Blog : GUEST BLOG: Some Things to Consider When Greening Your Portfolio
Potential investors seek out Progressive Asset Management Group (PAM Group) for a reason: to align their investments with their val¬ues. They may be mainstream investors grown dis¬enchanted with the social track record of their holdings -- espe¬cially in light of today’s Divest/Fossil-Free movement. Perhaps they simply want to roll over an older retirement plan where they had few or no socially responsible choices. Or maybe they’ve inherited a portfolio of securities full of companies they abhor.
Above all, sometimes people simply want a fresh start. But before you sell everything at once and go full-bore green, it’s important to fully under¬stand the possible financial ramifications. And while PAM Group advisors like the GA’s Mike Smith and Hunter Brownlie will meet your decision to improve your portfolio en¬thusiastically, it’s also their duty to advise you of the potential prob¬lems of moving too quickly, to recommend the wisest way forward.
With that, let’s consider some important factors you’ll want to consider before transforming your portfolio:
Gains on securities are subject to capital gains taxes of up to 23.8% (depending on your in¬come), if they’ve been held for more than one year. (Gains on those held less than a year are taxed at ordinary income tax rates.) So, instead of selling in one fell swoop, you may want to sell appreciated securities over several years, thereby mitigating capital gains taxes. Another tactic is to use any security losses to eliminate gains. One thing many people don’t realize – until it’s too late – is that securities given to you when the donor is alive usually assume the original “cost basis”. In other words, the original purchase price of the securities is used in calculating the tax. So, be¬fore you sell a bunch of securities given to you by your parents or grandparents, consider the potentially huge tax hit. Securities inherited from a will follow different rules; typically there are no gains taxes on sales in a qualified retirement plan such as an IRA. Always con¬sult your accountant before selling or buying securities if you’re unclear about IRS rules.
Asset Allocation is vital to long-term perfor¬mance, which is why investment professionals diversify portfolios into certain percentages of large company stocks, small-company stocks, bonds, etc. So when you green up your port¬folio you need to keep your recommended as¬set allocation in sight. Consider, for example, that selling big oil stocks (large companies) and reinvesting in alternative energy stocks (usually small companies) will add investment risk to your portfolio since small stocks are more volatile. Not that it’s not a sound idea; only that the risk may be a little higher.
Are you depending on your portfolio for income? Consider that many high dividend “non-social” blue chip stocks such as fossil fuels, utilities and tobacco or alcohol are of¬ten found in inherited income portfolios. Before you sell them, realize that this will reduce your income unless you replace them with greener in¬come alternatives – which do, of course, exist.
The current market environment is another factor to take into account. For example, those who sold everything in 2008 may now regret it, since the market has largely recovered since then. Recently, bonds have been under quite a bit of pres¬sure. The point: don’t ignore what’s going on in the marketplace when you’re looking to sell or buy.
Depending on the type of investment account you own, what it costs to realign your port¬folio is worth considering. While transaction costs may be low in a fee-based account (where commissions are waived in lieu of an annual management fee), in a com¬mission account your costs may be 2-5% on both sales and purchases. One solution to this is to convert to a fee-based account before you green up.
Finally, it goes without saying that both sales and especially security purchases should be carefully researched before proceeding. In our case, this requires both economic and social screening. It’s important to invest with your heart, but as with most things in life, let the head have a say, too.
Mike and Hunter will automati¬cally include all these critical factors into any portfolio realignment, and will be happy to consult on any outside accounts or projected inheritances or windfalls that you want to green up. Just give them the green light!
Mike Smith can be reached at firstname.lastname@example.org or 603-418-8662. He is a registered representative offering securities through Financial West Group (FWG), member FINRA/SIPC. The PAM Group is the socially responsible investment division of FWG.