Socially responsible investments and risky investments, how to balance?

Warren Buffett’s philosophy could inspire you in your investment strategy. (Photo: 123RF)

GUEST EXPERT. The investment jungle is still unforgiving in the face of our often overly emotional behavior. It is therefore important to think carefully about the setup of the investment portfolio. This is definitely not a build-on-the-fly environment… you might fall sooner or later.

In recent years, we’ve talked about ethanol, cryptocurrency, synthetic meat, and even cannabis. Does that mean we should have invested in it? With the ups and downs that companies in these various industries have experienced, it seems easy to answer this question today, but what about tomorrow’s new trend? Are we investing? If so how much?

That is why it is important to write your own investment policy. Normally, an investment policy is an agreement between an investor and the person who manages their investments. This is a document that is based on the profile of the investor, but is much more precise, describing, for example, the objectives, the expected return, the level of risk of the portfolio, the limits related to different sectors of the economy, etc.

So you note in your policy the types of investments that you are comfortable with and which are not. You will be able to decide what percentage of stocks and bonds is right for you. You can even use neutral and trusted sites to help you determine your investor profile, in other words your risk tolerance. For example, The Financial Markets Authority (AMF) has very good sites.

You will still determine in your investment policy the maximum percentage of your portfolio (for example 10%) that you will agree to invest in companies that represent a significant risk (for example, cryptocurrencies), a percentage that you will not change. afterwards.

You can also write down your own rules to remember when the time comes, because unlike your other investments, riskier investments may not require patience. Sometimes you have to admit you made a bad choice and sell at a loss before you lose your entire investment. This is Warren Buffett’s Rule #4 : “The most important thing to do when you find yourself in a hole is to stop digging.”

Whether the investments are high risk or not, you need to do your homework before investing in a company to fully understand the service offering or the products being offered. if that fails, Warren Buffett’s Rule #9 must be respected: “Never invest in a business you do not understand.”, that is, you should only invest in a company whose service offering or products offered you understand. For example, ” blockchain » or blockchains are undoubtedly very fashionable, but if you do not understand anything about them, stay away from this type of investment.

Still, you may question your stance on socially responsible investment (SRI) when designing your investment policy. In fact, you could decide that tobacco and oil companies are not for your wallet, just as you could decide the opposite.

To do your ISR homework, The AMF has another page on their website that can tell you a lot about this topic. This page explains what ISR covers, because let’s keep in mind that ISR doesn’t just mean “oil-free”. Respect for employees, human rights and corporate governance are just a few examples of what is part of SRI.

The AMF website states that there are currently no official standards that specify which investment products or which companies meet the ISR rules. It is not like the ISO rules, everything remains to be done in this area. It is therefore important that you define what SRI is to you in your investment policy. In other words, for you, it’s a matter of making your investment decisions based on your values.

However, several investment products pride themselves on being part of ISR, but as the AMF states on its website: “Some may have an overly promotional tone and only provide positive information on ESG factors that the bottom takes into account”.

You can also wait for international standards to be implemented, but you will have to be patient. Until all countries agree on such important points as those covered by SRI, you will lose many years of income because your portfolio will not be invested.

Therefore, you must take the time to do your own research before investing in a company or investment product that claims to respect SRI principles. How? By finding out about the activities of a company or, for an investment product such as a mutual fund, by looking at its prospectus or the list of companies in which the fund currently invests.

If you notice that there is a company that does not meet the criteria of your investment policy, simply do not invest there. Obviously, this can be tedious work, but it’s worth it if you end up with an investment portfolio that respects your values.

Finally, you should also think about investment opportunities that will require some time to decide. For example, what about a company that boasts of following SRI criteria, but most of its customers do not? Really, should you invest in company A if its only client, company B, is an oil company, while you don’t want to invest in that type of company?

Good research and good writing of your investment policy!

Clément Hudon, Pl. Fin., FCSI, BBA, M.Sc.

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