ESG Investing Is Feel-good Social Engineering- ChatGPT guest column

This is a myth based on falsehoods circulated by, of course, large powerful companies who are not ESG in their practices.  To appreciate how false this myth really is it is important to have a basic understanding of what the term means. The following summary was written by ChatGPT using the query "basics of ESG investing:

ESG investing, also known as sustainable or socially responsible investing, is an investment approach that considers environmental, social, and governance factors alongside traditional financial analysis. Here are some basics of ESG investing:

1. Environmental factors: ESG investing considers a company's impact on the environment, including its energy and resource usage, waste and pollution management, and carbon emissions. This information is used to assess a company's sustainability and its ability to address the risks and opportunities related to climate change.

2. Social factors: ESG investing also looks at a company's impact on society, including its treatment of employees, customers, suppliers, and the communities in which it operates. This information is used to assess a company's social responsibility, diversity and inclusion, and the potential social and reputational risks.

3. Governance factors: ESG investing considers a company's corporate governance structure, including its leadership, board composition, and executive pay. This information is used to assess a company's transparency, accountability, and ethical business practices.

4. ESG investment strategies: There are different ESG investment strategies, such as positive screening (investing in companies with strong ESG performance), negative screening (avoiding companies with poor ESG performance), and thematic investing (investing in companies that are aligned with specific environmental or social themes).

5. Performance: ESG investing aims to achieve both financial and non-financial outcomes. Studies have shown that companies with strong ESG performance may have better financial performance and lower risk over the long term. However, there is no guarantee that ESG investing will always outperform traditional investing.

6. ESG data and metrics: ESG investing relies on data and metrics to assess a company's ESG performance. There are different ESG data providers, and each may have their own methodology and ratings. It's important to understand the limitations and biases of ESG data and to use multiple sources of information when making investment decisions.

Not a bad summary in ten seconds! The rest of this is written by ChatGRD [Gary R Duell]. And it took me longer than 10 seconds!

This myth, that ESG investing is "feel-good social engineering", is almost amusing in how ridiculous it is if you stop to think about it. First of all, what's wrong with feeling good? Who doesn't want to feel good? More importantly, what's wrong with feeling good for mentally healthy reasons? Is it nuts to feel bad when the way you invest is causing harm? No. It's entirely appropriate. To the contrary, it is nuts to feel good, or simply not care, when your money is causing harm. ESG investing is portrayed as naïve. But what is genuinely naïve is to ignore all the costs and risks- to yourself and others -associated with how you invest and spend your money.

More importantly, what if ESG investing produced better investment results over the long term? (as I point out here:  https://financialmyths.blogspot.com/2022/08/socially-responsible-investing-will.html)  If you do a search you'll find recurring evidence that:

It has been empirically validated that companies with higher ESG scores tend to do better than companies with lower ESG scores in terms of stock performance and underlying financial metrics.

In fact, here is a search of Dimensional Funds' 149 ETFs ranked by annual returns. Note that the top three are all Sustainability focused.

I found one article in the trade press (Which I can no longer find. They probably took it down.) that made a big deal about how ESG funds had inferior performance vs non-ESG screens. Finally at the end of a convoluted and dense argument, an actual number: 0.8% lower returns. And that was just on negative ESG screens (avoiding bad companies). Positive ESG screens deliver better performance despite ESG funds being more expensive due to the extra work involved. The article ignored that fact.

So don't fall for this myth. It would probably be a good idea to avoid the companies perpetuating it. You can do good while doing well. And worst case, it will only cost you an average of 0.8% lower annual returns.

Best Always,

Gary Duell

Your Constructive Comments are Welcome!

Divinely Inspired Algorithms Can Beat the Market

As the case I'm going to describe would indicate, it is a solid myth that divine inspiration can feed your greed.  

That is so wrong on so many levels, isn't it?  But some investors apparently didn't think so.

(this blog post is based entirely on the case described in Wealth Management magazine regarding two Utah con men titled, "SEC:  "Divinely Inspired" Traders Were Mere Frauds") 

Thomas J. Robbins & Daniel J. Merriman "lost" $11 million of their clients' money by investing them in a fake company aptly named "ConTXT",  They claimed their algorithm-from-God (my portrayal, not in the article) would yield returns of 7.5% per week.  That's right, per week.  And with no risk!  I think you'd even have trouble doing that dealing crack.  But I don't know.

They appeased early investors for failure to achieve these returns by explaining technology was not yet sufficient to manifest their "spiritual revelation".  This while never investing the money and just spending it on themselves, using it all up within months.  To keep investors engaged, Robbins & Merriman touted their religious faith and phony large clients like the Mormon church, the Rothchilds, etc.

The article didn't mention this but a common thought pattern of such crooks is they believe their victims deserve to lose their money for being so greedy as to think they could actually get such outrageous returns.  I nearly agree with them in this case; but tell me how that thought can exist in a healthy mind, all at the same time.

So here are the key points, if we're to learn something from yet another bunch of scammers:

• Both men (four were actually involved) were ex-cons who had met in prison, their attendance in which had been precipitated by prior financial fraud.  
• As a result, neither was licensed or registered to give financial advice or sell financial products.
• None of the investors had looked them up on https://brokercheck.finra.org/ before handing over their money.  It's free.  It takes one minute.
  
• The investors were driven by misplaced trust (religion and money never mix well) greed and FOMO (fear of missing out), the worst investor motivators.
• Had they performed some due diligence, none of them would have been victimized.
• Had they focused on their goals and reasonable proven ways to realize them they wouldn't have had any interest in ConTXT to begin with.  (I love that name.  What a blatant giveaway.  Robbins & Merriman put the "Con" in ConTXT.)
  

Your Constructive Comments are Welcome!

6 Financial Steps You Should Consider NOW

Would you like to know why I've gotten zero freaked-out calls or emails from my clients because of the coronavirus, political upheaval or [insert your own freak-out factor]?  It's because we've already tested even worse scenarios (like the 2001-2003 recession) in their written retirement financial plans and they know they will be OK. 

However, that doesn't mean there aren't new opportunities and cautions:

1. If we have not developed your written retirement financial plan then get yourself on my schedule immediately.  I've opened my calendar up as much as possible for the next three weeks.  Call me at my mobile at 503-698-1110 or simply schedule yourself here:  https://calendly.com/g---5

Key Takeaway:  No matter what is happening in the world and in your life, there are risks to avoid and opportunities to acquire.  These risks and opportunities should be tested and executed carefully, as part of an overall plan, not by running out and buying four thousand rolls of toilet paper.

2. To make up for losses in the market-based portion of your portfolio, don't settle for inflation losses in your cash.  You should be getting at least 2.0% on your two-year money.  I've seen savings accounts paying as little as 0.07%.  Yes, seven hundreths of a percent. Increasing earnings and other benefits on your safe money will help offset these short-term fluctuations in the market and make dramatic long-term differences in your future cash flow. 

3. Does it make sense to refinance debt?  Probably.  Interest rates have tumbled with the market & I doubt they will increase this year.  Refinancing may be a great way to reduce your budget and preserve your savings. 

4. Is funding for your lifetime budget locked in?  If not, wouldn't that be worth finishing up?  Then you can ignore market hysteria.  Cash flow solves all other financial problems.

5. Do you need to put off that expected retirement date this or next year?  I won't sugar coat it; maybe you do.  But how do you figure out when you can retire?

6. Finally, taxes will probably shrink your money more this year than will the market.  What tax planning have you done?  Did you know the tax issue will become even more concerning in 2026 when the Tax Cuts and Jobs Act expires?  I don’t see any of my peers doing tax planning.  Maybe this is the perfect time to do Roth conversions or in-kind conversions of poor performing stocks.  When the market recovers, all the gains can be tax-free.  This video is pending my review of the three “stimulus” packages.  Lots of little- and not so little -goodies for everyone.

Warm wishes during these trying times,
and get yourself on my calendar!: 
https://calendly.com/g---5
Gary
 

Your Constructive Comments are Welcome!

Top Three Influencers of Fiduciary Advice

I've always believed a universal fiduciary standard should exist for anyone who gives advice to others that can affect- and ruin -lives, whether it's journalists, bankers, stock brokers, teachers or wedding planners.  I don't know why the fiduciary focus is strictly on finances.  If you hold yourself out as an expert, you'd better not be faking it until you make it or, worse, have self serving or even malicious intent.
I want to pass on this 2 1/2 year old article by Shelby George, written when a universal financial fiduciary standard looked like a sure thing.  Turns out Wall Street succeeded in killing it (Great PR move, Wall Street, fighting an initiative that puts your customers first).
I also want to emphasize this key phrase in her article, "The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors" whether self or advisor induced.  It would have helped protect investors not only from inexperienced or dishonest advisors, it would have helped protect them from themselves!  Virtually all of the big ripoffs of investors are catalyzed by investor greed, carelessness, unrealistic expectations and trusting without verifying.  Even with a universal, well-enforced fiduciary standard, investors still need to do their due diligence by verifying the credentials and recommendations of their advisors.

3 Influencers Driving Today’s Fiduciary Best Practices

November 21, 2016 | Fiduciary

Shelby George

Senior Vice President, Advisor Services

As the Department of Labor (DOL) has redefined “investment advice,” they have undoubtedly accelerated the evolution of what it means to be a fiduciary. Regulators are but one of the three key influencers shaping best practices for new fiduciaries. Financial institutions are working aggressively to comply with the DOL’s new rule; however, advisors can take actionable steps today to better identify the needs and best interests of retirement plan participants and IRA holders.

Influencer 1 – The Markets

The markets are an often overlooked key influencer. The current slow growth, low interest rate, long-term economic outlook creates new challenges for savers that were not a concern for the last generation of retirees. Fortunately, there has been an increased focus on savings as study after study finds that we need to save more for retirement than in previous years. Unfortunately, savings is only a part of the solution.
The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors and encourages new fiduciaries to pay particular attention to each investor’s unique risk tolerances and reactions to the markets as well as the investor’s long-term savings goals. In today’s market, where volatility is a “new normal,” it becomes critical for fiduciaries to frame investment due diligence and portfolio performance around the investor’s objectives rather than a hypothetical benchmark.

Influencer 2 – The Regulators

In the DOL’s own words1, the new rule will, “mitigate adviser conflicts and thereby improve plan and IRA investment results, while avoiding greater than necessary disruption of existing business practices.” However, certain compensation arrangements are viewed with heightened skepticism. In particular, the DOL application of ERISA’s self dealing prohibited transaction to all ERISA plans and IRA accounts will cause significant disruption to traditional brokerage models.
As the DOL encourages more level, transparent fee structures, fiduciaries must shift their focus to offering a service rather than selling an investment product. The value of the fiduciary’s services is based on the need of the investor.

Influencer 3 – The Litigators

ERISA class action litigation dates back to 1998 as an outgrowth of securities and class actions. Since that time, the volume and scope of the litigation has ballooned, especially when the stock market drops.
Recent 401(k) litigation demonstrates that no fiduciary decision is insignificant. IRA advisors are paying increasing attention to recent 401(k) fee litigation because of the DOL’s Best Interest Contract Exemption and the possibility of class action lawsuits.
With the new DOL Rule, advisors need to view each plan decision independently and have a repeatable and documented process for each. All processes should be designed to identify the needs of plan participants or the IRA holder and then make a recommendation based on that need. Each step of the process and the resulting recommendation should be documented with reasons given as to why the decision is in the best interest of the client.
To learn more about the three key influencers shaping fiduciary best practices and more on the DOL’s Fiduciary Rule, visit www.manning-napier.com/EvolutionaryFiduciary.

¹Source: Federal Register. Department of Labor. Rules and Regulations. Volume 81, no. 68, p. 20952.

 
Your Constructive Comments are Welcome!

There Oughta' Be a Law! (repost)

I'm reposting this financial mostly-a-myth because of the recently and rapidly growing list of "mistakes" made by our president and virtually every one of his inner circle.

I confess that my first reaction to outrageous behavior is, "there oughta' be a law!".   One way I attempt to keep up with the times is to watch TV about once a week, usually a news program on Sunday morning.  Holy cow!  A dozen "there oughta' be a law!" incidents come up in 15 minutes (so far, my upper tolerance limit), most having to do with advertising:

• Gambling is portrayed as entertainment, showing idiotically grinning couples.  I've never seen people smiling in a casino, have you?  There oughta' be a law against these ads.
• Drugs are also paired with happy, healthy actors who, in reality, will probably never need a prescription in their lifetimes.  Drug ads should be illegal.
• Fashion is advertised as an essential source of happiness, acceptance and, well, evolving as humans!  A top fashion consultant admitted that he doesn't follow consumers' fashion desires, he manufactures them.  There oughta' be a law.  (But in my case it's obvious I don't follow fashion.)
• Food.  If you just look around it's apparent that Americans get plenty of food.  Yet billions are spent daily trying to get us to eat cheap, crappy "food".  Or food that neither our budgets nor our bodies can afford.  This should be illegal, just like hard liquor ads are.
• Cars are a personal statement, instant evocations of status and coolness.  Oh.  And they can transport things and people.  But we need fewer of them, not more of them.  How are these ads any different than hard liquor, gambling, drugs or food?
• Investing "porn" is everywhere.  Really?  You're going to plan out the rest of your life based on information from whoever spends the most money to catch your eye??  Where do they get all that money to spend on ads?  From your money.  There are rational, evidence-based rules & tools you can find online, most for free.  Finally, there are honest, wise and experienced advisers in your community to help you curate the deluge of money madness.  Investing & insurance ads should be illegal. 

But then, several weeks after our Nuevo Vallarta vacation, it dawned on me what had been different- and profoundly relaxing -about Mexico.  At the resort, what was it about the pool area, the weight room, the parking lot . . . everywhere that was so calming?  What was absent?  Then I realized there were No signs, no rules, no "Danger" or "Forbidden" or "Warning" placards at every turn.  It felt clean, quiet, uncluttered, adult.  They relied on the intelligence and character of their guests to make things run smoothly and so far it seemed to be working.

Wouldn't it be easier, less expensive and more effective to encourage consumers* to be smarter and more discerning ?  That's a transferrable skill.  It would make us all better citizens, parents, workers, entreprenuers and, yes, consumers.  Absolutely there should still be laws and enforcement of them.  But the path to perfect safety is more perilous and ultimately results in zero freedom under dictators.  Which is why our current administration wants to entice you down that path to make you dumber, more fearful and less tolerant, hence, easier to manipulate and control.

*And, in the vein of today's post, voters

Your Constructive Comments are Welcome!

"THERE OUGHTA' BE A LAW!" and Mexico

I confess that my first reaction to outrageous behavior is, "there oughta' be a law!".   One way I attempt to keep up with the times is to watch TV at least once a week, usually a news program on Sunday morning.  Holy cow!  A dozen "there oughta' be a law!" incidents come up in 15 minutes, most having to do with advertising:

• Gambling is portrayed as entertainment, showing idiotically grinning couples.  I've never seen people smiling in a casino, have you?  There oughta' be a law against these ads.
• Drugs are also paired with happy, healthy actors who, in reality, will probably never need a prescription in their lifetimes.  Drug ads should be illegal.
• Fashion is advertised as an essential source of happiness, acceptance and, well, evolving as humans!  A top fashion consultant admitted that he doesn't follow consumers' fashion desires, he manufactures them.  There oughta' be a law.  (But in my case it's obvious I don't follow fashion.)
• Food.  If you just look around it's apparent that Americans get plenty of food.  Yet billions are spent daily trying to get us to eat cheap, crappy "food".  Or food that neither our budgets nor our bodies can afford.  This should be illegal, just like hard liquor ads are.
• Cars are a personal statement, instant evocations of status and coolness.  Oh.  And they can transport things and people.  But we need fewer of them, not more of them.  How are these ads any different than hard liquor, gambling, drugs or food?
• Investing "porn" is everywhere.  Really?  You're going to plan out the rest of your life based on information from whoever spends the most money to catch your eye??  Where do they get all that money to spend on ads?  From your money.  There are rational, evidence-based rules & tools you can find online, most for free.  Finally, there are honest, wise and experienced advisers in your community to help you curate the deluge of money madness.  Investing & insurance ads should be illegal. 

But then, several weeks after our Nuevo Vallarta vacation, it dawned on me what had been different- and profoundly relaxing -about Mexico.  At the resort, what was it about the pool area, the weight room, the parking lot . . . everywhere that was so calming?  No signs, no rules, no "Danger" or "Forbidden" or "Warning" placards at every turn.  It felt clean, quiet, uncluttered, adult.  They relied on the intelligence and character of their guests to make things run smoothly and so far it seemed to be working.

Wouldn't it be easier, less expensive and more effective to encourage consumers to be smarter and more discerning ?  That's a transferrable skill.  It would make us all better voters, parents, workers, entreprenuers and, yes, consumers.  Absolutely there should still be laws and enforcement of them.  But the path to perfect safety is more perilous.  Which is why our current administration wants to tempt you with that path by making you dumber.

Your Constructive Comments are Welcome!

THE TWO MOST IMPORTANT FINANCIAL TOOLS FOR 2017

This post heading is NOT a myth, for once.

Think about common risks in your life and the tactics you use to minimize or avoid them.

• If you're trying to lose weight then you burn more calories (read: Exercise) and consume fewer or at least better calories (quality proteins, greens, fruits & oils versus sugars, carbs & artificial or saturated fats).
• If you're taking a trip and worried about your car breaking down, you can take it in for service, check the tire pressure, top up the tank and other fluids.
• If you're worried about passing a class then you can burn the midnight oil, get help from your teacher and fellow students, search for tips and tricks online.

And so on.  We counterbalance risk with compensatory actions and strategies.

In my practice, most of my clients are concerned about two possibilities:

1. Outliving their income and assets
2. Inflation ballooning their living costs to unmanageable levels.

How can we compensate for these two very real risks in retirement?  We have two great tools (and I have Tom Hegna to thank for these concise ideas:

1. Risk pooling
2. Longevity credits

Let's review Longevity credits first.  I don't know if this is a true story or not but there were five elderly women who like to travel together in the Summer.  On New Year's day they would each put $100 in a box and save it for fun money on their trip.  One year, before their trip, one of them passed away.  The surviving four then had $125 each to spend on their trip.  They each received a 25% longevity credit.  

Is this a way to counteract inflation?  Of course!  (To be sure, in real life much larger groups are formed, but to similar effect.)

Cojoined with Longevity Credits- and making longevity credits possible, is Risk Pooling.  We've all seen schools of fish, flocks of birds, herds of wild animals.  There is great survival value in pooling the risk of predators.  By gathering together, more of them are likely to survive.  It's the same with house insurance.  If the risk were 1 in 1200 that a house would burn down in your neighborhood each year, you could band together with your neighbors to create a fund sufficient to replace that house every year.  (Ideally, it wouldn't be the same house.)  So instead of having to come up with, say, $500,000 to replace your house if it burned down, you would only have to pay 1/1200 of that each year, or $416, otherwise known as a Homeowner's Insurance Premium.

Aside from being a perfect hedge against outliving one's income (we'll get to that) Risk Pooling is a relection of our better nature, like the Amish coming together to build a barn for a neighbor.  Unfortunately, Risk Pooling is an insurance process and must be conducted by insurance companies under most state and federal laws.  I say "unfortunately" because insurance companies get a (mostly) undeserved bad rap.

Social Security is the best current example of both these concepts.  Millions of people participate and the law of large numbers, the larger the Risk Pool, means the system works more predictably the greater the number of participants.  Social Security is an insurance program, it is not a federal entitlement.  But wait, you say, how is that so many beneficiaries will take more in income out of the system than they put in?  The answer is Longevity Credits from the funds of those who die prematurely.

Much maligned annuities are similar tools for privately pooling risk and receiving longevity credits.  And they are much more flexible than Social Security:  you can design cash flow just about any way you like, level, increasing with inflation, for certain period of years,just for your lifetime or for the lifetimes of you and your spouse.  Annuities are like the vacation box.  And that's how we account for a lot of the "too good to be true" features they provide.  For example, let's take a couple with $250,000, he's 68 and she's 62.  The cash flow they desire is joint, lifetime income beginning in 10 years to give them an inflation bump up.  Their lifetime payout at that time would be over $25,000/yr.  no matter how long the last surviving person lives.  And in the meantime, unlike with Social Security, they have access to their principal if they need it.

So.  The two financial pillars for 2017, the year of unpredictability (to say the least) are:

• Risk Pooling and
• Longevity Credits

Your Constructive Comments are Welcome!

Follow Your Gut

I want to profusely thank Brian Love for his excellent Behavioral Finance article in the latest issue of Financial Advisor IQ (The Incredible "Shrinking" Advisor).  Love's article reiterates why the most important aspect of our profession is not securities analysis or projecting rates of return.  So I title this post with the myth that you should follow your gut when choosing investment options.  To the contrary.
Shown in the graphic below are the six primary mental and emotional biases investors suffer.  Which cause them to experience worse returns than unmanaged indices.  Wall Street & the financial media primarily exploit these biases rather than curing them.
Personally, I think the most destructive is the 5th one, a preference for Lotteries.  Just look at the billions that flow into national & local government sanctioned lotteries, for example.  Like any other bias-subject commodity on the market, this bias causes lotteries to be way over-valued.


Your Constructive Comments are Welcome!