Aligning Your Roth IRA Investments With Your Racial Equity Values

Recently many people have been concerned about boycotting based on racial equality but have not thought of aligning that to their Roth IRA investments. While this article highlights Roth IRA investing this could be applied to all investing. I am only applying this values alignment idea to the pursuit of retirement, through the Roth IRAs tax deferral and tax free withdrawals benefits. This is intended to show that aligning racial equality values with retirement is not a short-term fringe investing idea, but a long-term core strategy.

While companies may decide to pull back on their DEI initiatives, individual investors do not have to do so. In fact, you may want to buycott and support companies that have publicly said they will support DEI. Your employer plan, such as a 401(k), 403(b) or TSP limits what you can invest in. This is not the case with your individual investments. In that case, the limit is most often based on the size of your investment and the platform that your investment advisor has access to. Many investors aren’t fully aware of what companies their mutual funds hold. Fund companies are required to file reports of their holdings. If you go to their website, you can look for the individual funds holding report or if interested in their top holdings, look for their Fact Sheet. I like Fact Sheets because they typically provide some insight into Objectives, Strategy and any purposeful declarations of companies they might exclude from their portfolio.

Often reading the word ‘exclude’ gives people pause. Few mutual funds say they can invest in anything at any time. The fund’s prospectus gives the rules that portfolio managers must abide by, in pursuing their risk adjusted returns. That may be as simple as investing in large capitalization companies or only investing in small cap companies. Others may also include Fossil Free investments. Neither exclusion suggests that a fund will provide more or less return than another. Investment fund managers make choices about what to include in their portfolios, and the wisdom of these decisions can only be judged in hindsight.

As a values-aligned investment advisor, I use tools like the Morningstar Sustainability Ratings and YourStake.

Do racial equality Roth IRA investments have to be at odds with returns?

The term racial equity aligned Roth IRA may mean different things to different people. Through YourStake (YS), a values-based research company, we can analyze investments from an investment adviser’s perspective. While YS is not an advisory firm, they offer their service to investment advisers who want to help their clients align their values with their investments.

First, I established a definition of racial equity values using YS values set (yours may differ):

• Board Racial/Ethnic Diversity: The percentage of non-white board members or director nominees.
• Diversity Score: Percentile ranking of the largest US employers based on their cultures around diversity and inclusion according to employee reviews.
• Predatory Lending Exposure: Companies that have received 25 or more Consumer Financial Protection Bureau complaints for predatory lending complaints, including payday loans, installment loans, pawn loans, title loans, tax refund anticipation loans, personal lines of credit, and check cashing, over the last 3 years.
• Best Companies to Work For: Companies that are trustworthy, caring, and fair in times of crisis.
• Discrimination Violations: Fines paid to the US government or UK government since 2016 for discriminatory employment practices or unequal access to products and services on the basis of age, gender, sexual orientation, disability, or veteran status.

Now, I selected the following indexes: MSCI ACWI VS. the MSCI KLD 400 (KLD). The MSCI ACWI captures large and mid-cap representation across Developed Markets (DM) and Emerging Markets (EM) countries. The index covers approximately 85% of the global investable equity opportunity set. I selected it because the YourStake optimizer uses it to overlay the selected values sets. You may think that the S & P 500, Russell 1000 or some other indices is a more appropriate comparison for an all-stock portfolio. The MSCI KLD is designed to provide exposure to the common stocks of companies that MSCI determines to have positive environmental, social, and corporate governance characteristics. However, this is not explicitly racial equity exposure as defined in this article. As you can’t directly invest in an index, I selected the iShares MSCI ACWI and the iShares MSCI KLD 400 Social ETF which replicate the pure index.

Those are compared to YourStake’s values optimizer (we’ll call it YSO Equity). YourStake optimizes portfolios based on the MSCI ACWI Index, risk tolerance (I used Aggressive) and the previously defined Racial Equity values. YourStake removes companies from consideration from the MSCI ACWI index and then seeks to create a “best fit” portfolio from the remaining companies.

While I suggest five different ways for you to evaluate your investments, Risk adjusted, Values adjusted, Fee adjusted, Tax adjusted and Stress adjusted, we’ll look at values and the hypothetical growth you might have experienced, had you been invested in these options.

The Racial Equity Values Performance Results

As you might expect, from a values perspective the KLD and the YSO Equity had the best Overall score. Specifically, the MSCI ACWI scored better than the MSCI KLD. That could be attributed to the fact that the ACWI has about 3000 companies includes UK companies whereas the KLD is based on US companies only.

After a 10-year hypothetical “look back”, the iShares MSCI ACWI gained 156.4%, KLD gained a 249.2% increase in value, the and the YSO Equity an impressive 341.2%.

The returns show that the KLD and YSO Equity were clear winners. That said, the YSO was nearly 1000 percentage points higher. However, I believe the biggest take away from this data is that the higher values aligned portfolios created the greatest return on investment*.

So Why Roth IRAs?

Integrating a racial equity values strategy into your Roth IRA can be particularly advantageous due to the account’s tax-free growth and withdrawal benefits. By selecting investments that align with racial equity principles, you not only support social justice but also position yourself to potentially enhance your retirement savings. Notably, sustainable funds (Morgan Stanley’s sustainability philosophy encompasses Diversity and Inclusion) have demonstrated competitive performance; for instance, in 2023, such funds achieved median returns of 12.6%, surpassing the 8.6% returns of traditional funds. See this research from morganstanley.com.

Since Roth IRAs allow for tax-free growth and withdrawals, the gains from these well-performing, socially responsible investments can be realized without additional tax liabilities in retirement. This combination enables you to align your investment portfolio with your values while maximizing the tax-free benefits inherent in a Roth IRA.

For a more in-depth comparison between Roth vs. other types of accounts, feel free to read my article on Comparing Tax-Adjusted Returns: Roth IRA Vs. Traditional IRA Vs. Taxable.

Concluding Racial Equity Aligning Investment Thoughts

Racial equity values aligned with Roth IRA investment is rarely discussed. At one’s job, employees are often defaulted into target date mutual funds. The focus is often on saving to get the match, not on sufficient savings or returns, much less considering what companies I am supporting. This article shows that aligning your Roth IRA with your values may also increase your returns. In my experience, people who incorporate their values into their investment strategy tend to not make lots of short-term decisions regarding their investments. This could be especially true if you feel that making money based on the incarceration of others is not how you’d like to fund your retirement.

This approach may also check many other boxes regarding evaluating your investments. YourStake is not an investment adviser but provides its services through investment advisors who choose to use their research. This article shows that should you choose to pass through a mutual fund or exchange traded fund, or take the precision of a direct indexing approach, you can potentially have superior returns aligned with your racial equity aligned investing values.

_{(*The performance of the YSO hypothetical lookback is hypothetical and doesn’t guarantee any future results.} 

_{*The YSO portfolio returns are presented without considering fees, whereas the funds would have expense ratios.}

_{*Comparing individual securities vs. funds in a portfolio snapshot is subject to “survivorship bias”. For example, any company that was dropped from the index [e.g. going bankrupt] wouldn’t show up in the optimized portfolio, but it did play a role in bringing down the historical performance of an index fund that held it at the time.)}