50 Shades of Green

For What It's Worth -

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Happy Thursday, FWIW readers!

The economic news keeps pouring in (unemployment down, jobs added up more than expected, and the first signs of moderating inflation in quite a while), yet our attention this week turns to Washington. Unless you’ve been off the grid on vacay (our OOO messages lead us to believe many of you deserve 🎉 as you unplug), no doubt you’ve heard that the US Senate did a pretty big thing last Sunday. In a 51-50 vote, senators passed the Inflation Reduction Act (aka the “climate bill,” and not to be confused with your Roth IRA), which is expected to clear the House of Representatives on Friday and then zip off for the President’s signature.

Overall, it should help cut greenhouse gas emissions by about 40% from 2005 levels by 2030. A win for clean energy is a win for the environment, but what does this bill — whether you prioritize sustainability or not — mean for FWIW investors?

Here’s a few of the key areas for investors to keep an eye on:

  • Renewable energy developers are rejoicing due to the expansion of tax credits for wind, solar, and energy storage, as well as the opening of some coastal waters for offshore wind development. If you’re thinking it’s time to increase your exposure to renewables, we have some suggestions of ways to learn more about wind and solar opportunities.
  • Electric vehicles (EV) adoption might get a boost from tax credits, but sticker price caps and domestic manufacturing requirements mean the credits don’t apply to most cars on the market today. Industry analysts say Tesla should benefit, as should mainstream car brands with more affordable models, like Toyota, Volkswagen AG, GM, and Ford. The bottom line: do your research to understand which companies are well-poised to capture market share—with or without tax credits.
  • While the jury’s out on which carmakers will benefit, companies making EV batteries, or mining/refining critical minerals in the US, will see a boost. (Yes, we have a primer on how to research companies and funds focused on EV batteries, too.)
  • Carbon capture companies will get their moment to shine thanks to tax credits that make large-scale commercial projects more feasible.
  • Manufacturers of heat pumps and energy efficient appliances might see increased demand as consumers seek to take advantage of home improvement tax credits.
  • Developers of big ticket energy projects (think hydrogen and diversifying nuclear capabilities) and companies that can supply lower carbon products to the US government are very excited about the expansion of the Department of Energy’s Loan Programs.

Clearly, there’s a lot to unpack (we didn’t even talk about the corporate minimum tax or health care adjustments also included in the bill) and we’ve barely scratched the climate “gold rush” surface here. We’ll surely revisit once the bill becomes law and we start to see the impacts. For now, check out what else is happening in the investing world this week.

News you can use

  • Sustainable aviation fuel (SAF) is taking flight in August with lots of new partnerships. Alaska Airlines signed a deal for 185 million gallons with biofuel maker Gevo, whose stock is up over 40% in the last month. Lufthansa and Shell are talking 594 million gallons. On the innovation side, public solar energy firm Heliogen and Dimensional Energy plan to create SAF out of thin air, and Boeing is building an R&D center in Japan. SAF currently meets just 0.5% of global jet fuel needs.
  • Buckle up and grab some popcorn, because the meme stocks have returned. Shares in companies like Bed Bath & Beyond, GameStop, and AMC have been inexplicably soaring this week as they trend on Reddit and elsewhere on social media. No one knows how long it will last (or who will get hurt this time), but the ride has restarted just weeks after headlines declared it was over.
  • For the first time in history, every company in the S&P 500 index has at least one racially or ethnically diverse director, reports CNN. This is obviously not enough, but it is a significant milestone as the movement continues. This week also marked the deadline for most Nasdaq-listed companies to make board-level diversity data public. By this time next year, they will have to have at least one diverse director or explain why they don’t.

Invest like a woman

For centuries, women have been told that they do nurturing better than numbers, fashion better than finance, and should manage the household budget rather than understanding stocks. So if there’s one myth we want to bust today, it’s that women and investing aren’t a good mix.

In fact, many studies show women actually tend to do better than men when it comes to generating returns. Asset manager Fidelity analyzed more than 5 million customers with retirement savings plans over a decade and found that, on average, women outperformed their male counterparts by 40 basis points, or 0.4%.

Unfortunately, less than half of women in the US invest in the stock market, compared to 66% of men, according to one 2021 survey. It’s a pity because holding shares in public companies is one of the most straightforward way of fighting inflation and building individual wealth long term. And, based on the data above, their track record is enviable.

So what can investors like you, no matter your gender or where you are on your financial journey, learn from the mindset and strategies that women often bring to investing?

Build investing plans that match your changing needs

Women tend to have different wealth journeys than men due to lack of pay equity, more career breaks due to caregiving responsibilities, and longer lives on average. To make sure they are financially on track to meet their short-term goals (a wedding, vacation, new car) and long-term goals (retirement, paying off debt), they are required to monitor and adjust their investing strategy as they get older. For example, Credit Suisse’s insightful “Woman to Woman” plan advocates tilting your portfolio towards income-paying assets, like dividend stocks, during maternity breaks. Ellevest, a robo-advisor designed by women for women, takes into account life cycles and tailors portfolios to goals and Invest for Better builds “circles” where women can support each other as they map out the impact they would like from their investing.

We can all learn from this approach since our lives are full of both nice and not-so-nice surprises. Building a diversified portfolio with sufficient risk and regularly rebalancing it with financial checkups are crucial in financial planning. In addition to online retirement and asset allocation calculators, you can also consider using target date funds that offer automatic allocations, and human or robo-advisors to help you attain long-term success.

Trade less, be less speculative, stay consistent, and don’t panic!

Research from both Fidelity and Vanguard shows that female investors bought and sold the stocks they have 50% fewer times than men. Why is this an advantage? As the aptly named paper “Trading is Dangerous to Your Health” found, investors who traded the most underperformed major indexes by 6.5% on an annual basis. Women tend to do more research and avoid jumping on the latest trend or trying to time the market. They are also less likely to dump stocks at the first sign of trouble, or when markets get stormy, and prefer to hold long-term. Good advice for all. (Another myth successfully busted by women investors: “women are more emotional or irrational.”)

Be willing to ask for help

Whether due to the lower rates of financial literacy or other cultural reasons, women have more anxiety and less confidence about money, which has real implications for their lives and independence. However, all these studies include data showing that women express a real interest in getting financial advice and feel more confident when they have professional help. This is not a sign of relinquishing control. Instead, it is this willingness to gain information, listen to experts, etc. that also distinguishes many female investors.

We will be sharing thoughts on when and where you might turn to a financial advisor in future editions of FWIW.

And if you want to invest in women…

Women investors show more interest in sustainability and ESG than men. UBS found they prefer investing in a way that is aligned with their values, and predicted an increase in gender-lens investing. Whether this is driven by the data that shows companies outperform with women at the table, women feeling more comfortable investing in companies with leaders that have similar life experiences, or other reasons, it’s clear many believe this is a key to long-term investing success.

You can back companies with women senior execs and board members either by doing your own research (here’s a running list of S&P 500 companies led by women) or choosing funds specifically designed for this. Some options are the SPDR SSGA Gender Diversity Index ETF (SHE), the Fidelity Women's Leadership ETF (FDWM), and the Glenmede Women in Leadership U.S. Equity Portfolio (GWILX) mutual fund.

You can also look at the best places for women to work, firms that disclose their women-to-men pay ratios, and those with policies like paid parental leave. The YWCA Women’s Empowerment ETF (WOMN) provides exposure to companies with strong policies and practices in support of women’s empowerment and gender equality and all net advisory fees are donated to the YWCA.

Also worth a gander: FWIW’s Guide to Gender-Lens Investing

Restore the balance

Let’s face it: the wacky economy is throwing us all off kilter these days—and we’re not just referring to your mental state. Chances are, market volatility, high inflation, and rising interest rates have put your stock holdings more off balance than a yoga class first-timer.

What do we mean by being off-balanced? As FWIW readers know, when you first start investing, you shouldn’t put all your eggs in one basket; instead, invest in a variety of areas. Today we are going to talk about how to take care of all those different eggs that you picked up. (BTW, who puts eggs in a basket?!) This may take a number of forms but one option is to allocate certain percentages of your capital to different types of stocks and bonds.

For example, you might have invested in 60% stocks and 40% bonds. But no matter where you start, over time the value of each investment shifts, causing your allocation to drift. If you started 2022 with a 60/40 stock/bond split, your portfolio would have drifted to something like a 58/42 weight mix by the end of June, simply based on market performance. Or maybe you invested one-third of your money in tech stocks, one-third in sustainable ETFs and one-third in energy companies. Whatever your spread of holdings, it is unlikely that they hold the same value today as they did when you bought them.

That might not seem like a big deal, but left unchecked for too long, your investments may not deliver the long-term returns you are seeking or may expose you to more risk than you had originally planned.

If you’re just getting started on your investing journey and trying to figure out the mix that works for you, this article from The Balance has some great tips.

Rebalancing to stay on track

To keep your portfolio (a fancy word for the group of investments you own) aligned with your risk tolerance and investment objectives, experts suggest regularly rebalancing. That means buying and selling portions of your portfolio to bring investment weightings back to their desired state.

A general rule of thumb is to check your holdings every six months to one year and make moves when your asset allocation has deviated too far from where it should be (say, 5% or 10%). You’ll also want to readjust when you receive an influx of cash that you plan to invest, such as from an inheritance or bonus, or when life events change your risk tolerance (like having a baby, changing jobs, or buying a house).

Once you know what your target allocations should be, you’re ready to rebalance.

DIY rebalancing

Rebalancing starts with looking at everything you’ve invested in and comparing the breakdown of holdings in each category to your desired targets. You’ll want to take stock (pun intended) of all your holdings:the funds in your retirement and brokerage accounts, cash, and any alternative investments like crypto or real estate. You might be able to do this through your brokerage firm’s software, but can also create a simple spreadsheet, or use an app like SigFig’s Portfolio Tracker or FutureAdvisor.

Once you have everything in one place, you can calculate what percentage of your portfolio is invested in each asset type based on today’s values. If you find those percentages are too far from where they should be, you have two basic options to get it back on track:

  • Sell overweighted assets and buy underweighted ones. Let’s say you’re seeking a 60/40 stock/bond split, but you’re actually at 65/35. To get it back to normal, you can sell 5% of your stock holdings and invest that money in bonds. (As always, when selling assets, you should consider transaction fees and the tax implications of the rebalancing).
  • Reallocate future contributions. Alternatively, you can stop making contributions to overweighted asset classes while continuing to contribute to other asset classes. This method will take longer to get back to your desired portfolio weighting, but you can avoid the fees and capital gains taxes associated with selling investments.

Outsourced rebalancing

If rebalancing takes more time than you can fit into your life right now, no biggie — you’ve got options:

  • Put your money in a target-date fund, which is a mutual fund that allocates a basket of investments based on your expected retirement date, adjusting the asset allocation over time.
  • Invest in balanced mutual funds, which maintain a specific asset allocation over time (but are not tied to your age).
  • Work with an investment advisor that will keep watch on your portfolio and guide you through the rebalancing process.
  • Use a robo-advisor that will do the work for you in a way designed to minimize fees and capital gains taxes. Keep in mind that one of the biggest rebalancing mistakes investors can make is simply overlooking the step. So whether you go the DIY route, invest in balanced funds, or work with an advisor, always have a plan to restore the balance.

Before you go -

To no one’s surprise, Italians have snubbed an American fast food fave, just like Mexicans did with Taco Bell before them. Nonnas rejoice!