Ascertaining your portfolio's SRI investment performance as a socially responsible investor depends upon the factors you need in sustainable investing, socially responsible investing, SRI, and social investing, which can be achieved through SRI mutual funds, socially responsible stocks, socially responsible investment funds, socially responsible funds, and socially responsible investment.
Enacting the proper financial decisions in socially responsible investing is similar to other types of market investments - with the exceptions that your selection of social investment financial instruments is limited, and that you must create additional social screens in your investment process.
Risk tolerance for socially responsible stocks
When it comes to socially responsible investing, some market analysts argue that socially responsible stocks holds larger beta, or a greater risk, than full market investments – due to the lack of total diversification.
Understanding how much uncertainty you can tolerate in the fluctuations of your socially responsible investment portfolio value is an important factor in the investment decision process. Generally, per the risk-to-reward ratio, the more risk you can tolerate, the greater gains you stand to obtain, whether or not you are a socially responsible investor.
Sharpe Ratio: determines how much extra premium you obtain for every additional unit of risk
Within your risk tolerance, you must also evaluate your Sharpe ratio. This can help
you compare across socially responsible investments when you evaluate your per unit risk premium. With the wide range of socially responsible mutual funds, which either target conservative values investing or aggressive growth strategies, it is important to select one that trades within your risk tolerance parameters as a socially responsible investor.
Socially responsible investments portfolio diversification
Diversifying is the underlying fundamental in a successful portfolio, and socially responsible investing is no exception. According to mathematical models, a well diversified portfolio should be comprised of 25 to 30 different socially responsible stocks, which have different reactions to market changes.
However, full social investing diversification can be difficult for the average socially responsible retail investor. The research, time, and effort it takes to deeply research a fully diversified financial portfolio – especially in terms of socially responsible investing – can be overwhelming. In addition, without a significant amount of funds, it is challenging to create a sufficiently diversified socially conscious investing portfolio.
Thus, many investors opt to diversify through socially responsible investment funds or social investing ETFs. Although there are the associated load fees and expense ratios, socially responsible funds are an easy, effective way to fully diversify your social investing portfolio.
Evaluating time horizon for your socially conscious investing
Selecting the appropriate socially responsible investment vehicles is dependent upon your time horizon. Understanding your time expectations will ensure that you choose the appropriate socially responsible investment options, as well as your asset allocation strategies.
Holding all other factors constant, you can generally be more aggressive with your socially responsible investment returns given a longer time horizon, which provides padding for short-term fluctuations. The shorter your time frame, the more conservative your social investment should be, as there remains a small period of time for your investments to recapture any short-term losses in your socially responsible investment portfolio.
With this in mind, varying socially responsible mutual funds meet different time horizon needs. For example, the Domini Social Equity Fund (DSEFX) is focused on long-term growth, with a longer time horizon – whereas the Citizens Ultra Short Bond Fund's strategy stems from short-term returns for the socially responsible investor.
Socially responsible investment objective
When choosing between your socially responsible investing options, it is fundamental that you understand your investment goals, and how that relates with SRI investment performance.
Are your socially responsible investment goals targeted for long-term, values investing growth? Or, are you seeking consistent, reliable income as a socially responsible investor? If so, you may want to consider a socially responsible investments fund such as Parnassus Equity Income , who selects large-cap companies that pay dividends. Your investment objective as a socially responsible investor plays a large role in determining what type of socially responsible instrument you choose.
Socially responsible investment style
Understanding your socially responsible investment personality helps determine which socially responsible financial instruments are best suited for your portfolio.
If you are an active, aggressive investor, then you may want to consider trading socially responsible ETFs, which benefit from their market exposure, instantaneous execution, and an ability to profit from intraday swings. On the other hand, if you are a passive investor, then an actively managed socially responsible investment fund may be best for your investing style.
Enacting socially responsible screens
Fundamentally, the only factor that differentiates a socially responsible investment portfolio from an unscreened market portfolio is the social considerations, which are translated through social screens.
According to NIS Social Ratings , the most comprehensively screened socially responsible funds are:
With negative, positive, and best in industry screens, you choose your investments based upon your beliefs as a socially responsible investor. Trading socially responsible stocks by implementing your own social screens can be difficult and time-consuming, but rewarding for the active socially responsible investor. If you opt to select socially responsible investments mutual funds, there is a broad array of SRI funds that focus on specific social issues, ranging from alternative energy to Catholic or Muslim derived beliefs.
Selecting the appropriate socially responsible investing vehicles depends upon your diversification, risk tolerance, income requirements, time horizon, and social screening standards as a socially responsible investor. Given the continued growth in sustainable investing financial options, the market will continue to develop suitable financial tools that will meet your investing needs.
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