Investment Management

Staying Invested During Volatile Markets

Staying Invested During Volatile Markets

by | Aug 15, 2024 | Economic News, Financial Advice, Investment Management, Uncategorized

Economic Analysis by Jeff Platt and Kai Kramer

 

You may have been watching the news and wondering about the recent market turbulence. We see several main factors affecting markets at this time:

    • Unemployment rate increased from 4.1% to 4.3% in July
    • Jobs growth totals 114,000 in July, coming in lower than the expected 175,000
    • Jobless claims for the week ending July 27 climbed by 14,000 to 249,000

Additionally, the Bank of Japan raised their interest rates last week from 0% – 0.1% to 0.25%. The rise in interest rates has caused the yen to appreciate versus the dollar, which is putting an end to a common strategy called a “carry trade.” This is where investors borrow in a cheap currency to buy other (higher yielding) global assets.

 

So what are we doing about the market drop?

We have all heard the phrase, “Don’t just stand there; do something!” John Bogle, founder of Vanguard, modified this for long-term investors to say, “Don’t do something; just stand there!” In today’s investment environment, both expressions are true. This may sound familiar to many of you as it is exactly what we wrote in our quarterly newsletter of April 2020 when we saw a similar market drop at the beginning of the COVID-19 pandemic.

You might also remember how we stayed the course through that turbulent time by maintaining equity positions, rebalancing portfolios to long-term strategic asset allocation (IPS), and doing some tax loss harvesting. These responsive moves benefited portfolios.

We believe that the recent movement in the markets may be another opportunity for investors with a long-term perspective.

 

Strategically, we will continue to maintain each client’s asset allocation because even if we were 100% convinced a recession was coming and we sold out of equities, we would still need to decide when to reenter the market and we DO NOT want to miss that window.

The graph below shows how annualized returns would diminish by missing the 10, 20, 30, 40, 50, and 60 best trading days of the 21-year period between 2002-2023. During that time, the S&P 500 would have returned 9.0% annualized. If you missed just the best 10 days, the annual return fell to 4.8%. If you missed the best 30 days, your returns would be negative! This illustrates the difficulty of trying to time the market and how detrimental this could be to one’s portfolio.

Maintaining portfolio allocations is more difficult when markets experience this type of volatility. Over time, however, investors are compensated for their stock market exposure. Remember, too, that the proper asset allocation is the one you will not abandon during difficult times.

We hope this information provides you with some peace of mind at this time. If you have any questions about what you are seeing in the news or about your portfolio, please do not hesitate to get in touch.

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Get Started

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Does the SECURE 2.0 Act Make 529s More Attractive?

Does the SECURE 2.0 Act Make 529s More Attractive?

by | Nov 7, 2023 | Financial Advice, Financial Planning, Investment Management, Tax Strategies

Many of your have heard of the popular 529 savings plans that custodians can set up to fund their child or grandchild’s college education. Earlier this year, you likely also heard about the SECURE 2.0 Act which brought down some of the biggest changes to retirement and savings plans in recent years. But what does college planning have to do with retirement planning and how could the new legislation make 529s even more attractive than they were before?

 

Understanding the SECURE Act 2.0 and 529s

 

For those unfamiliar with the jargon, let’s get the basics out of the way. The SECURE Act 2.0, or the “Setting Every Community Up for Retirement Enhancement” Act, is legislation that primarily aims to help individuals increase and protect their retirement savings. But hidden within this big retirement package are some intriguing updates to 529 college savings plans.

 

A 529 plan, in simple words, is a tax-advantaged savings plan designed to encourage saving for future education costs. Typically, these plans allow families to invest after-tax dollars that grow tax-free. And, when the time comes, withdrawals for qualified education expenses are also tax-free.

 

Breaking Down the Benefits of SECURE 2.0 to 529s

 

But what does the SECURE Act 2.0 have to do with these 529s, you ask? Well, it broadens the definition of “qualified education expenses” and enhances the flexibility of these plans.

 

Thanks to SECURE 2.0, 529s now cover costs related to apprenticeships, and — here’s the big kicker — student loan repayments. Yes, you heard it right! You can now use the 529 plan to repay up to $10,000 in student loans. This new feature alone could make 529s far more appealing to many families.

 

Additionally, under SECURE 2.0, if your child gets a scholarship, you can now withdraw the amount of the scholarship without the usual 10% penalty. That means more flexibility to adapt to life’s surprises.

 

Balancing the Pros and Cons of 529 Plans

 

Now, does this make 529s more attractive? It’s not a simple “yes” or “no.” While these changes certainly sweeten the deal, they don’t fundamentally alter the nature of 529s.

529s remain an investment tool best suited for those quite certain about their children’s path to higher education. If your family’s situation matches this description, the expanded benefits under the SECURE 2.0 Act could indeed make the 529 plan more attractive.

 

However, if there’s considerable uncertainty about your child’s educational future, or if your family might not be able to take advantage of the new benefits (like the ability to pay off student loans), the enhanced 529 might not seem much more attractive than before.

 

The Risk? The Tax Costs of Overfunding a 529

 

The reason that we say 529s are an investment tool best suited for those “quite certain about their children’s path to higher education” is because a new J.P. Morgan study found that a 529 account is still the most tax-efficient way to save for a student’s education—but only if that account is actually used and depleted by the time the student completes their education.

 

That’s because removing the funds from the 529 for non-qualified expenses triggers a tax event. If the beneficiary does not go to school or does not finish school, the custodian has two choices:

 

  • Take back the money in the 529 account or give it to the student. However, in both cases, taxes and a 10% penalty must be paid on the earnings at the recipient’s ordinary income tax rate. If the student is in a lower tax bracket, it makes most sense for the student to receive the funds and pay taxes at the lower ordinary income rate.
  • Pass the account on to a lower generation (e.g., grandchildren). But there would be a tax liability for this option as well. The initial beneficiary might have to use some of the $12.92 million gift tax exclusion when a new beneficiary is named.

 

In other words, if you aren’t sure your child will attend college or may not complete a full four years, you’ll want to look at other options to avoid these tax implications. Other options include a pay-as-you-go approach, funding UTMA accounts, or setting up grantor trusts.

 

Choosing the Most Impactful Path

 

The SECURE 2.0 Act has brought some considerable enhancements to the 529 college savings plans, making them potentially more attractive to many families. However, whether these changes tip the scales in favor of a 529 plan for you and your family will largely depend on your specific situation and needs. A 529 account is the most tax-efficient education savings alternative, but only if the account is exhausted when the student’s education is completed.

 

As always, remember that financial planning is a personal journey. It’s essential to consult with a professional advisor who understands your financial goals and circumstances. If you’d like to discuss these changes and see how they impact your current financial strategy, don’t hesitate to get in touch!

 

At Platt Wealth Management, our team of financial advisors are ready to understand your goals and dreams in order to present the right solutions to your needs and opportunities that will simplify your financial life. We would love to learn more about you with a complimentary Discovery Call. Contact us today to discuss your opportunities.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Get Started

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Your Ultimate Guide to Dividend Investing

Your Ultimate Guide to Dividend Investing

by | Oct 26, 2023 | Financial Advice, Financial Planning, Investment Management, Uncategorized

The best any expert can say about the stock market right now is that future returns will be uncertain, and volatility may be the new normal. Although there are slivers of light shining on some parts of the economy, many storm clouds darken the near to intermediate-term outlook on the stock market.

 

Make no mistake; this is not a gloom and doom stock forecast. Quite the contrary, investors should maintain a cautious optimism and remain invested in the stock market, albeit fully hedged against uncertainty and volatility.

 

One of the best strategies for accomplishing this is investing in dividend stocks as a portfolio stabilizer and a source of returns in an uncertain economy. In order to help you decide if dividend investing is right for you, we’ve put together this comprehensive guide. Of course, always consult with your financial advisor to understand what you’re buying and why you’re holding it in your portfolio.

 

What is Dividend Investing?

 

Dividend investing is a strategy focusing on investing in companies that regularly distribute a portion of their profit as dividends to shareholders. The most direct way a business can affect shareholder performance is through a cash dividend. A cash dividend is simply a return of investment to the shareholders. Each year, or each quarter, the board of directors announces a dividend that is paid in cash—sometimes in stock—directly to shareholders. 

 

The better-performing companies will periodically increase their dividends. Some companies have been paying dividends for decades, so it becomes an expectation and a way to attract new investors. Once a company starts paying a dividend, it will go to any length to continue to pay it because not doing so indicates the company may be in trouble. 

 

Creating Your Dividend Investing Strategy 

 

Not all dividend stocks are created equal. As with any investment class, it’s important to establish strict criteria for selecting the stocks that best match your profile and meet some standard of quality. Chasing the highest yields can be as risky as investing in junk bonds. Over the long term, companies with an established record of uninterrupted dividends, a clean balance sheet, and a positive earnings outlook will outperform the higher-yielding investments in terms of both dividend income and capital appreciation. 

 

When investing for the long term, diversification is always the key. With dividend stocks, you can invest across many sectors and among various dividend-paying investments, such as common stock, preferred stock, real estate investment trusts (REIT), ETFs, and mutual funds. 

 

What to Look for in a Dividend-Paying Company

 

With dividend stocks, investors need to apply the same due diligence they would use to purchase any stock, careful not to focus strictly on the dividend yield, which can be especially alluring after the stock price has fallen. It would be essential to know why the stock price fell and whether there may be the possibility of a dividend adjustment. 

 

One of the most important factors to consider is the company’s debt-to-equity ratio, which could put pressure on the dividend during a down economy if it is too high. Dividend payers that have no trouble generating excess cash flow can be relied upon to pay their debt and dividend in any economic environment. 

 

You also want to look at a company’s dividend payout ratio, calculated by dividing the annual dividends per share by earnings per share. The dividend payout ratio represents the portion of net income the company is paying out as cash dividends. Companies with a payout ratio of less than 50% are considered financially stable, with the potential to increase earnings over time. 

 

What to do with Cash Dividends

 

Investors need to decide what to do with their cash dividends. If the company is performing well and driving solid investment performance, you probably want to reinvest them back into the company. That drives investment performance further. However, if the multiples become unattractive over time, reinvesting in the company may not make sense. That should prompt a decision as to whether the stock is still attractive.

 

Whether you hold or reinvest your cash dividends in the company, they are subject to income taxes. The advantage of dividend income over other forms of income is it is taxed at a maximum rate of 20% (plus a 3.8% surtax for the highest-earning taxpayers). The tax rate for taxpayers in the lower tax brackets is 15%. 

 

Why Now Is the Time to Invest in Dividend Stocks

 

While high-quality dividend stocks are not likely to generate market-leading returns in any given year, they will lose less money on the downside, which is the key to growing portfolio value over the long term. Investing in high-quality dividend stocks is not about generating outsized returns; instead, it is about generating a rate of return meaningfully greater than the inflation rate while preserving capital during protracted market declines. Dividends are always positive, so they are a counterweight in down markets.

 

Many investors are unaware that dividend yield and growth have accounted for approximately 40% of long-term stock returns since 1930. During decades when inflation averaged more than 5%, they accounted for 54%. 

 

Eventually, the U.S. economy will right itself, and sanity and stability will return to the markets with large-cap, dividend-paying companies leading the way. Until then, and even then, dividend stocks will provide an effective counterweight to most risks investors will encounter, including inflationary pressures (or stagflation), increased market volatility, interest rate fluctuations, or market declines. There has never been a better time to make dividend stocks an integral part of your investment portfolio.

 

Adding a dividend stock component to your portfolio will not only increase your tolerance for volatile markets, but it can also become an enduring source of income regardless of the movement of stock prices, inflation, and interest rates. 

 

Ready to find out if dividend investing could be the ballast you need in uncertain times? Or perhaps a source of income you could use to fund your future retirement?

 

No matter where you are in your investing or retirement journey, our team at Platt Wealth Management can help. Simply schedule an appointment with one of our trusted advisors to discuss your opportunities today.

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Get Started

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Impact of New Tax Laws on Your Financial Planning

Impact of New Tax Laws on Your Financial Planning

by | Sep 22, 2023 | Financial Advice, Investment Management, Tax Strategies

For many Americans, taxes are an essential consideration in their financial planning. As they should be! Because the tax code changes frequently, it’s critical to pay close attention to how they could impact your bottom line. ­­­­­­­­­

 

Although Congress hasn’t passed any new tax legislation in the last few years, tax law changes could still affect many taxpayers. For example, the passage of the Inflation Reduction Act and the SECURE 2.0 Act in 2022 introduced a number of new tax provisions—some of which we are just now seeing come into play.

 

For starters, under the current tax code, there are certain changes that occur automatically because they are indexed to inflation.

 

Plus, there are actually several key provisions from the Tax Cuts and Jobs Act (TC&JA) of 2017 that are scheduled to expire in the next couple of years which could throw a wrench in some of your financial plans.

 

And if those weren’t enough, the IRS is constantly issuing new rules on existing tax laws that can catch people off guard if they’re not paying attention.

 

But you want to know, “How do tax law changes affect me?”

 

Here are some of the key facets of your financial plan that could be affected by changes to the tax code over the next few years:

 

  1. Adjustments to Income Thresholds for Tax Rates

 

It’s always important to stay on top of the changing income thresholds that determine your tax rate. In most years, they are adjusted for inflation, making it possible for your adjusted gross income to be taxed at a lower rate. For example, for married couples filing jointly in 2022, the income threshold 22% tax bracket was $83,551 to $178,150. In 2023, it was adjusted to $89,451 to $190,750. So, if your 2023 income was roughly the same as your 2022 income, the threshold likely dropped you into the 12% bracket.[i]

 

  1. Possible Increase in 2026 Tax Brackets

 

The most significant change you will see regarding your tax bracket could occur starting in 2026 with the expiration of many provisions of the 2017 TC&JA. The sunset provision in the law means tax brackets will revert to their pre-TC&JA levels while decreasing the income thresholds, resulting in a significant tax hike unless Congress takes action.[ii]

 

For example, the current top tax bracket of 37% will revert to 39.6%, and the income threshold of $693,750 for joint filers will decrease to $470,700. There will be similar adjustments for all the tax brackets.[iii]

 

  1. Deductions and Credits

 

It’s important always to be aware of adjustments to the standard deduction, which increases yearly. The 2023 standard deduction for joint filers was increased to $27,700 from $25,900.[iv]

 

The Inflation Reduction Act extended tax credits for homeowners adding solar and wind power systems as well as energy-efficient water heaters through 2032. Tax credits have also been extended for the purchase of new and used electric vehicles through 2032.[v]

 

  1. Retirement Planning[vi]

 

The SECURE 2.0 Act made several changes to the tax code to enhance your retirement planning efforts. A big one is the additional delay in the starting age for Required Minimum Distributions (RMDs). Effective January 1, 2023, the threshold age to begin RMDs is raised to 73 from 72. It will gradually be increased to 75 by 2033. This allows you to delay distributions and defer taxes associated with them. However, it can also result in larger distributions over a shorter lifespan, resulting in larger tax liabilities.  

 

Another significant change is an upward adjustment to the annual catch-up contributions individuals 50 and older can make to workplace retirement plans—increased starting in 2023 to $7,500 from $6,500. Beginning in 2025, workers age 60 to 63 will be able to make catch-up contributions of up to $11,250 per year.  

 

  1. College Planning

 

Another SECURE 2.0 change offers a boost to college savers as it allows unused balances of up to $35,000 in 529 college savings plans to be transferred free of tax and penalty to a Roth IRA. To be eligible, 529 plans must be established for at least 15 years, and the fund transfer can’t exceed the standard Roth IRA contribution limit (currently $6,500 per year, $7,500 if age 50 or older).[vii]

 

  1. Estate and Gift Planning

 

Another expiring provision of the TC&JA is the unified estate and gift tax deduction increase, which nearly doubled from $11.2 million for couples to $22.3 million in 2018. The exemption has risen over the years due to inflation, reaching $24 million in 2023. When the provision expires in 2026, the exemption will be cut in half to $6.8 million. This will impact wealth transfer and lifetime gifting strategies.[viii]

 

 

Keeping Up with the Taxes

 

With a divided Congress until at least 2024, we believe it’s doubtful we’ll see any new tax legislation in the next few years. However, there are still plenty of changes due to automatic adjustments, expiring tax laws, and provisions added to non-tax legislation, such as the TC&JA and SECURE 2.0 Act, to make visiting with your financial advisor and tax professional at least once a year worthwhile.

 

Tax rules keep shifting, and let’s be honest, they can be a real headache to keep up with. From changes in how much we pay to what we can write off, there’s a lot to track. With some big rule changes coming up, it’s a smart move to check in and make sure you’re on the right path.

Want some peace of mind about your finances? Let’s chat! Schedule a call with our financial advisors now, and let’s make sure you’re set up for success.

 

[i] https://www.kiplinger.com/taxes/tax-brackets/602222/income-tax-brackets

[ii] https://www.kiplinger.com/taxes/what-to-do-before-tax-cuts-and-jobs-act-tcja-provisions-sunset#:~:text=The%20Tax%20Cuts%20and%20Jobs%20Act%20(TCJA)%20of%202017%20is,can%20help%20you%20get%20started.

[iii] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023

[iv] Ibid.

[v] https://www.cleanenergyresourceteams.org/inflation-reduction-act-what-you-need-know

[vi] https://www.cnbc.com/2023/01/03/3-changes-in-secure-2point0-for-required-minimum-distributions.html

[vii] https://stwserve.com/secure-act-2-0-allows-for-rollover-of-unused-529-plan-funds-to-a-roth-ira/

[viii] https://www.fidelity.com/learning-center/wealth-management-insights/TCJA-sunset-strategies

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Get Started

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How Much Should I Have Saved for Retirement by Age 55

How Much Should I Have Saved for Retirement by Age 55

by | Aug 28, 2023 | Financial Advice, Financial Planning, Investment Management

“Am I on track to meeting my retirement goal?” That’s a burning question for many Americans, especially those whose retirement date is coming into view. For those nearing age 55, considered to be the start of the final glide path to retirement, it’s a critical milestone that could determine what, if any, steps need to be taken to get or stay on track to achieving their retirement goal. 

 

Financial planners often suggest that by age 55, you should have saved a substantial portion of your nest egg to ensure a comfortable retirement. However, in practice, there is no one-size-fits-all answer to how much, as individual circumstances vary significantly, including your current savings rate, lifestyle expectations, retirement goals, and expected expenses. 

 

Why It’s Risky to Use General Rules of Thumb

 

If you follow general rules of thumb, you have probably heard that you should aim to have saved somewhere between 10 to 15 times your annual income by the time you retire. That estimate is based on the widely used assumption that you’ll need to replace about 70 to 80% of your pre-retirement income to maintain a similar standard of living. 

 

Based on those guidelines, it’s suggested that you have at least eight times your annual income saved by age 55. 

 

However, today’s retirees are finding that rules based on decades-old averages and assumptions don’t necessarily account for 21st-Century realities, such as rising healthcare costs and expanding life expectancies. Of course, it also depends on exactly when you expect to retire, how much you have saved, and at what age you plan to start your Social Security benefits. 

 

To get a more accurate idea of how much you should have saved by age 55, consider the following steps:

 

  1. Crystalize Your Vision of Retirement

 

It begins with knowing what it is you want to have happen. The more clearly defined your goal, the more motivation you will have for achieving it. To ensure you save enough, your goal needs to be clear, and your planning assumptions must be realistic. Although your time horizon may be off in the distance, your vision needs to be tangible with defined lifestyle needs. Your vision will likely change over time, which is why it is essential to review your retirement plan regularly. When you lose sight of your target, you are less likely to hit it.

 

  1. Determine What it Will Cost

 

With a clear vision and well-defined goals, you can then attach a price tag. The mistake many people make is that they try to use some general rule of thumb, such as calculating their retirement income need as some percentage of their current income. Your income calculation should be more deliberate, based on a realistic spending plan.

 

It’s also risky to assume that your expenses will decline in retirement. That’s not necessarily true anymore. When you consider the increasing costs of health care, long-term care, and even the possibility that you may be caring for your aging parents for a while, these can throw any budget out of whack. Plan for a cushion and factor in the increasing cost of living. With an average inflation rate of 3%, your cost of living will double in 20 years. You will also want to factor in an expanding life expectancy. People who reach age 65 today have a 50% chance of living past age 90.

 

  1. Know Where you are Today

 

In addition to a clear vision, you need a clear picture of where you are today in relation to your goals. A thorough assessment of your financial situation, including your current savings, future savings capability, risk tolerance, and other priorities, will determine your retirement savings requirement.  

 

Don’t Set It and Forget It

 

Another significant mistake people make is not checking to see that they are still on track to meeting their retirement goal. If there is one thing we have learned over the last decade, it’s that the economy and the markets can change very quickly. If you experienced the pandemic-induced shutdown of the economy and the steep market crash of 2020, you also know your financial circumstances can change rapidly. For many people, their retirement targets moved, but they didn’t make the necessary adjustments. That’s why you can’t set and forget your retirement plan. Instead, you should take frequent snapshots of your financial circumstances and where you stand in relation to your goals. 

 

Your retirement plan should be adjusted based on your evolving needs and priorities. When done regularly, the adjustments are typically small, just enough to keep you on track. When you always know where the target is, you’ll know if your aim is true.

 

By following these steps, you will have the vision, the goal, the cost, and the motivation to get your plan on track. Determining the actual amount you need to save will require some calculations that can be done using a retirement income calculator. However, it’s highly recommended that you work with a financial advisor with the tools, resources, and objectivity to guide you to your retirement goal.

 

Partner with an Expert Financial Advisor to Guide You Into and Beyond Retirement 

 

Ready to see how your savings measures up to your goals?

 

Platt Wealth Management can help. Our team is made up of only the best financial advisors–those who are ready to understand your goals and dreams in order to present the right solutions to your retirement planning needs. We also help identify opportunities that will simplify your financial life, boosting confidence in your path forward. Ready to learn more? Schedule a call with our team today.

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Get Started

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

How to Get Started with Environmental, Social and Governance (ESG) Investing

How to Get Started with Environmental, Social and Governance (ESG) Investing

by | Aug 16, 2023 | Financial Advice, Financial Planning, Investment Management

As of 2022, there were $8.4 trillion in sustainable investing assets. Investors from all walks of life leverage sustainable investments as part of their wealth management plan. If you’re someone whose life decisions are often driven by how your choices impact the environment, your community, and society as a whole, it’s time to look into ESG investments. Environmental, social, and governance (ESG) investments consider how the companies you invest in help safeguard the environment and community—helping you earn money and build a more ethical portfolio.

Plus, a company’s commitment to environmental, social, and corporate governance can also positively impact its performance, offering lucrative opportunities for investors. Here’s how you can get started with ESG investing as part of your investment management strategy.

 

What is Environmental, Social and Governance Investing (ESG) Investing?

 

ESG investing is a form of sustainable investing that considers environmental, social and governance factors to judge an investment’s financial returns and its overall impact. Environmental, social and governance factors (ESG) are used to evaluate a company or investment’s sustainability.

  1. Environmental Factors such as:
  • Carbon footprint
  • Air and water pollution
  • Deforestation
  • Green energy initiatives
  • Waste management
  • Water usage
  1. Social Factors such as:
  • Employee gender and diversity
  • Data security measures
  • Commitment to customer satisfaction
  • Sexual harassment policies
  • Human rights
  1. Governance such as:
  • Board diversity
  • Political contributions
  • Level of executive pay
  • Large-scale lawsuits against the company
  • Internal corruption cases
  • Lobbying practices

Investors use ESG scores ranging from 0 to 100 to measure the sustainability of an investment. Scores below 50 are poor, while scores over 70 are highly desirable.

 

Benefits of ESG Investments

 

Building a sustainable investment portfolio can help increase your potential for high returns. According to the Morgan Stanley Institute for Sustainable Investing, the returns of sustainable mutual and exchange-traded funds were similar to traditional funds and, in some cases, actually outperformed traditional investments between 2004 and 2018. Also, the JUST U.S. Large Cap Diversified Index (JULCD) has returned 15.94% since its inception on an annualized basis compared with the Russell 1000’s 14.76% return. 

Morgan Stanley also noted that sustainable funds showed a lower downside risk than traditional funds. Even during turbulent markets when traditional funds showed more significant downside deviation with a higher potential for loss, sustainable funds experienced a 20% smaller downside. Morningstar, an investment research company, also found that in the first quarter of 2020, 25 of 26 sustainable index funds outperformed comparable traditional funds despite the pandemic.

 

What Types of ESG Investments are Available?

 

Although there are several ESG investment options available for your financial planning strategy, the two most common options include:

  1. ESG stocks: Although investing in a single stock type isn’t the best strategy, finding a few individual ESG stocks offers an opportunity to gain from their performance over time.
  2. ESG mutual funds: Almost 600 open-end and exchange-traded ESG funds are available. Mutual funds create instant diversification, and with ESF mutual funds, you can create a more personalized portfolio, so your investment will have the most impact on the issues you care about.

When considering ESG investments, reviewing the prospectus and considering the company’s ESG score are both equally important.

Plus, ESG investments can be broken down by an even more detailed scoring systems, which make it easier to focus on investments that mean the most to you.

  1. Issue-specific ESG scores measuring performance based on a single issue.
  2. Category-specific ESG scores based on either environmental or social or governance issues.
  3. General ESG scores focused on all three categories.

Consult with your financial advisor to find the best investments for your portfolio.

If you want to explore the possibilities of adding ESG investments into your financial planning strategy, speak to the experts at Platt Wealth Management today. We can help align your investment choices with your environmental, social, and governance values today.

 

 

 

 

 

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Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

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