All Posts by Eric Weigel


About the Author

Eric Weigel is the Chief Investment Officer of Insight Financial Strategists. He sets the direction of Insight Financial Strategists' investment strategy and works on helping clients meet their goals

Feb 14

Key Insights Into Understanding Equity Market Corrections

By Eric Weigel | Capital Markets , Investment Planning , Portfolio Construction , Retirement Planning , Risk Management

correctionsCorrections, Recoveries and All That Jazz

Stock Market Corrections are tough on equity investors.  Over the last couple of weeks, there has been nowhere to hide – normally defensive strategies provided little relief.

After a long period of minimal equity market hiccups investors were reminded that the opposite side of the return coin involves risk.

Equities do better than bonds, on average, precisely because investors require compensation for the additional risk of their investments.

If risk and return are tied together why do investors get so nervous when suddenly equity markets go haywire?  Memories of 2008 come flooding back and investors get hyper fixated on relatively small market movements.

As of Friday, February 9, the S&P 500 had dropped 8.8% from its high of January 26.  Granted the drop has been swift and intraday market action (the difference between the high and low of the day ) has been off the charts, but you would have thought that we were on the verge of another Financial Crisis.

Figure 1 depicts the rolling 12 month returns on the S&P 500 as of the end of 2017. There are more periods of positive rather than negative returns as expected. We can also see that the downdrafts in recent years have been painful for investors – the implosion of the Technology Bubble (2000-2002) and the 2008 Financial Crisis still very much linger in investor minds today.

Figure 1

The key insight that investors need to come away with from looking at the history of stock market returns is that to get the good (those returns averaging 10% a year) you must be prepared financially and most importantly emotionally to endure the bad (those nasty corrections).

Investors need to remember that risk and return are the opposite side of the same coin.  They also need to understand the context in which market corrections take place.  While history always rhymes every equity market correction possesses unique elements that shape its ultimate effect on investors.

Understanding the market and economic context is incredibly important for everyday investing.  It is, however, absolutely critical for understanding the implications of equity market corrections and most appropriate course of action.

The point is that not all equity market corrections are made of the same cloth.  Some are deep and lasting. Some are deep and over before the eye blinks. Others last for a year or two and progress at a slower rate. And, finally other corrections turn into cataclysmic events that leave investors bruised for a long time.

Given the events of the last couple of weeks we understand the skittishness of equity investors. Last year was fantastic for investors.  We hardly had a hiccup in the last year. Investors started adapting to the environment – high returns and low volatility.

All the fireworks have come from Washington rather than Wall Street.  Yet, the lingering suspicion is that this party like all others before it must end at some time. Maybe it is just time, right?

We are professional wealth managers, not magicians or fortune readers. Nobody knows when the next big stock market crash will happen and least of all nobody knows the severity of the downturn.

At best, we can analyze the current equity market downturn and attempt to better understand the context in which current equity market prices started heading south.

While all equity market downturns are unique, for simplicity sake we categorize periods of extreme equity market distress into three distinct types of corrections – technical, economic and structural.  Each type of correction has its own distinct patterns and associated implications for investors. Not every moving animal in the woods is a Russian Bear!

stock market

Technical Correction:

This type of correction typically comes out of nowhere and takes market participants by surprise. One bad day for the stock market turns into 2 or 3 in a row and soon enough there is an avalanche of pundits predicting the next global crisis.

Maybe a bit surprising to some, pundits use perfectly logical arguments to justify their bearishness – inflation is about to spike up, the economy is tanking, earnings are coming down, there are no buyers left, and so forth.

All perfectly valid reasons for an equity market correction but the key characteristic of such prognostications is that they are mostly based on speculation and not rooted in contemporaneous economic trends. The arguments are more based on what we fear as opposed to what the current reality is.

Technical Corrections tend to occur on a regular basis especially for higher risk asset classes such as equities.  Long-term equity investors have seen these before and do not seem fazed by the market action.

Newer generations of investors, however, experience great fear and regret.  The immediate response is to sell down usually their most liquid holdings and wait for the market to calm down.  Maybe they will get in again after the panic is over.

Technical Corrections tend to last only about a week or two.  In the context of long-term capital market history they barely register to the naked eye. Boom they are gone, and people quickly forget what they just went through.  Technical corrections are learning opportunities but are most often quickly forgotten until the next blip.

Economic Corrections:

These types of capital market corrections are caused by the economic business cycle, i.e., periods of economic expansion followed by recession and eventual recovery.  Typically, the clues as to whether the economy is heading into a recession are present ahead of time.

Usually a large number of economic indicators will point in the same direction.  For example, the yield curve may become inverted (long rates lower than short-term rates), business confidence surveys start showing some downward trends, companies start hoarding cash instead of investing in plant and equipment and layoffs start accelerating in cyclically sensitive sectors.

In the last half century, business cycle recessions have been mostly shallow and short-lived. Economic recessions are, no doubt, painful but the implications to investors are fairly straightforward.

In the early stages of a recession, equity investments suffer the most while bond market strategies tend to provide the upside.  As the economy starts recovering, equity investments outperform marginally but with significant volatility.

Being early is never comfortable but it beats being late.  Some of the best equity returns happen during the late early stages of a recovery when the average investor is still too snake bitten to put any money at risk.

And finally, as the economy moves into full expansion mode equity investors typically enjoy a nice margin of outperformance relative to safer assets such as bonds.  As the uncertainty regarding the economic recovery fades in the rear view, capital markets tend to become less volatile as well.

Structural Corrections:

These are the most severe type and involve periods of real economic and financial stress.  Something has gone off the rails and public capital markets are the first to feel the brunt of the economic imbalances.

Structural Corrections are not merely stronger business cycle events. The integrity of the entire economic and financial system is at stake.  Without decisive fiscal and monetary policies there is a risk of total economic collapse.  Under these circumstances, equity investors are often completely wiped out and bond holders don’t fare much better.

Structural Corrections happen during periods of total economic unravelling.  The most usual signs of eminent economic collapse are massive unemployment, huge drops in productive output, and the unavailability of credit at any cost.  The financial system is usually at the root cause of the crisis and liquidity in the system suddenly disappears.  Faith in the system dries up overnight – the first stop are banks, next are capital markets.

The Great Depression of 1929-39 and the Financial Crisis of 2007-09 are prime examples of Structural Corrections that were felt across the globe.  History is, however, littered with other instances of more localized cases such as the 1997 Asian Crisis, the 1998 Russian Default and the Argentinian collapse of 1999-2002.

What should investors do during a correction?

The answer depends on the context surrounding the capital markets at that moment.  For example, the implications of a Technical Correction are very different from those of a Structural Correction.

Misdiagnosing what type of correction you are in can have severe consequences for your financial health.  Becoming too risk averse and selling everything can be as harmful as not being risk-aware enough and always expecting the markets to recover irrespective of business and capital market conditions.

Finding the right balance is key. In reality, after many years of watching markets one is never really 100% sure of anything.  In fact, if anybody says that they have perfect certainty all it means is that they either have not done all their homework or that they fail to understand the statistical concept of probability.

Our preferred approach is based on a solid understanding of capital market behavior coupled with hands-on experience under a variety of capital market situations.  Understanding capital market history is the prerequisite but experience is the key extra ingredient to gain confidence in properly evaluating the context in which markets are experiencing distress.

Table 1 provides a checklist as to the type of issues that we consider when evaluating the type of correction we might be in.

Table 1


Where are we today?

As of February 12 we have already seen signs of recovery, but the S&P 500 is still down 7.5% from its January 26 peak. Investors remain nervous. The CBOE Volatility Index stands at close to 27% which is significantly higher than where it was before the equity market started convulsing.

A 7.5% drawdown on the S&P 500 is not that uncommon. Investors should be wary but also keep their eye on their long game of growing risk-adjusted portfolio returns.

We believe that the current equity market downdraft falls under the category of a Technical Correction. Why? The numbers back up our assertion.  Our view is that equity markets remain healthy and will out-perform lower risk alternatives such as bonds.

equity downturn

Let’s start with a rundown of the negatives about equity markets.  The biggest knock on equity markets is that they are over-valued relative to historical norms such as price-to-earnings ratios. Agreed, the current Shiller P/E stands at 33.6 relative to a historical average of 17.  For access to the latest Shiller data click here.

On an absolute basis the S&P 500 is over-valued.  When considered relative to interest rates the picture changes.  Estimates by Professor Domadoran at NYU, for example, yield fair valuations on the S&P 500.

What else? Interest rates are too low. Agreed again, but low yields are the problem of the bond investor. A low cost of money is actually good for equity investors.

What about rising interest rates? The 10 Year US Treasury Note hit a low of 2.05% in early September and has been rising since. It currently stands at 2.84%.  Higher, for sure.  A real danger to equity markets? Not quite, especially in light of low rates of inflation.

Inflation-adjusted yields (sometimes called real yields) are still significantly below historical norms.

Higher real rates imply lower equity values.  We agree, but we see the current upward progression of interest rates in the US as fairly well telegraphed by the Federal Reserve.

We also still believe that US monetary policy is accommodative.  For example, Federal Reserve Bank of Atlanta estimates generated by the well-known Taylor rule show current Fed Funds rates about 2% too low (read here for a review).

What about the positives regarding equity markets? For one, we have a strong global economy.  Every major economy in the world is in growth mode.  The IMF recently raised their estimate of global GDP growth to 3.9% for both 2018 and 2019.

Inflation seems under control as well. The IMF estimates that global inflation will run 3.2% in 2018, unchanged from last year. Inflation in the US ran at 2.1% in 2017.

Monetary policy remains accommodative.  In the US the Fed reserve is slowly weening investors off artificially low interest rates, while in most other parts of the world (Europe and Japan in particular) central banks have yet to embark on the process of normalization.

The recently enacted lowering of the US corporate tax rate is also a positive for US domiciled companies.  Lower corporate tax rates translate immediately into higher cash flows.  Higher cash flows translate into higher corporate valuations. The main beneficiaries of lower corporate taxes are ultimately shareholders. 

What should investors do today?

Our analysis of the data leads us to the conclusion that the current equity market correction is driven by technical considerations and not fundamental issues.

We do not know how long the equity downdraft may last, but we expect this blip to barely register in the long-run.

Our advice may be rather boring but plain-vanilla seems the best response to the current state of investor panic.

  • If you were comfortable with your financial plan at year-end, do nothing. Don’t obsess over every single market gyration. There is not enough evidence to merit an increase in fear or a significant re-positioning of your portfolio towards safer asset classes such as bonds
  • If you did not have a plan in place, don’t go out and sell your equity holding before figuring out the status of your financial health in relation to your goals. Consult a certified financial planner if you need help.
  • If you have some cash on the sidelines, deploy some of it in the equity markets. Given that all major equity markets have taken a beating spread your money around a bit. We still rate International Developed Markets and Emerging Markets as attractive.  Consider whether it makes sense for you to put some money in the US and some abroad.

Whatever you do don’t panic. Focus on your asset allocation in relation to your needs, goals and appetite for risk. Don’t let that Russian Bear get to you!

Taking risk and suffering the inevitable equity market drawdowns is part of investing. Be cautious but be smart. Talk to your Advisor if you need help. Make your money work for you!

Jan 11

5 Risk Factors for Investors in 2018 – 3 Bad and 2 Good

By Eric Weigel | Capital Markets , Investment Planning , Portfolio Construction , Risk Management

5 Risk Factors for Investors in 2018 – 3 Bad and 2 Good

2017 came and went without nary a whimper. None of the big concerns at the end of the previous year happened or at least global capital markets did not seem to be disturbed by much of anything.

Stocks went up in a straight line, bonds did ok, volatility was super low and at the end of the year exuberant expectations were in full bloom as everybody and their aunt became fixated on Bitcoin.

The global economy keeps doing well and memories of the 2008 Financial Crisis are receding.  Consumer sentiment remains upbeat.

Being an investor is wonderful when markets are calm and statements show gains month after month.  Everybody is an investment genius. We forget how painful  it is when capital markets experience stress and things get a bit crazy.

The mental picture I use is that of flying.  The six hour trip from Boston to LA is great when it is all smooth sailing.  The plane seems to be flying itself and you pay more attention to the movie you are watching than thinking about the age of the aircraft or training of the pilot and crew.

But the first time there is a little air bump and maybe lighting strikes your plane you immediately tense up and fix your gaze on the crew.  Are they calm? Do they seem competent? Is this their first rodeo?

You form a mental image of what you want your pilot to look like.  Calm and collected for starters. But mainly experienced. We all want to see Captain Sully at the helm.

Clearly, we all would love smooth capital markets forever. But the close friend of return is always uncertainty.  The two are inseparable even though they may not always be in direct contact.  In times of turbulence you want experience at the helm and a solid understanding of how the two are intertwined.

How do we think of uncertainty in the capital markets? There are as many ways of defining uncertainty as there are opinions as to who the greatest quarterback in history is (we all know it is Tom Brady, right)  but without hopefully appearing too cavalier we think that it is useful to think of uncertainty as a normal distribution of potential outcomes.

We fear the left tail where things go terribly wrong, we accept the middle of the distribution as textbook risk/return, and we think that our own brilliance (just joking) has led us to the right tail of the distribution.

In 2017 equities, in particular, had a monster year with the S&P 500 up over 25% and many international markets up even more.  The year turned out much better than expected.  What do we expect for this coming year?

Our baseline assessment is fairly benign as we discussed last month in our Capital Market Overview. A quick review is in order.

We expect equities to again do better than bonds.  We also expect international assets to outperform domestic strategies.  We expect robust global growth.  Our most likely scenario for this year is for continued growth, subdued inflation and no major equity or bond market meltdown.  In our judgement there is about an 80% probability that such a scenario plays out in 2018.

On the downside we expect the low volatility that has accompanied capital markets recently to once again revert back to risk on/off.

Our baseline assessment is fairly benign

We expect to see more large jumps in market prices caused by low probability events lurking in the left hand side of the distribution.  The press calls these events Black Swans. Our best assessment is that there is about a 15% probability of seeing a Black Swan event in 2018.

On the other end of the uncertainty distribution you have what we call Green Swans – events, low in probability that when they happen are wildly positive for investors. We attach a 5% chance of experiencing such extreme positive events over the current calendar year

What could cause a Black Swan in 2018?

1. An inflation spike caused by a sustained rally in commodity prices

Inflation in the US is currently running a bit above 2% and market participants do not expect to see any major revisions over the next two decades (see the Philadelphia Federal Reserve estimate of inflationary expectations).

In our view, forecast complacency has set in and the risks are to the upside. Traders would describe the low inflation trade as over-crowded.  Maybe it is time to re-think what happens if the consensus turns out to be wrong.

The immediate effect of an upward spike in inflation would be a rise in bond yields.  Equities would probably take a short-term hit but the primary casualties would be found in the fixed income market.

What could cause a sustained surge in commodity prices? One, could be a supply disruption say in the oil market. Another could be related to the resurgence of global growth and continued demand for commodities such as iron ore and copper.  Third, a depreciating US dollar leading to commodity price inflation.

2. A spike in capital market turmoil caused by a geo-political blowup

The blowup could be anywhere in the world but most political commentators point to North Korea and Iran as the most likely centers of conflict.

Another possibility is a cyberattack endangering public infrastructure facilities especially if it is sovereign sponsored. Third, Jihadi terrorism on a large scale and on high profile targets. And last, the outcome of the Special Counsel investigation into Russian meddling.

All of these events have blowup potential.  While the probability of any of these events happening in 2018 is low, the magnitude of the capital market response is likely to be large and negative especially for equity markets.  Global economic growth would also, no doubt, loose some of its momentum.

3. An avalanche of bond defaults in the apparel and retail industries in the US and/or a debt bomb crisis in China

It is no secret that the US apparel and retail sectors are going through massive consolidation driven in part by the shift to online shopping.  It is widely acknowledged that the US retail market is over-built.

The number of apparel and retail companies expected to disappear is higher today than in 2008 during the Financial Crisis. Read here for a list of apparel and retailers at risk.

According to the Institute of International Finance global debt hit a record last year at $233 trillion.  Debt levels as a percentage of global GDP are higher today compared to 2007.  Figuring prominently in the debt discussion is China.

Global Debt Reaches a Record in Q3 2017
Source: IIF, IMF, BIS

The IMF recently issued a warning to the Chinese authorities about the rapid expansion of debt since the 2008 Financial Crisis.  The rapid expansion in debt has funded lesser quality assets and poses stability risk for global growth according to the IMF.

Estimates by Professor Victor Shi at UC San Diego put Chinese total non-financial debt at 328 percent of GDP. Other estimates are even higher leading to an overall picture of rising liabilities and numerous de facto insolvencies.  The robust GDP growth in China and the tacit understanding of the monetary authorities of the extent of the problem will hopefully keep the wolves at bay.

The implications of a debt scare for investors would be quite dire. Investors have had plenty of experience with debt crisis in recent years – Greece and Cyprus come to mind as Black Swan events that temporarily destabilized global capital markets.  A Chinese debt scare would no doubt be of greater impact to global investors. Emerging market debt spreads would certainly blow up.

What about the right hand tail of the uncertainty distribution – the Green Swans?

These are wildly positive events for investors that carry a low probability of happening.  What type of Green Swan events could we hope for that would lead capital markets to yet another year of phenomenal returns?

1. Positive global growth surprise possibly brought on by the recently enacted US tax reform

The US is the largest economy in the world and still remains a significant engine of global growth.  Could we be surprised by a spurt in US economic growth this year?

According to the Conference Board US real GDP is expected to growth 2.8% in 2018. Could we see 4% growth? The President certainly hopes so.  Not that likely. The last time that US GDP growth was above 4% was in 2000.

What could give us the upside scenario for growth?  Maybe a jump in consumer spending (representing 2/3 of GDP) driven by real wage growth and lower taxes.

Another possibility is a surge in investment by US corporations driven by cash repatriations and recently enacted corporate incentives.

We view both scenarios as likely but providing only a marginal boost to growth. As they say we remain cautiously optimistic, but would not bet the farm on this.

2. A spurt in exuberant expectations driven by the cryptocurrency craze

Fear of missing out (FOMO) takes over repricing all investments remotely tied to the cryptocurrency craze along the way.  We saw a similar scenario play out in 1999 in the final stages of the Technology, Media and Telecom (TMT) bubble.

In those days TMT stocks were no longer priced according to traditional fundamentals but instead on the idea that laggard investors would buy into the craze and drive prices even higher. Lots of investors succumbed to FOMO in the final stages of the bubble.

Photo by Ilya Pavlov on Unsplash

The recent price action of Bitcoin and most other cryptocurrencies has a similar feeling to the ending stages of the TMT bubble.  It is almost as if Bitcoin and its cousins are being discussed along with the latest Powerball jackpot.

No doubt fortunes have been and will continue to be made in cryptocurrencies.  Blockchain technology which underlies the crypto offerings is here to stay, but we worry about the lack of investor education and the speed of the price action in late 2017.  Whatever happened to Peter Lynch’s “buy what you know” approach?

What would be our best estimate for capital markets should the cryptocurrency craze gain further momentum in 2018? First, technology stocks would continue out-performing. Chip suppliers such as Nvidia and AMD would continue to see massive growth.

Companies adopting blockchain technologies would see their valuations increase disproportionally.  In general, animal spirits would be unleashed onto the capital markets making rampant speculation the order of the day.  The primary beneficiary would be equity investors.


History tells us that it is almost certain that after 8 years of an economic expansion and stock market recovery we should see an outlier type of event in 2018.  What shape and form it will take (or Swan color) we don’t know.

Preparing for tail risk events is very expensive and under most scenarios not worth bothering with.

Black Swans create great distress for investors, but the opportunity cost of playing it too safe is especially high today given prevailing interest rates that fail to keep up with inflation.

The fear of missing out (FOMO) during Green Swan events is also a powerful investor emotion.  Again playing it too safe can result in many lost opportunities for capturing significant market up moves.

Investing in capital markets is all about weighting these probabilities and focusing on a small number of key research-driven fundamental drivers of risk and return.

How you structure your portfolio and navigate the uncertainties of capital markets is important to your long-term financial health. Putting a financial plan in place and having an experienced Captain Sully-type as your captain during times of turbulence should reassure investors in meeting their long-term goals.




Note: The information herein is general and educational in nature and should not be construed as legal, tax, or investment advice. Views expressed are the opinions of Insight Financial Strategists LLC as of the date indicated, based on the information available at that time, and may change based on market and other conditions.  We make no representation as to the accuracy or completeness of the information presented.  This communication should not be construed as a solicitation or recommendation to buy or sell any securities or investments. To determine investments that may be appropriate for you, consult with your financial planner before investing. Market conditions, tax laws and regulations are complex and subject to change, which can materially impact investment results.

Individual investor performance may vary depending on asset allocation, timing of investment, fees, rebalancing, and other circumstances.  All investments are subject to risk, including the loss of principal.

Insight Financial Strategists LLC is a Registered Investment Adviser.



Dec 13

Doing Good While Also Doing Well

By Eric Weigel | Investment Planning , Sustainable Investing

Incorporating Sustainable Investing Principles Into Your Portfolio


The term “sustainable investing” is often used interchangeably with “socially responsible investing”. In general, these terms describe an approach to investing that combines traditional financial methods to portfolio construction with the desire to simultaneously create positive societal outcomes.

What might these societal outcomes be? The industry has gravitated to three broad areas of impact – Environmental, Social and Governance (ESG).

We are all exposed to these various areas in our daily lives and many of us care deeply about some of these issues.  For the most part, we have channeled our beliefs into action through charitable giving and volunteering efforts.

But a new way of “doing good while also doing well” has emerged in the last few years .  Investment strategies have been designed to deliver competitive financial returns while also impacting society in a positive manner.

Sounds too good to be true? Large institutional investors have been able to achieve both financial and societal returns for a long time, but only in recent times have investment strategies been designed to enable individual investors to achieve the same objective.


How did sustainable investing get started? In its early days socially responsible or what we now call sustainable investing took an exclusionary view to investing . For example, tobacco companies were often excluded from portfolio mandates. Another, probably more extreme example involved the divestment of South African investments during the apartheid era.  Companies selected under this form of exclusionary screening had to meet a minimum threshold of “do no harm” but that was about it.

How has sustainable investing changed in the last few years? More recently, investors have looked at ways to create positive social outcomes within their financial portfolios.  The focus has shifted toward emphasizing investments with the dual objective of superior risk adjusted financial returns along with demonstrably positive environmental, societal and/or governance outcomes.

Doing well while doing good

“Doing good while doing well” is the basic rationale why investors are increasingly interested in enhancing how they manage their portfolios by including non-financial metrics such as environmental, societal and governance factors.

Besides ethical and moral motivations, why have investors suddenly become so interested in sustainable approaches to investment management?   Simple – self-interest combined with the realization that currently disclosed financial metrics are insufficient to properly account for the long-term sustainability and valuation of companies.

Large and small investors have woken to the fact that environmental issues such as climate change and carbon emissions have significant implications for our global well-being as well as for the long-term financial health of companies. This is the E in ESG.

Investors are also becoming very interested in the societal impacts of corporate behavior. Issues such as workers’ rights, gender and diversity policies and human rights in general. This represents the S in ESG.  For example, recent sexual harassment scandals at various media companies highlight the impact of non-financial events on corporate valuation.

Probably the oldest way of using non-financial criteria to evaluate companies involves the area of corporate governance.  This is the G in ESG.  Board composition, executive compensation practices and sustainability disclosure criteria are just three areas of increasing investor attention.

Is it possible to achieve competitive returns and also deliver a significant impact? Research indicates that “doing good while doing well” is achievable if properly implemented.

One of the concerns of early investors in SRI approaches was that excluding companies deemed to be “bad actors” would significantly restrict one’s investment opportunities and returns would commensurately suffer.

Recent empirical studies show that returns need not suffer especially when risk-adjusted.

Research from Morningstar depicted below highlights a segment of socially responsible funds compared to the broad universe of US equity mutual funds. The general conclusion is that socially conscious funds tend to have a higher representation among 3 and 4 star funds and lower proportions in the tails.

While not a ringing endorsement, the Morningstar research at least points out that there is no empirical reason to suspect that socially conscious funds underperform the general universe of US mutual funds.


Research generally shows that sustainable investing strategies do no harm, but can you do better? Yes, when the issues examined have a clear link to financial performance.  This relates to the issue of materiality.

Certain ESG issues are important from a societal standpoint but have a tenuous relationship to financial metrics such as company profitability or asset valuation.  For example, preserving the Costa Rican Toucan is a worthwhile societal goal, but few publicly traded companies have a direct financial link to such an effort.

On the other hand, global warming has a direct effect on the severity of hurricanes and directly impact the financial performance of companies in the insurance and construction industries among others.  Such an effect would be deemed material and of great consequence to individual investors with allocations to sustainable investing strategies.

Recent research by Harvard professors Khan, Sarafeim and Yoon identified a large variation in long-term measures of company financial success when evaluating companies on material ESG metrics.   Their conclusion is that companies with superior sustainability practices outperform companies with poor practices. *

How can individual investors incorporate sustainable investing strategies into their overall portfolios?  Our take is that properly constructed portfolios incorporating financial as well as non-financial ESG criteria are competitive on a risk-adjusted basis over short holding periods while providing significant positive upside over the long-term.

Our belief is that investors will benefit long-term from lower levels of business risk in their holdings as well as potentially higher stock returns.

Companies with superior ESG practices tend to provide greater transparency in their disclosures, be better prepared to deal with adverse events when they happen, and be more open to adapting their business models around environmental, social and governance issues likely to be material over the long-term.

Are sustainable investing strategies different from traditional approaches? The same risk-return balancing issues that apply to any investment portfolio apply to an approach using sustainability criteria. The biggest difference at the moment occurs at the implementation stage.

Implementing ESG portfolios requires additional research and caution.  While a growing universe of investment vehicles exist in the form of mutual and exchange traded funds there are wide differences in liquidity, composition and cost.  Properly conducting due diligence on the various sustainable investing offerings requires an above-average experience and know-how of financial materiality issues.

At Insight Financial Strategists we have done significant research on sustainable investing and believe that these strategies are here to stay and will deliver on the goal of “doing good while doing well”.

Please schedule a time to discuss with us your financial planning and investment needs and how a sustainable investing approach might fit your requirements.


Note: The information herein is general and educational in nature and should not be construed as legal, tax, or investment advice. Views expressed are the opinions of Insight Financial Strategists LLC as of the date indicated, based on the information available at that time, and may change based on market and other conditions.  We make no representation as to the accuracy or completeness of the information presented.  This communication should not be construed as a solicitation or recommendation to buy or sell any securities or investments. To determine investments that may be appropriate for you, consult with your financial planner before investing. Market conditions, tax laws and regulations are complex and subject to change, which can materially impact investment results.

*  “Corporate Sustainability: First Evidence on Materiality” by Mozaffar Khan, George Serafeim, and Aaron Yoon, Harvard Business School Working Paper No. 15-073, March 2015.

Individual investor performance may vary depending on asset allocation, timing of investment, fees, rebalancing, and other circumstances.  All investments are subject to risk, including the loss of principal.

Insight Financial Strategists LLC is a Registered Investment Adviser.