We build personal portfolios for clients. As in, really personal. Each client brings their existing holdings, taxes, social issues, market viewpoints, all of which are part of our portfolio construction process. Recently a new client decided she wanted to exclude gambling, adult entertainment, and tobacco companies from her large-cap equity portfolio. That isn't an unusual request, in fact avoiding "sin" stocks is fairly common. What came next though surprised me. She also wanted some exposure to the legal Cannabis industry. I asked her if she saw any disconnect in the two positions, and she replied, "...they're not the same at all. Cigarettes kill people, plus I'm convinced marijuana will be legal in all 50 states within a decade".
The introduction of a client's social values and market viewpoints are a large part of what makes our portfolio construction process so personal. Our role is to create and manage a globally diversified portfolio in a controlled tax and risk management framework based on her values and views. Rather than spending our time picking stocks or trying to time the market, managing this process in a risk-controlled way is the essence of our investment process. As a firm, we don't have an investment opinion on legal Cannabis or tobacco companies. Still, our discussion got me thinking about her point of view, and I thought it might be interesting to share a few thoughts about the legalization of marijuana with you in this edition of IFP Insights.
Data from the Pew Research Center shows the amount of Americans who approve of the legalization of marijuana has steadily increased over the years.1 This shift became more apparent in the months surrounding the 2020 election period, as every state voting for marijuana legalization approved the ballot. And, though marijuana legalization brings economic benefits to states that begin regulating the drug, there is still a lot of controversy surrounding the subject. Let's examine some opinions and economic impacts to understand the conversation better.
The Opinions on Marijuana Legalization
According to that same Pew Research Center study, most Americans believe marijuana should be legal for recreational use. At the same time, 32 percent feel it is appropriate for medicinal purposes only, and eight percent think it should not be permitted at all.1 Many of those opposing legalization cite car accidents and further drug use as reasons, while many of those for legalization cite medical benefits and reduced law enforcement concerns.1
The Potential Economic Impacts of Marijuana Legalization
As the first state to legalize medical and recreational marijuana, Colorado provides an example of the economic impact of legalization. Data from the Federal Reserve Bank of Kansas City shows that legalization improved employment by 5.4 percent over four years, totaling 0.7 percent of total employment, and contributed to about two percent of the state's total tax revenue.2 Upon legalization, for recreational or medical purposes, marijuana legalization can impact a state's economy in other ways.
Impact #1: Job Opportunities
With a new, regulated market, many jobs become available. They are not limited to employment in the marijuana industry but can also include secondary or tertiary sectors. Companies that produce farming equipment, transportation, medical products, and inspection equipment are just a few examples.
Impact #2: Increased Tax Revenue
As shown above, with regulation comes taxes. Many states determine marijuana taxes based on local factors. But what is consistent is that many states distribute tax revenue to education programs, healthcare, public safety, and state savings, according to the Tax Policy Center.3 Many states may distribute income this way to offset the harmful effects of marijuana legalization.
Impact #3: Boost State Economies
Marijuana Business Daily projects marijuana sales to reach $19.4 billion to $23.5 billion between recreational and medical use.4 This increase in sales impacts local economies, which results in increased tax dollars towards the previously mentioned tax programs.
Impact #4: Improved Police Procedures
Supporters of marijuana legalization state that police would be free to pursue more serious crimes rather than marijuana possession crimes. And, though the NJCRS does show an improvement in crime trends in marijuana-legal states, the study states that it is difficult to determine whether legalization was the primary cause.5 However, a reduction in crime rates could improve police procedures and reduce the cost of jailing and court procedures.
Impact #5: Growing Investment Opportunities
New markets create new investment opportunities. Just as marijuana legalization generates jobs and taxes, it also improves investors' chances in these industries.
Impact #6: Reduced Medical Marijuana Costs
According to the Harvard Medical School, CBD is beneficial for many medical conditions and is considered safer and less addictive than opiates.6 The legalization of recreational marijuana would increase the total amount of available products, reducing the cost of medical marijuana and its byproducts.
Marijuana legalization remains controversial. Regardless of your position, the fact remains that there are economic benefits to consider.
Building Your Personal Index Portfolio
Personal Index Portfolios combine the best features of low-cost indexing, active tax management, and the inclusion of your environmental, social, and faith-based views.
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 outcomes, we can’t control (beating the market), we focus on the things we can control. We document those into a written Investment Policy created specifically for you. We are not stock pickers or market timers, our role is to manage your portfolio according to this written plan, serving as your fiduciary.
Our scientifically-backed financial personality assessment for investing (similar to a Myers-Briggs® Type Indicator) is 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:
If understanding your Financial Personality is interesting to you, we invite you to take our assessment here. It's short (~3 minutes) and completely free. We will share the results with you regardless. Still, if you would like to dig deeper to understand how we use this information to build personalized portfolios, we would welcome the opportunity to speak with you.
Todd Smurl, CFA
This content is developed from sources believed to be providing accurate information and provided by Integrity Financial Planning, LLC and Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.