||Market timing is extremely hard. Staying in the market can generate much higher returns versus trying to time
the market perfectly.
|15. Not Doing Due Diligence||Check the credentials of your advisor through sites like BrokerCheck, which shows their employment history and complaints.
|16. Working With the Wrong Advisor||Taking the time to find the right advisor is worth it. Vet your advisor carefully to ensure your goals are aligned.
|17. Investing With Emotions||Although it can be challenging, remember to stay rational during market fluctuations.
|18. Chasing Yield||High-yielding investments often carry the highest risk. Carefully assess your risk profile before investing in these types of assets.
|19. Neglecting to Start||Consider two people investing $200 monthly assuming a 7% annual rate of return until the age of 65. If one person started at age 25, their end portfolio would be $520K, if the other started at 35 it would total about $245K.
|20. Not Controlling What You Can||While no one can predict the market, investors can control small contributions over time, which can have powerful outcomes.
For instance, not properly diversifying can expose you to higher risk. Holding one concentrated position can drastically impact the value of your portfolio when prices fluctuate.
In fact, one study shows that the optimal diversification for a large-cap portfolio is holding 15 stocks. In this way, it helps capture the highest possible return relative to risk. When it came to a small-cap portfolio, the number of stocks rose to 26 for optimal risk reduction.
It’s worth noting that one size does not fit all, and seeking financial advice can help you find the right balance based on your financial goals.
Another common mistake is trading too much. Since each trade can rake up fees, this can impact your overall portfolio performance. A separate study showed that the most active traders saw the worst returns, underperforming the U.S. stock market by 6.5% on average annually.
Finally, it’s important to carefully monitor your investments regularly as market conditions change, factoring in fees and inflation. This will let you know if your investments are on track, or if you need to adjust based on changing personal circumstances or other factors.
Controlling What You Can
To help avoid these common investing mistakes, investors can remember to stay rational and focus on their long-term goals. Building a solid portfolio often involves assessing the following factors:
- Financial goals
- Current income
- Spending habits
- Market environment
- Expected returns
With these factors in mind, investors can avoid focusing on short-term market swings, and control what they can. Making small investments over the long run can have powerful effects, with the potential to accumulate significant wealth simply by investing consistently over time.
Misc5 days ago
Ranked: America’s Best Universities
Technology1 week ago
Ranked: Largest Semiconductor Foundry Companies by Revenue
Misc1 week ago
Visualized: EV Market Share in the U.S.
Maps1 week ago
Interactive Map: The World as 1,000 People
Retail1 week ago
Ranked: Average Black Friday Discounts for Major Retailers
Brands1 week ago
Ranked: Fast Food Brands with the Most U.S. Locations
United States1 week ago
Visualizing 30 Years of Imports from U.S. Trading Partners
Markets1 week ago
Ranked: The Biggest Retailers in the U.S. by Revenue