Brandon Renfro, Ph.D.

Retirement - Finance - Investing

Month: December 2016

Why the Time To Implement Your Retirement Savings Plan Is Now

For most 20 to 30 year-olds, talk of retirement saving or planning makes their eyes glaze over. Some have so much student debt, they can’t even see the end of tunnel, much less any light that might be there. Others are just getting started in their careers and starting families, and don’t feel as though they can look beyond next month’s rent or mortgage payment. Yet, they’re all at the optimal age to start a retirement saving program. Here are 4 reasons why:

1. Good habits beget more good habits.

We’ve all heard the expression “old habits die hard”, right? Well, it’s also true that habits lead to other habits – good and bad. It’s really all about discipline. Most bad habits come from a lack of discipline while most good habits require discipline; and discipline in one area of life stimulates greater discipline in other areas. Because saving for retirement is about the longest term goal you’ll ever have, it requires long-term discipline. By developing such discipline early in your adult life, the discipline necessary to achieve other, shorter-term goals will come more easily.

2. Retirement is a longer haul.

Life expectancy in the U.S. increased by about 56 percent from 1901 to 2001, and it continues to go up. In 1901, life expectancy was about 49.5 years; in 2001 it was 77 years; and in 2011 it climbed to 78.7 years. As that upward trend continues, the number of years you will need to provide for yourself in retirement also increases. So the sooner you begin to save and plan for retirement, the better your chances of having a comfortable lifestyle in retirement.

3. More time becomes more money – literally.

When it comes to retirement savings, time really IS money. The positive effect of compounding interest over time is nothing short of amazing.

For example, if you saved $1,000 per month at 7% from age 25 to age 35, and left that money invested at the same rate, you would have almost $1,500,000.00 when you reached age 65. On the other hand, if you waited until age 45 to start saving the same mount at the same rate until age 55, and left it invested, you would have less than $375,000.00 when you reached age 65. The same amount saved, at the same rate, over the same 10 year savings period. The only difference is the amount of time the money was left to continue compounding (30 years vs 10 years). That’s the power of compounding. Check this article on the power of compounding for more details about this almost magical concept.

4. Independence in your golden years.

Most people who work hard for decades to sustain themselves and their families in a comfortable lifestyle become very independent-minded – not necessarily a bad thing, right? But imagine such an individual reaching retirement age without a nest egg sufficient to sustain a comfortable lifestyle in their retirement years. How difficult would it be to face such a situation with the limited options available to people of that age?

Consider this: By the time you reach retirement age, whatever age that is to you, it’s too late to start planning and saving for a comfortable retirement lifestyle. Your earning, planning and saving years are well behind you. Sure, you could continue to work and support your lifestyle the way you always have; but that’s not retirement, even if you only work part-time. Your life is still tied to someone else’s schedule. That’s not independence.

Another consideration is health. As a twenty- or thirty-something, it’s probably difficult to imagine that health will ever be an issue for you, but someday it will. So, if you’re retired and you reach a point when you’re not healthy enough to continue working, you either have to dial your lifestyle way back, or rely on your children or others to help maintain the lifestyle you’ve become accustomed to. That might be feasible if your son is a perennial mega-star in the NFL, or your daughter is a multi-platinum recording artist; but it’s not very likely, is it? And it’s definitely not independence.

In Conclusion

Given the personal power and lasting independence that comes from implementing your retirement saving plan now, and the incredibly high cost of procrastination, you really can’t afford to wait another week.

Green Investing: 3 Things You Should Know

As you begin to grow your retirement savings, you have many choices about where to allocate your investments. One option that shouldn’t be overlooked is green or sustainable investment. Green investing allows you to do something great for the environment, align your investments with your personal values, and reap future financial benefits all at the same time. Here are a few key points to keep in mind about green investing:

Green Investing Basics

Green or sustainable investments allocate your retirement investment funds toward stocks or bonds in companies that are considered eco-friendly and green, including companies in the clean energy and conservation fields. Sustainable investing takes both your financial goals and your social and environmental values into consideration. This also benefits green energy and sustainability in the “big picture” sense, because the more private citizens choose sustainable investing, the healthier and more robust the green sector will become.

In addition to proactively investing in clean and sustainable industries, green investing actively avoids investing in companies with a record of pollution and environmental irresponsibility. Green investing is financially viable while also being good for your conscience.

Green Energy as a Risky Investment

Green energy is established as a viable and profitable industry, so green investments are not inherently speculative. Even the United Nations has weighed in and declared renewable and sustainable energy a sensible investment.

With proper research or the guidance of a financial advisor, you will easily be able to invest in green and sustainable businesses that offer a risk level you feel comfortable with. As a younger investor, you may choose to allocate a percentage of your retirement savings to funds that are tied to slightly riskier green investments, like start-ups with a lot of potential but a short financial history. When balanced with lower risk options, this can be a strategic and ultimately profitable approach.

Green Investing Has Great Long-term Potential 

In general, it’s best to think of your green and sustainable investments in terms of their long-term potential. Investing in solar, wind energy, or other sustainable industries is unlikely to make you rich overnight. When investing for your retirement, however, the best approach is to keep the long game in mind.

As the world’s population grows and non-renewable resources dwindle, sustainable energy and any technology designed to help reduce our carbon footprint and protect resources will only become even more important. Your future self will thank you for investing in green technology and sustainable energy now, as something that will benefit you financially down the road while also contributing to the protection of our environment.

Know Your Sustainable Industry Options

Most socially conscious investors are already aware that the solar industry is a solid investment which is on track to reach its predicted 116% growth for 2016. You have many investment choices within the solar industry, from mutual funds that invest in major corporations like SolarCity to smaller solar start-ups and producers of photovoltaic equipment.

Your options for sustainable investments are hardly limited to solar technology, however. You can also invest in the wind energy industry, the hybrid car technology sector, biofuel makers, and start-ups dedicated to finding solutions to international water shortages or implementing new technology designed to help clean up our oceans. As businesses continue to seek alternatives to conventional, non-sustainable energy sources, the options for sustainable and green investing only grow.

When deciding where to allocate your retirement investment funds, don’t overlook green and sustainable investing.

Do Socially Responsible Mutual Funds Perform Well?


An important consideration of any investment strategy is the ability of the strategy to provide satisfactory results. Sustainable or socially responsible investment strategies are not immune to this line of investigation. Arguably, most investors who choose SRI investing likely emphasize the altruistic traits of the investments themselves over investment performance. However, even the most committed investor will eventually abandon SRI investments if performance isn’t acceptable.

So, do investments in socially conscious companies provide investors with adequate returns? According to Meir Statman in his article Socially Responsible Mutual Funds which appeared in the Financial Analysts Journal, yes, about the same as comparable non-socially minded investments.


Dr. Statman arrived at his conclusion after observing the returns of the Domini Social Index and socially responsive mutual funds from 1990-1998. As a researcher, it does stick out to me that this period is within a famously long bull market, so we would want to look at studies of other periods with different market characteristics for validation. We call this an out-of-sample robustness test in academic speak. I’ll be writing about some of the other studies in future posts.

Dr. Statman found that the Domini Social Index provided an annualized 19.02% while the S&P 500 generated 17.31%.

Risk Adjustment

Of course, pure return is not the end of the story. It is important to be conscious of risk and understand its role in producing portfolio return. When comparing returns of two or more investments we need to account for risk in the comparison.

One measure of risk is beta. Beta is a ratio measure and relates risk to return. A beta of 1 means that an investment is expected to have the exact same risk and return as the overall market, however market is defined in that setting. In this case, as in most, the market is the S&P 500. Therefore, the S&P 500 by default will have a beta of 1. The Domini Social Index had a beta of 1.05 for the period studied. Because of this, the higher return of the Domini Social Index is expected to some degree.

Another measure of risk is standard deviation, or variability of return around an average. In the study period the standard deviation of the Domini Social Index was 14.19% and 13.23% for the S&P 500. Again, the DSI was riskier so the higher return is at least partially due to that.

To account for this difference in risk Dr. Statman used a modification of the Sharpe ratio in order compare the risk-adjusted returns of the Domini Social Index and the S&P 500. Even accounting for the higher risk the Domini Social Index performed better than the S&P 500.

Expenses – Passive Indexes vs. Active Funds

Statman also compared the return of 31 socially conscious mutual funds to the Domini Social Index and the S&P 500 over the same period. He found that the average return of the socially responsible mutual funds was about 6.26% less than the S&P 500 and 8.03% less than the Domini Social Index.

However, keep in mind these comparisons are of mutual funds and indexes. Indexes don’t have the management and trading expenses of mutual funds and these expenses play a big role in investment performance. This is one of the main benefits of investing in passive index funds which track indexes thereby significantly reducing costs. In this study all mutual funds, both socially responsible and conventional, trailed the index.

Socially Responsible or Conventional Mutual Funds?

Comparing SRI mutual funds to conventional mutual funds Dr. Statman found that the performance of the socially responsible mutual funds was better than the conventional funds. The 1.50% average expense ratio of the socially responsible mutual funds was very comparable to the average 1.56% for the conventional funds. Again, making an adjustment for the risk difference between the two groups of mutual funds Statman showed that the socially responsible mutual funds performed slightly better than the conventional mutual funds. The difference was statistically insignificant so we would conclude that performance was essentially the same between the two groups.

Values and Returns Don’t have to Conflict

The conclusion then is that socially responsible mutual funds and conventional mutual funds performed about the same. This is a win for socially conscious investors. Investors didn’t have to give up investment returns in order to choose investments that align with their values.