Helena wants to retire as early as possible, but she's not just concerned about finding investments that will generate the returns necessary to realize her goal.
She's also worried about her investments' impact on the environment.
"I'm not interested in investing in oil in any way, even if it means having slower growth in my investment portfolio," the 37-year-old postsecondary administrator says from Toronto.
Helena has already invested most of her savings in one socially responsible investment (SRI) mutual fund offered by her financial institution, Toronto-Dominion Bank.
"When I moved most of the money into sustainable funds, I was actually dissuaded by the adviser at the bank who indicated you can get 8 per cent on average with other funds," says Helena, who earns about $120,000 a year.
So far, she has about $47,000 saved in a registered retirement savings plan (RRSP) and a locked-in retirement account (LIRA). She also has a defined benefit work pension that will pay her about $40,000 a year at age 50, her retirement goal.
"I'd like to figure out if there's a way to refine my portfolio while avoiding oil and getting a reasonable return, which may be a wish list that can't be fulfilled," she says. "The other thing is that I have almost no time to invest doing the research on this."
Two advisers specializing in socially responsible investment, Patti Dolan with Raymond James in Calgary and Victoria-based financial planner Stephen Whipp, have provided the following tips for Helena to build an investment portfolio for early retirement that is also sensitive to her concerns about the environment.
LIRA (TD Global Sustainability Fund)
RRSP (In three TD funds, with the majority also in TD Global Sustainability Fund)
401(K), from a previous U.S. job
Both advisers say socially responsible investing isn't as black and white as avoiding one specific sector. She may find her options too limiting and she should work with an adviser specializing in the SRI space to build a plan that is both realistic and suitable to her values while helping her achieve her retirement goal.
Patti Dolan's advice:
1. Diversify the portfolio ... with SRI funds.
Helena is invested in three funds with TD, with more than 90 per cent of her assets in one SRI fund, which has a poor track record for market returns. Ms. Dolan says the SRI mutual funds universe in Canada offers several other options. "Investment management companies such as NEI Investments and Meritas SRI Funds, for example, have very talented teams running several different funds where they work with companies to adopt better environmental, sustainability and governance practices," the certified financial planner says. While Helena has a variety of SRI mutual funds to choose from, many SRI equity funds actually invest in energy firms. As an alternative, she can avoid investing in oil by choosing technology mutual funds and other specialized sectors such as financials and health care.
2. Consider exchange-traded funds.
Another option is exchange-traded funds (ETFs). Similar to mutual funds, only bought and sold on a stock exchange, ETFs' management costs are a fraction of those of mutual funds. Helena will need an adviser who can purchase stocks and bonds to buy the ETFs on her behalf, or she can open an online brokerage account to buy them herself. Again, she can select specialized ETFs that are sector specific, investing only in Canadian financial institutions, for example. Some ETFs also have SRI mandates, such as the iShares Jantzi Social Index Fund that emulates the performance of the Jantzi Social Index, a listing of Canada's top companies meeting SRI criteria. While this ETF has only been around for a few years, the index itself has a long track record of performance that is slightly better than the broader Toronto Stock Exchange (TSX). "Since 2000, the Jantzi Index has a return of 5.66 per cent as of the end of March," Ms. Dolan says. "That's compared to 5.57 per cent for the S&P/TSX Composite and 5.3 per cent for S&P/TSX 60."
3. Don't avoid; engage.
Avoiding oil companies is a tall order for Helena if she sticks only with mutual funds, even those with an SRI mandate. "The reality is that the world runs on oil," Ms. Dolan says. "We'd have to all hang up our car keys if we wanted to change that." Rather than avoiding stakes in oil companies, Canada's largest SRI funds invest in energy firms that they can work with to encourage better environmental stewardship, she says. "Since the mid-1990s, I have witnessed the advancement of socially responsible investing from merely avoiding sectors to successfully engaging the management of companies to accomplish positive change."
Stephen Whipp's advice
1. Save, save and save some more.
Helena might have a great pension through her work, but if she wants to retire early while avoiding investing in oil companies, she'll need lots of additional savings to provide additional income in the first years of retirement. "While she will get about $40,000 a year from her pension, that's not much when inflation is factored in," says the certified financial planner with Stephen Whipp Financial. With a no-oil mandate, Helena may have to settle for lower investment returns and possibly more volatility depending on the strategy she chooses. As a result, she should maximize contributions to her RRSP and open a tax-free savings account. (She has $15,000 of unused RRSP room.) These savings will be a crucial part of her retirement income if she retires at 50.
2. Invest in companies instead of funds.
If Helena is worried about investing in funds that may own oil companies, she could opt to buy shares in individual firms that meet her criteria. "She could buy companies that pay dividends, which have proven over the long term to be more stable, a better buy." Some dividend-paying companies that fit her mandate are Canadian utility providers Brookfield Renewable Energy Partners, Algonquin Power and Utilities Corp. and Northland Power Inc. "These companies have long-term contracts to provide electricity," he says. "And they do that with solar, wind and hydro." But because Helena only has about $47,000 to invest, buying individual stocks can be risky. She can either invest in a few companies, or buy very small positions in several so her portfolio is diversified. The former strategy exposes her portfolio to sector volatility while the latter likely involves more time and effort than she's prepared to devote to her investments.
3. Be conservative.
An alternative to buying equities or equity funds is investing in non-corporate fixed income. "Most of the SRI fund companies have money market and government bond funds," Mr. Whipp says, adding Helena could also invest in bond ETFs. This strategy requires her to save as much as possible because the rate of return would barely keep pace with inflation. Earning a high income, Helena may be able to increase her portfolio to six figures on savings alone in the next few years. At that point, she could start diversifying into stocks and corporate bonds that match her no-oil mandate. Her portfolio would also be large enough to hire a professional money manager to execute the strategy on her behalf, he says. In the meantime, she can invest conservatively while refining her investment values because, although oil companies are often at the forefront of environmentalists' ire, no corporation is perfect. "They're run by human beings, which means they all have warts," Mr. Whipp says. "What she has to do is figure out what warts are acceptable and which ones aren't."
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