How to reduce risk in your ethical portfolio
Look for companies that solve problems or meet consumer needs in the new financial environment.
For ethical investors, watching the stock market plunge has been a stark reminder that even outstanding companies often follow the tide. So going forward, how can investors assess and manage the risks associated with stocks more effectively? Looking for answers, the Monitor's Laurent Belsie turned to two investment pros who deal with ethical investments: John DeSantis, president of Civic Capital Group in Boston, and Joe Clark, managing partner of Financial Enhancement Group in Indiana. (The views expressed here are for informational purposes and do not represent an endorsement by The Christian Science Monitor.)Skip to next paragraph
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Is the investment world suddenly riskier?
Mr. Clark: Yes, but not for the reason most people perceive.... If you step back and you look at the forest, and you understand that the generation that was born in the 1920s – we refer to [it] as the Bob Hope generation – for every one person that was born there, there were more than four people born in the baby boom. So for every one car we needed [then], we needed four [for the boomers]. For every teacher, four; for every hospital, four; for every doctor, four. And if you follow that logic then the risk follows later. The echo boom, the generation that followed the baby boom, is actually smaller than the baby boom. For every one person we have in the baby boom, there's about 0.95 people here. And so if you think about it, for every car we needed [for boomers], we now need 0.95. For every house, 0.95. America is not designed to contract.
Mr. DeSantis: One way of just observing the risk in the stock market is that commentators at the beginning of this year were talking about the increased frequency of 1 percent moves in the market. My last count so far in September, we've had four 3 percent down days. So that's just a little statistical observation one can make that yes, it's quite more volatile and a little bit more scary for the average investor.
Does federal intervention help or hurt?
Clark: It makes people less comfortable because they don't know the rules.... The risk is that if you do what you expect [the government to do] and the government does something different, your portfolio just got hurt.
Are socially responsible companies inherently less risky than the norm?
Clark: The interesting thing about companies that try to follow their social [conscience is] they give you a measuring stick out front. They say: We're going to do this, but we're also going to do this. And as an individual, you have the ability to look at that measuring stick and go, "OK, did they or did they not?" Here's the challenge. We're talking about the company. And what your real question is is about the stock price. Stocks go up [or down] based on one thing: Are people buying it or are they selling it?
DeSantis: It's absolutely a benefit to have an ethical component to the companies that you're investing in. And let me give you just one example.... Wells Fargo is a bank that's gone up in value this year. How's that when we read about the AIGs and the Fannie Maes and all the other horror stories in the financial press? The reason is, they've been in business for more than 150 years and they were started on the core concepts ... of trust and credible credit ratings and managing conservatively. So they're recognized within the circles as being a more prudent and ethical company. That has translated into gains for them and gains for shareholders.