At Faith-Based Investor, we have found that by combining strong investment opportunities with a disciplined use of moral and financial criteria, we can often help our clients meet or exceed their objectives.  In order to help you with your portfolio, I wanted to share some of our internal processes that may help you make some wiser decisions when it comes to investing.

Here is how we build portfolios using the latest asset allocation and diversification principles.

Step one: first we start with our moral criteria

We selectively try to find companies that meet our standards:

Positive Screens

• Feeding the poor and helping the underprivileged
• Building stronger communities
• Promoting traditional values
• Finding cures for diseases
• Operating in an ethical and moral manner
• Making a difference in society

Next we determine which companies we wish to avoid:

Negative Screens

• Abortion
• Pornography
• Embryonic stem cell research
• Alcohol
• Tobacco
• Gambling
• Homosexual activism
• Anti-family entertainment
• Poor human rights

Step two: next we determine which investments meet our financial criteria

Our investment philosophy is quite simple: Find tomorrow’s treasures today! That is easier said than done! However, with painstaking research, dedication, and per­severance, it is possible to find high-quality, undiscovered smaller companies that may one day grow into larger, more recognized and profitable companies.  We also try to find larger, well respected companies that we feel are undervalued in the marketplace.

Some of the key qualities we look for include great products and services in an expanding industry, strong managers with significant insider ownership, strong balance sheets with little or no debt and plenty of cash, commitment to returning value to shareholders in ways such as pay­ing a dividend or repurchasing shares, strong cash flows, increasing revenues and earn­ings, improving margins, and extremely attractive valuations.

Once we find what we call a “dream buy,” it’s game over. Buy the shares, hold ’em for the long haul (three-plus years), and sit back and wait until the big boys on Wall Street are willing to pay a hefty premium for the shares. We also want to balance risk in the portfolio so we look at stocks, bonds, and alternative investments.

Step three: determine your proper mix

We spend a lot of time getting to know our clients. We want to know their dreams and goals, how long they can tie their money up for, how much risk they are willing to take, what they have for emergency funds, what does their tax situation look like, and a whole host of other questions.  That helps us determine how much each investor should have in each of the four major asset classes (stocks, bonds, cash, and alternative investments).

Step four: diversifying your risks

This is one of the most important steps in the process.  We break our investments into eight categories and have created eight separate folios.  We use FolioFn to manage client accounts.   Here is how we use diversification:

1.) Large Cap 25 Index: we have hand selected 25 larger companies that we feel are best representative of the S&P 500 Large Cap Index.

2.) Mid Cap 25 Index: we have hand selected 25 mid sized companies that we feel are best representative of the S&P 400 Mid Cap index.

3.) Small Cap 25 index: we have hand selected 25 smaller companies that we feel are best representative of the S&P 600 Small Cap Index.

4.) Foreign 25 Index: we have hand selected 25 foreign companies that we feel are best representative of the EAFE Index.

5.) BRIC 25 Index: we have hand selected 25 companies in emerging markets (Brazil, Russia, India, and China) that we feel are best representative of the MSCI BRIC Index.

6.) Fixed Income Index: we have hand selected 10 ETFs that we feel are best representative of the fixed income markets.

7.) Alternative Investment Index:  we have hand selected 7 ETFs that we feel are best representative of the alternative investment markets (commodities such as gold, silver, agriculture, and oil to name a few).

8.) REIT Index: we have hand selected 25 real estate companies that we feel are best representative of  the Real Estate Investment Trust (REIT) market.

Step five:Building your strategy

We now combine the 8 folios in a way consistent with our client’s goals and objectives. We have five different strategies for our clients: from those seeking capital preservative all the way to the most aggressive investor.  By using the eight folios in a portfolio, we diversify the risk our clients take.  By having some exposure to large, mid, small, international, and emerging market stocks are clients tend to see less volatility.  By diversifying risk in the fixed income markets, our clients tend to see more consistent income, by adding in alternative investments and real estate, our clients also see additional diversification benefits.

Now what?

Hopefully, by seeing how much work and effort goes into building a portfolio, you will be challenged to take a closer look at your own personal strategies.  Do you or your advisor take this much care and go through this much effort?  If not, why not?  What areas do you need help?  If I can help in any way, please let me know!

Let the good times roll?

It seems these days like many investors are waiting for the “other shoe to drop”.  They are waiting for more bad news and they are stuck on the sidelines missing out on investment opportunities.  Is now the best time to invest?

I mean with nearly 10% unemployment, the housing market on the skids, interest rates at historic lows, the European debt crisis, the upcoming November political showdown, and everything else all coming to a front, is now really a good time to invest?

Let me answer this with three letters:  Y-E-S!

I even added in the exclamation point (in case you missed how I feel).

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Someone once said to me, “You can either work for God or against Him. You can’t be ‘on the fence’ because the devil owns the fence.”  I love how he put it like that…

I believe the same goes with investing.  We can either attempt to invest in a way that is pleasing to God or invest in things He is against.  When I meet new potential clients, I often ask two very important questions:

“Do you know where your money is?”

“Do you know how your money is invested?”

Most people answer “no’ to both of these questions. Off the top of their heads, they probably have only a rough idea of how their portfolios are allocated – and why.  Most of all they are unaware they may be investing in companies profiting from abortions, pornography, gambling, embryonic stem cell research, tobacco, alcohol, homosexual activism, and a whole host of other important moral issues.

If you took time to have someone analyze your investment portfolio (401K, Roth, IRA, Mutual Fund, and other investment accounts), you would know exactly where you stand.  Transparency is a characteristic of a good relationship between an investment client and an investment advisor.

Many investors do not have that kind of relationship where their advisor shares the same faith and values and I believe this is incredibly important. How about you? Do you know the details of how you are invested? If you don’t, why settle for such uncertainty? You have an alternative. I provide a boutique style of investment analysis and have access to tools that allow me to get a snapshot of your portfolio allocations, financial status, and  see if your investments line up with your faith and values.  Contact me to today and let’s spend 30 minutes getting to know one another and see if there may be a business fit.

Is your investment strategy as morally conscious as you are?

Many well-educated, morally conscious investors wind up buying shares of companies whose beliefs and business practices are far removed from their own. Why? Most investors simply haven’t thought about merging their personal beliefs with their investment strategies. Some may not even be aware of where and how their money is invested.

Is it that big of a deal? Only you can answer that. For some it is, and for others it’s not. What matters to you may not matter to the next guy, and vice versa. But consider this – when you invest in a company, you own part of that company. Some investors would prefer to separate themselves from their investments, but any shareholder cannot. So what you really need to consider, based on what the company does and how they conduct business, is whether you would feel comfortable being a partial owner of that company.

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Can you make money by morally responsible investing?

I just read Good Returns by George Schwartz, President & CEO of Schwartz Investment Counsel, a registered investment advisory firm for endowment funds, foundations, and mutual funds (Ave Maria Funds).  Faith-based investing has been my passion for years so I was really excited to dive in and see George’s perspective.

In Good Returns, George lays out in great detail the methodology to produce excellent investment results without supporting companies that oppose your values.  One of the great distinctions that George makes is the difference between socially and morally responsible investing.  Many faith-based investors confuse these two forms of investing.  Many end up investing in a socially responsible fund when in reality they really wanted a morally responsible fund.

George wonderfully describes these differences:

“Socially Responsible Investment” funds tend to focus on the issues of the politically liberal lobby—screening out companies believed to be environmentally harmful, defense contractors, producers of alcohol, tobacco, and firearms, etc., and screening in companies that provide low-cost housing, promote gender equity and gay rights, etc. These designations are very broad and loosely defined.

“Morally Responsible Investing,” on the other hand, is a very specific approach to religiously based investing—one that is motivated by faith and is guided by a particular set of ethical precepts. It focuses specifically on making investment decisions that embrace key areas of human concern. Just because an investment plan has a religious flavor or touts a church connection, you shouldn’t assume that it is markedly different from the general run of “socially responsible” offerings. For the morally responsible investor, overshadowing every other consideration is the sanctity of life. This means screening out companies that make abortion-related drugs, publicly traded hospitals that perform abortions, companies involved in embryonic stem cell research, and companies that contribute to Planned Parenthood. The next consideration beyond the sanctity of life is the inviolability of marriage. Morally responsible investors screen out companies involved in the production and distribution of pornography. This includes most Hollywood studios and entertainment media and several publishers.”

Money & Morality

The book starts out with a discussion on money and morality with a scriptural foundation on why faith is so important in our finances. God knows what we view as most important in our lives.  His Word says, “For where your treasure is, there your heart will be also.” (Matthew 6:21).  Our money: bank accounts, investments, retirement accounts, etc is where many of us place our treasure.  Yet, only select few, examine where their “treasure” is being invested.  Do we as the Body of Christ want to be profiting from companies involved in abortion, pornography, gambling, tobacco, alcohol, embryonic stem cell research, homosexual activism, and entertainment that mocks Christian values to name a few?

George lays out his background and how he got started in the area of morally responsible investing (MRI).  Once a critic of MRI, he quickly became one of the strongest advocates of this method of investing, after a business meeting with Tom Monaghan, at the headquarters of Ave Maria Funds.  Tom, in case you weren’t aware, is an entrepreneur and conservative Catholic philanthropist and activist who founded Domino’s Pizza in 1960.  After this meeting, George was convinced that as a Catholic, investing in a morally responsible manner was not only what he desired to accomplish, he also felt an obligation to positively impact corporate America.  If he could get companies to stop funding and supporting abortion, how much of an impact could like-minded investors have?

Over the course of the next several chapters George depicts the history and accomplishments of the Ave Maria funds.  This includes background on his life as well as those around him which helped grow the organization to where it is today – with over 25,000 shareholders! There is also much discussion on how he selects investments, using a very similar approach to what we use at Faith-Based Investor.  When you look for companies that are morally and financially sound and trading at a discount to book value, it truly is a winning formula!

Throughout Good Returns, George strikes up a good balance of practical investment advice, scriptural references, political discussions (for example comparing Reagan and Obama), and how to build a solid portfolio.  Overall, I highly recommend this book.  It is a good read and offers a unique and refreshing look at investing.  It also brings in a much needed discussion of how we measure investment success: not only should we care about the amount of profit, we should equally care about the source of the profit! As we have seen with the performance of Schwartz’s track record, you can have BOTH morally sound investments and Good Returns!

I heard it again today!

Someone misquoted the Bible and said, “money is the root of all evil.” This is so far from the truth.  It is the “love” and “lack” of money that often lead to evil!

So much of our time is occupied by earning a living, it is difficult to keep our priorities straight. Someone expressed the dilemma in these terms: You can’t win. If you run after money, you’re materialistic. If you don’t get it, you’re a loser. If you get it and keep it, you’re a miser. If you don’t try to get it, you lack ambition. If you get it and spend it, you’re a spendthrift. If you still have it after a lifetime of work, you’re a fool who never got any fun out of life.

Money itself is morally neutral—it can be used for good or evil. The problem is caused by the love of money, not the amount of money you have (see 1 Timothy 6:10). We can be just as covetous and materialistic over a little as over a lot. People like Abraham, Joseph, and David showed us wealth does not always jeopardize a person’s walk with God. The real issue is attitude, not affluence.

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