Responsible investing makes good sense ... even in these uncertain times

Taos financial adviser offers insights on trade wars, tweets and the R-word

By Doug Cantwell
dcantwell@taosnews.com
Posted 8/29/19

The R-word - recession - continues to pop up in the news as the market rides the roller coaster. It's making a lot of Taos residents queasy - especially the …

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Responsible investing makes good sense ... even in these uncertain times

Taos financial adviser offers insights on trade wars, tweets and the R-word

Posted

The R-word - recession - continues to pop up in the news as the market rides the roller coaster. It's making a lot of Taos residents queasy - especially the retired ones.

"Financial advisers act as a buffer between clients and the rash decisions they might make during times of uncertainty," said Billy Knight, a born-and-bred Taoseño who's done business here for 20 years as Knight Financial Limited.

"If you have a plan in effect, and you have longterm goals, why would you let one or two days or even a few months change that plan?" he added. "Unless it looks like it's going to be systemic, like something that's going to have the sort of effect we had in 2008."

Well, one might ask, is it starting to look as if the wild volatility and recent tanking of the market are becoming systemic?

"I wouldn't say that ... yet," Knight advised. "But one thing that concerns analysts lately is the inversion of yields on the two-year and 10-year Treasury notes." In other words, the yield on the 10-year should always be higher than on the two-year, which is typically the case. But recently the yields have flip-flopped a number of times.

Historically, Knight added, this yield inversion has been seen as a harbinger of recession. "This doesn't mean you should run out and sell off your portfolio before the market closes," he said. "If the inversion were to last for more than a few weeks, then it probably should be taken as a warning sign. But even when that's happened in the past, the actual recession didn't arrive until 16 to 22 months later."

However, Knight added, there are variables currently in play that we haven't seen before. He attributes the recent volatility to the trade wars being waged - and the tweets being tweeted - by the president.

"If you look at the retail sector, it's doing really well," he said. "American consumers are out there spending money; unemployment and inflation are historically low. In fact, the Fed even wants to get inflation back up to 2 percent to slow things down a bit."

As for trade wars, Knight added, nobody ever wins. "But the big losers are American consumers, because 100 percent of the cost of all these tariffs on Chinese goods gets passed on to us. The same is true of corporate tax cuts. We, the consumers, pick up the tab."

In spite of the current unrest, Knight remains a firm advocate of what's become known as socially responsible investing. In the late 1980s, progressive communities became conscious of their investment choices and whether they aligned with their personal values. Brokers and investment firms started offering investment options selected for sustainability - i.e., whether they met the mark for responsible environmental, social and governance (ESG) practices.

"Companies that reduce their carbon footprint, maintain compliant labor practices or promote diversity on their board would all fulfill ESG standards," said Knight.

Back then, it was assumed that high-minded investors would pay a price, because such companies typically generated lower returns than their non-ESG counterparts. But that trend has been reversing for a couple of decades now, as technologies evolve and consumers change their spending habits along with their values.

"These days, investing in sustainable companies can actually improve profitability," Knight said. He cited an Oxford University study from 2015 that concluded that ESG practices positively influence operational performance and stock prices.

Another study published about the same time in the journal Management Science tracked companies rated "high sustainable" from 1990 to 2010 and found that on average they started outperforming those rated "low sustainable" in 1995 and continued to increase their lead for the remainder of the study period.

Because a lot of Taos residents have progressive beliefs and tend to align their spending with those beliefs, Knight recognized early on that ESG investing was a critical service he needed to provide if he was going to succeed in this community. There was also the fact that a lot of clients who wanted to invest responsibly just didn't have the time or inclination to research their investments in a rigorous manner.

"Today, it's widely accepted that ESG investing allows you to support what you value without having to sacrifice the financial success of your portfolio," Knight said. "How often does it happen that doing the right thing - the responsible thing - is also the most profitable thing?"

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