How local weather change is affecting retirees’ portfolios
A car travels north to escape the Bond Fire as it crosses Santiago Canyon Road near Southern California’s Silverado Canyon on December 3, 2020.
Leonard Ortiz | Getty Images
Shifting priorities and portfolios
As retirees feel the effects of forest fires, frost, cyclones and floods, some have changed their investment philosophies.
Some customers are looking to move away from fossil fuels while pursuing climate-friendly investments, said Nicole Middleton Holloway, CFP and founder of Strategy Squad in San Francisco Bay, California.
These so-called ESG investments, which stand for environmental, social and governance, can target companies that focus on low-carbon, climate-conscious, green bonds, clean energy or other sustainability-oriented options.
However, the specific investments and allocations vary by client, she said.
For example, an investor with a moderate risk tolerance can shift a small portion of their equity allocation, typically 8 to 12%, into investments with a focus on the green economy.
But someone with an aggressive portfolio may still prefer capping their exposure to 12%, Middleton Holloway said.
“They don’t want it to be a big part of their portfolio,” she said.
Typically, clients diversify their investments by opting for exchange-traded funds or mutual funds, with 400 climate change-focused options available around the world last December, according to Morningstar.
Although these assets tend to be more volatile, many investors have seen strong returns, Middleton Holloway said. Plus, they believe it can be safer than long-term exposure to fossil fuels.
“There is a risk / reward ratio,” she added.
Diversify for long term investments
Those who retire at 60 may need 30 years of capital income, possibly well into the late 80s and 90s, McGlothlin said.
“We need a portfolio that will last and last,” he said.
A client believes the world’s reliance on fossil fuels may decrease in the future and asked to move their portfolio accordingly, McGlothlin said.
In Texas, many of its clients own land or so-called master limited partnerships, a type of publicly traded asset invested in oil rigs. As a result, falling oil prices had a direct impact on their finances during the pandemic.
It feels to me like the last year has brought this to the fore.
John McGlothlin III
Financial planner at Southwest Retirement Consultants
“They saw how quickly their income streams were reduced significantly or simply stopped,” he said.
The quick hit in their wallets was a “wake-up call” that sparked a desire to diversify their retirement portfolios.
“To me it feels like the last year has brought this to the fore,” said McGlothlin.
According to Morningstar, investors invested $ 51.1 billion in net new money in ESG assets in 2020, breaking records for the fifth year in a row.