Our Modern Investing Dilemma

Article originally posted in Eventide Insights. Eventide Asset Management, LLC is a Boston-based investment adviser practicing “investing that makes the world rejoice®.” Founded in 2008, Eventide’s vision is to serve individuals, financial advisors, and institutions by providing high-performance investments that create compelling value for the global common good.

by Shaun Morgan, Director of Education, Eventide

Values-Based Investing Can Help Us Avoid Two Consequences of Modern Investing. 

“One of the biggest issues I saw in the investment world is that people didn't even understand what investing is. And I think that is still a major problem.” —Robin John

Over sixty percent of Americans report that they are invested in the stock market.1 That is a remarkable feat. Investing has enabled us to put our excess capital to productive use by supplying it to businesses that create, build, and scale some of the essential anchors of societal infrastructure—and if these businesses succeed, they have the potential to generate a return greater than our initial investment. 

In its basic form, investing has built-in checks and balances that should help align the incentives of company management with those of investors, as well as those of stakeholders affected by the business—its customers, employees, suppliers, local communities, the environment, and broader society. The way we see it, investors will buy into businesses they believe will prosper. In order to do so, a business must create a valuable product or service that people will want to buy. And they will have to operate in a way that is profitable, scalable, and repeatable—which is largely dependent on the strength of the business’s relationship with its stakeholders.

If each exchange between a company and its investors and other stakeholders is transparent and voluntary, all are incentivized to keep each other’s well-being top of mind. 

But we have a problem.

Through the tools of modern investing, transactions between a company and its shareholders have lost their transparency—making it difficult for investors to remain intentional about how to allocate their capital.

For most people, exposure to the stock market is through retirement accounts or a portfolio put together by a financial advisor. In fact, managed investments, including retirement accounts, ETFs, and mutual funds, comprise 71% of all financial assets compared to just 17% being attributable to individual securities such as stocks and bonds. In the former case, each fund or portfolio’s investment strategy is implemented by someone other than the end investor.

Asset markets are more accessible than ever, and investing in them is easier than ever. However, most people have no idea how their money is being invested. This can lead to two types of consequences: micro and macro.

Micro consequences of modern investing: 

Encouraging unwanted behaviors

Our values influence how we approach almost every aspect of our lives—how we conduct ourselves at work, interact with our neighbors, participate in our communities, and strive to become our best selves as a friend or spouse. If we applied our values to our investments, our approach might look very different. 

For example, by taking a closer look, investors might realize that holdings in their retirement accounts and mutual funds go against their values. Maybe one company manufactures a product harmful to people; maybe another mistreats its employees. If we saw ourselves as participating in and profiting from the actions of a business, including things we would not do or encourage in our personal lives, our values might lead us to approach investing from a different perspective.

In our experience, when investors understand that buying shares of a company shows support for and reinforces its business and behaviors, their values become all the more important.

Macro consequences of modern investing: 

Building an undesirable future

One macro consequence of uninvolved investing can be the misallocation of capital. We believe, ideally, investor capital ought to fuel those areas of our economy that we collectively want to see grow. But does our current capital allocation reflect, as a society, your actual needs and desires for economic growth? 

For instance, does the outsized allocation of investment into social media companies over the past 10 years represent the highest and best use of our capital? Or might we, as individual investors, have chosen to direct our investments elsewhere as we learned through research and experience how the profitability of these companies often comes at the expense of our mental health and relationships?

How do we solve these problems?

Becoming more knowledgeable investors

In a perfect world, with unlimited time and resources at our disposal, each of us would be able to take charge of our investment decision-making: conducting our own research; growing more knowledgeable about markets, industries, and businesses; and investing only in the companies that we would truly want to own. 

For many of us, this isn’t a practical solution. We don’t have the time or expertise it takes to research companies and construct a portfolio able to meet our individual risk and return requirements.

This leads to a more practical solution:

Invest Intentionally With an Investment Company You Trust

We believe you can still outsource the work of investment research and portfolio management to the experts—without relinquishing your values in the process. One way to do this is by choosing investment companies that put together mutual funds and ETFs that invest in alignment with your values. 

Three of the most important aspects of an investment company to consider are its management team, its approach, and its values. Is the team competent, disciplined, and ethical? Is the approach founded on timeless, repeatable, and proven principles? Do the company’s values align with your own—will it invest in the types of companies that you would personally want to own and to profit from in your portfolio?

It’s Your Money: Find a Financial Advisor Who Will Apply Your Values When Investing It

If you have a financial advisor, your values and intentions are important to discuss with that person. Some financial advisors simply construct portfolios that invest in “the market” with little attention to how your money is being invested in the market. They might make a portfolio that invests in a number of funds, and those funds may simply invest in all stocks of a specific category, like a fund that invests in all midcap companies or all technology companies, with no further intention paid to which midcap companies or technology companies they are investing in. 

There are, however, financial advisors that diligently research and select the individual investment companies that put together the funds that they use in their portfolios. These financial advisors should be able to answer questions about how your money is being invested—by understanding each investment company’s team, approach, and values.

In our experience, great financial advisors already know you and your values well. Your discussions with them have played an important role in determining your financial planning, estate planning, or charitable giving goals. Incorporating your values into your investment portfolio is a natural next step for these advisors.

Connecting Your Values With Your Investments Can Help Build a Better Today and a Better Future

We can have the best of intentions in diligently saving our money and investing for the future. However, the structures and systems of modern investing can obscure what happens between investment and return, leading us to encourage and contribute to behaviors and long-term outcomes that we may not have intentionally chosen.

This is why, at Eventide, it has long been our intention to bring greater transparency and values-based discernment to investment products that are as broadly available as possible. We invite you to join us in what we call “Investing that makes the world rejoice®.”