Divesting Reduces Risk: Part 2

The last post talked about the hypothetical impact of removing fossil fuel investments from broadly diversified mutual or exchange traded funds. When taking money out of any single industry, whether the unwelcome stocks are in fossil fuels or mass media or donuts, it is hard to argue that extracting investments from a single industry will have a measurable effect on long-term fund performance. Diversification means that the sensitivity to whatever happens in any one industry is going to be very low.

The practical question then is this – how can an individual who wants to be in diversified funds take this idea and do something with it? You can’t tell a mutual fund company “I’d really like to invest in your XYZ fund – except, can you take out the fossil fuel companies?”

In fact, there are many, many ways for an investor to move into these waters. If you explore this website, you’ll find easy ways to start – including, if you don’t manage your investments directly, how to find an investment advisor who gets it.

So what’s the takeaway generally? It’s a certainty that people and the planet are in big trouble if we don’t massively curb the burning of fossil fuels. As we do that the value of the traditional fossil fuel companies will fall. On the flip side, it would be reasonable to think that diversified small and mid-cap funds will hold up very well against their large cap brethren over the long haul. Also, keep in mind this is just one of many reinvestment possibilities an investor can follow – including supporting the growth of the new energy economy by investing in funds that tie to that theme or investing in fully fossil free funds.

Many investment advisors make the point that your investment decisions should allow you to sleep at night. Will betting against the planet and your kids’ future keep you up at night? Think about it.