Is Values-Based Investing Right for You?
Investing today goes beyond account balances; it’s about making your money work in ways that matter to you. Values-based investing allows you to grow wealth while supporting the causes you care about. Whether protecting the environment, encouraging responsible business practices, or creating positive social impact, this strategy helps your portfolio reflect your priorities and goals for the future.
But does this approach fit your financial plan? One of the most frequent questions we receive from investors is, “Can values-based investing deliver competitive returns while staying true to my principles?”
As Boston financial advisors, we are experiencing more investors, from young professionals to current retirees, asking how values-based investing might shape their financial futures. In this article, we’ll look at frequently searched questions related to values-based investing and the potential trade-offs to be aware of when deciding if it’s right for you and your family:
- Why should I consider values-based strategies?
- What is direct indexing, and how does it enable value-based investing?
- Are there risks in excluding specific market segments?
- How can a financial advisor in Boston guide me to invest based on my values?
Read Our Newest Quick Guide: Building a Portfolio That Reflects Your Goals and Values
Values-Based Investing Definitions
Values-based investing is a broad term for aligning investments with personal beliefs, ethics, or social priorities. It’s often used as an umbrella term that includes all of the strategies described below:
Socially Responsible Investing (SRI): One of the earliest socially responsible approaches. SRI typically involves “screening out” companies or sectors that conflict with specific values, for example, avoiding tobacco, weapons, birth control, or fossil fuels.
Environmental, Social, and Governance (ESG) Investing: ESG invests in companies based on environmental practices, social responsibility, and governance (corporate leadership and ethics). Many mutual funds and ETFs use ESG scoring to select holdings.
Impact Investing: This strategy goes further by actively seeking investments that produce measurably positive outcomes, such as renewable energy projects, affordable housing, or companies advancing medical innovation.
Biblically Responsible Investing (BRI): A niche form of values-based investing for investors who want their portfolios to align specifically with biblical or faith-driven principles.
Sustainable Investing: Often used interchangeably with ESG, sustainable investing typically emphasizes environmental concerns, such as reducing carbon footprints or supporting clean energy.
Faith-Based or Mission-Driven Investing: Broader than BRI, this includes any investment approach guided by religious or organizational missions. Nonprofits, endowments, and foundations often subscribe to this model.
SFA Tip: These terms may overlap, and funds or investment firms may use them differently. The critical step is clarifying what you want your investments to reflect, then letting a financial advisor in Boston help you choose the right mix of strategies for your investable assets.
Why People Choose Values-Based Strategies
Whether sustainability, corporate ethics, or social justice, values-based investing helps you feel good about how your assets are invested. And it’s not just a matter of feelings: studies show that some socially screened portfolios can outperform conventional ones by several percentage points per year.
As Boston retirement planners, we’ve seen more investors, especially younger ones, prioritize values-aligned portfolios alongside returns. Engaging with your investments in this way also helps reinforce long-term commitment to your plan, boosting performance through compounding over more extended periods.
SFA Tip: Tell us which values matter most to you: environmental, social, governance, or a combination. We’ll incorporate them into a customized portfolio that complements your personal and financial goals.
Direct Indexing Strategies
Rather than investing in generic ESG funds, direct indexing lets you own the individual stocks in an index (like the S&P 500) and customize your holdings. You can exclude or overweight sectors or companies based on your values. This gives you far greater control in a personalized portfolio. However, it’s not a perfect fit for everyone. Complexity can be a hurdle, and the tax consequences may require an additional layer of tax advice.
Benefits of direct indexing include:
- Align holdings with your beliefs, not a fund’s predetermined screens.
- Use tax‑loss harvesting to offset gains by selling underperformers.
- If you already hold a prominent position in a company, direct indexing prevents overlap.
SFA Tip: We’ll guide you through direct indexing options available to individuals rather than the institutional alternatives.
Risks of Missing Market Segments
One common trade-off with values-based investing is the potential reduction in diversification. Screening out specific sectors, like energy or defense, might reduce exposure to parts of the economy that you’d miss out on. Less diversification can mean more volatility or missed returns.
Another risk is relying on poorly screened investments. Some ESG funds appear socially conscious, but their portfolios might still hold companies that clash with your values. Watch out for foreign subsidiaries of domestic companies.
SFA Tip: We’ll assess your portfolio’s exposure and ensure your beliefs don’t generate increased investment risk.
Strategies You Can Deploy Today
- Start by pinpointing what matters most, such as a faith-based focus, climate, human rights, board diversity, or another priority. Defining these specifics moves beyond broad labels like “ethical investing” and creates better alignment between your values and portfolio strategy.
- Have you unwittingly invested in companies that conflict with your values? We can help identify your holdings and highlight areas that require change without disrupting your pursuit of long-term financial goals.
- You don’t have to go full direct indexing right away. Start with screened ETFs or mutual funds that align with your values, then gradually transition into more customized strategies based on your initial experience.
- Direct indexing may make more sense if you have at least mid-six figures in investable assets. It offers customization and tax benefits but requires professional oversight to manage the complexity of the portfolios.
- Values and markets change over time. Establish a rebalancing schedule that periodically checks performance and values alignment so your portfolio stays on track based on your performance requirements and ethics.
SFA Tip: We work to align your investments with your values, balancing personal priorities with sound financial principles.
At Sherr Financial Associates (SFA), we’re more than just Boston retirement planners or investment managers; we listen, customize, balance, and implement.
Values-based investing can work for you. Let’s ensure that your portfolio reflects both your principles and financial goals. Contact us to learn more about values-based investing strategies.
This material is provided for informational purposes only and does not constitute tax advice. Please consult a tax or legal professional regarding your individual circumstances before deciding to invest. Commonwealth does not provide tax or legal advice.
Investments are subject to risk, including the loss of principal. Environmental, social, and governance (ESG) criteria is based on a set of nonfinancial principles in addition to financial principles used to evaluate potential investments. The incorporation of nonfinancial principles (i.e., ESG) can factor heavily into the security selection process. The investment’s ESG focus may limit investment options available to the investor. Past performance is no guarantee of future results.
Exchange-traded funds (ETFs) are subject to market volatility, including the risks of their underlying investments. They are not individually redeemable from the fund and are bought and sold at the current market price, which may be above or below their net asset value.
Direct Indexing strategies are subject to certain risks, including, portfolio tracking error, which is a portfolio’s deviation from the performance of the target market index. This can be caused by the strategy’s representative sampling methodology and client portfolio customization. Tax-loss harvesting can have unintended tax consequences and there may be higher fees or costs associated with a replacement security or stock position. There is no guarantee that a favorable tax outcome will be achieved.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
