We are in the midst of a historically long period of growth in the U.S. stock market. Yet the euphoria for many Colorado investors is tempered by questions about our country’s future. If you have followed classic advice about diversified investments, it’s likely that you own shares in companies behind initiatives not aligned with your priorities. What is a principled investor to do?
It turns out there’s a lot to be done. Options range from tax-efficient, high-impact philanthropy to other options such as personal lending and socially responsible investing. Consider these options to see if one or many of them may fit your situation.
Giving through investments. Perhaps the simplest and most direct way of mixing charity with investments is to put the two together. Transferring your mutual fund shares or stocks that have gone up in value is a giving and tax boon for your favorite charities and you. By transferring holdings in a taxable investment account directly to your supported causes, you avoid paying federal capital gains tax and state income tax on the appreciation while the charity receives the full benefit of the value of the funds.
Say you were a prescient investor in Apple stock and purchased it for $78 a share five years ago. With shares now valued roughly at $175, if you were to sell them you would owe sizable tax.
But if you transfer the Apple shares directly to a qualified charity, it avoids tax on the profits while you get full credit for the donation in most cases. Depending on the charity, it can be a hassle to arrange for a direct transfer of your appreciated investments. A good shortcut here is to use a donor advised fund, which is a low cost charitable fund set up in your name with at least $5,000 of investments to start. Charles Schwab and Fidelity are my favored brokerage options because of their reasonable costs and low minimum grants to your favorite charity of $50. Local community foundations have funds that allow you to support their mission as well as fund your charitable interests.
Finally qualified charities can be funded directly from IRAs for those aged 70 1/2 or older, allowing you to satisfy some of your required annual distribution while avoiding tax on it.
Peer to peer lending. How would you like to help your peers with the expectation of a reasonable profit? Through the private lending services of Prosper and Lending Club, you can review the profiles of potential borrowers as well as their intended use of the loan and then can decide to fund part of their loan request.
The loan proceeds could be used for an aspirational purpose such as funding a new business or as commonplace as refinancing high interest credit card debt. As a lender, you decide which borrowers you want to approve. There’s generally a $25 minimum investment per loan, and it rarely makes sense to invest less than $1,000 in peer to peer lending portfolios.
Keep in mind that when you loan your funds out that it can be three to six years until you get your principal back, with the upside that you can earn 7 percent or more annual interest while you wait. Remember we haven’t seen how these lending platforms perform at their current scale during a severe economic downturn. Don’t put any funds into this category that you can’t afford to lose.
Socially responsible investing. Pioneered by boutique mutual fund companies such as Parnassus and Ariel, socially responsible investing is mostly done through specialized mutual funds. Before SRI funds invest in a company, they apply screens to de emphasize corporate ne’er do wells while directing funds toward companies aligned with their goals.
Apparently investing with a conscience is more challenging than curbside recycling as criteria can vary tremendously from one fund to the next. The emergence of environment, social, and governance (ESG) funds further muddies the waters as there may be companies that exhibit fabulous shareholder rights provisions while hawking high-fructose corn syrup.
My recommendation when looking at ESG and SRI funds is to focus on attributes that are important with all investments. What are the costs? What asset class does it invest in (such as U.S. large companies)? Has it kept roughly in line with benchmarks over long periods? If you’re paying more for a sustainable fund versus its peers, make sure you get something for that expense namely investing in companies that you’re proud to own. Using Morningstar or the fund company’s web site you can review a list of stock holdings to see if their version of socially responsible meets your standards.
David Gardner is a certified financial planner with a practice in Boulder County and can be reached with questions at email@example.com and on Twitter @Dave_CFP
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