Impact Investing - The Pros And Cons

Nov. 13, 2019 11:04 AM ET4 Comments
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Summary

  • The pro and cons of impact investing.
  • Compounding and diversification are two important concepts that should be part of any investment decision.
  • Bill Gates has some interesting views on the topic that may surprise you.

Over the last 30 years, the popularity of impact investing and a desire to 'do good' with investment portfolios has blossomed. In April 2019, The Global Impact Investing Network estimated the global impact investing market was $502 billion. While impressive, it represents less than 1% of the investing universe.

Impact investors, looking to have a positive social and environmental influence, tend to analyze factors not typically on the radar of traditional investors. In particular, ESG, an acronym for environmental, social, and corporate governance, is a framework for investors to assess investments within three broad factors.

We all want to make the world a better place, but are investment portfolios the right tool to do that?

To answer the question, it is important to step back from impact investing and explore investment goals and how wealth grows fastest to help answer the question.

As a wealth fiduciary, our mission is managing our client's portfolios in a risk-appropriate manner to meet their financial goals. Whether a client is ultra-conservative or uber-aggressive, the principle of compounding underlies every strategy we employ. Compounding, dubbed the "eighth wonder of the world" by Albert Einstein, is an incredibly important factor in wealth management.

Wealth compounding is achieved through consistency. Targeting steady growth while avoiding large drawdowns is the key. To do this, we develop an aggregation of diversified investment ideas.

Investment diversification is well-touted but not well understood. Commonly, it is believed that portfolio diversification is about adding exposure to many different investments within many different asset classes. True portfolio diversification is best created by owning a variety of assets with unique, uncorrelated cash flows that each individually, offer a promising risk and return trade-off.

To demonstrate the importance of drawdown avoidance, we compare two portfolios. Both average 5% annual growth. Portfolio A grows by a very dependable 5% every year. Portfolio

This article was written by

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720 Global has joined forces with Lance Roberts at Real Investment Advice. We publish research on macroeconomic trends, market dynamics, investment opportunities, and a host of topics designed to help individuals and professionals navigate the markets. For more information please message us or visit us at www.realinvestmentadvice.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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