In today’s world of bespoke clothing and customized coffee, investors are looking to extend the trend of personalization to their portfolios. For many, this means making sure their investments and values are aligned. A staunch environmentalist may buy shares of an electric carmaker, for example, while someone passionate about gender equality may divest from a company with an all-male board.
Still, some investors are reluctant to tell their advisors about one very personal area of interest: their religion. While their faith may guide which charities they support, many people stay agnostic when designing their portfolios and building personal wealth.
You don’t have to. Faith can align with investment decisions in an approach called faith-based investing. An increasing number of investors today are choosing this path and making sure their holdings match their religious beliefs – in other words, putting their money where their morals are.
What is it?
Faith-based investing is a type of socially responsible investing – intentionally avoiding stocks of companies whose products, services, or values do not align with your own. For most Christians, this often means screening out “sin stocks” and avoiding companies that support:
- Adult entertainment
For some, faith-based investing may also exclude companies that lobby for or engage in activities seen as opposing Christian doctrine, such as medical interventions deemed contrary to the pro-life movement. Others may want to eliminate, or divest, certain companies they feel are violating elements of their belief system or being repressive to their religious viewpoints.
For Catholic clients specifically, we adhere to the United States Conference of Catholic Bishops’ socially responsible investment guidelines. These guidelines lay out core church principles and values that should be kept at the forefront of Catholic faith-based investing efforts.
There are six major themes in the USCCB:
- Protecting human life
- Promoting human dignity
- Reducing arms production
- Pursuing economic justice
- Protecting the environment
- Encouraging corporate responsibility
How does it work?
Personal indexing involves buying a set of individual stocks that make up an index that closely tracks the performance of that index. This contrasts with buying an index mutual fund or index exchange-traded fund (index ETF) that tracks the index.
This “unwrapping” of a fund to directly own the individual stocks found inside can provide greater autonomy, control, and tax advantages to investors over owning an index mutual fund or an index exchange-traded fund (index ETF). The ability to employ faith-based investing is one example of the benefits of Personal Indexing – the control to screen out stocks that do not align with your values.
When building your faith-based portfolio, we begin the process with a basket of the individual stocks that make up an index (S&P 500 for example). We then remove the stocks which fail your selected faith-based investing screens. The remaining stocks are then assembled into a portfolio that has the tightest fit (lowest performance risk) to the benchmark index.
Your portfolio is reviewed daily, incorporating new data (price changes, stock splits, mergers, etc) and any other restrictions you ask us to place on the portfolio such as active tax management strategies. The result is a Personal Index Portfolio designed from the ground up with your unique personal values and tax priorities.
Why index portfolios?
Research has long shown that trying to beat the performance of an index using active portfolio management is ultimately a “losers game" and that taxes and other costs dramatically reduce portfolio performance over time compared to index investing.
Instead of spending our efforts on things we can’t control (trying to beat the market), we focus on the things we can control (your asset allocation, faith-based preferences, managing taxes, controlling portfolio costs). We document those into a written Investment Policy created specifically for you. Because our investment philosophy is based on indexing - we are not stock pickers or market timers, our role is to manage your portfolio according to this written plan, serving as your fiduciary.
How much does it cost?
There are two elements to understanding the costs of faith-based investing.
- Performance vs an index benchmark (performance risk).
We provide Personal Index Portfolios as part of our advisory service. This means we include active tax management, environmental, social, and faith-based investing at no additional cost above our investment advisory fee.
Many advisors either charge an extra fee (typically .40% or 40bps) for this service or use actively managed mutual funds or ETFs (fees can range from 30bps to 100bps+) to implement faith-based investing. These expenses are in addition to your advisor's fee, so it is important to be mindful of the overall costs. Also, keep in mind that products like mutual funds and ETFs cannot be customized which limits the ability to incorporate tax or other types of personalization.
Removing stocks from the index portfolio due to faith-based screens will cause some level of divergence from the index returns (performance risk). These deviations may improve your performance or detract from it. Every portfolio we manage is reviewed daily with the intention of minimizing this performance risk subject to constraints you give us such as tax management or being true to faith-based screens. In fact, part of the ongoing portfolio review process is to discuss any performance deviations and determine if the strategy is meeting your financial, as well as faith considerations.
How do I get started?
You can learn more about our investment process here, but a good way to start is with our financial personality profile. It is a scientifically-backed financial personality assessment for investing (similar to a Myers-Briggs® Type Indicator) designed to draw the strongest positive connection between you and your money. Before we start the investment process, we take the time to understand what drives your financial decisions along these dimensions:
To learn more about your financial personality, we invite you to take our assessment here. It's short (~3 minutes) and completely free.
If you would like to dig deeper to understand how we could build a personal index portfolio for you, including faith-based investing, then schedule an introductory call, we would welcome the opportunity to speak with you.
If you enjoyed this post, please share it on social media using the links below!