April 05, 2004
Diversifying Asset Allocation in Socially Responsible Individual Retirement Accounts
by William Baue
Diversifying in SRI IRAs can be challenging, as asset allocation in retirement accounts has few
Last year at tax time, SocialFunds.com provided a basic introduction to practicing socially
responsible investment (SRI) in individual retirement accounts (IRAs), which minimize tax
liabilities. (For a quick primer on SRI IRAs, read last year's article.) This year, we
present a sophomore course on the topic, focusing on diversification and asset allocation.
Modern Portfolio Theory (MPT) holds that broad
diversification across asset classes reduces volatility. However, achieving diversification in SRI
IRAs can be challenging.
"You can get diversification, but the truth is it's very
hard," said Michael Lent, a financial adviser with Progressive Asset Management (PAM), a national network of advisers that specialize
in SRI. "Most mutual funds in the SRI field have a $1,000 minimum for IRA accounts, so it's tough
to do--you really have to look at how much money you have in your IRA to figure out what sort of
diversification you can actually achieve."
In addition to the amount of money in one's IRA
portfolio, there are two other key factors for to consider in asset allocation.
classes are determined by the client's time frame between now and retirement and their risk
tolerance," Mr. Lent told SocialFunds.com. "Most clients who are young will tend to favor a
majority of their assets in equity mutual funds."
"However, some people don't want to be
in equities because they don't believe that equities will necessarily perform the same way in the
future as they have in the past," added Mr. Lent.
The diversity of individual priorities
and investment styles make it difficult to generalize about SRI IRAs.
"I'm a strong
believer in customizing a strategy for each client," said Mr. Lent. "That's why they need an
To locate an adviser that specializes in SRI, investors can contact PAM or the
First Affirmative Financial Network (FAFN), the other major national network of SRI
advisers. SocialFunds.com also features a search engine for locating SRI financial
planners. In addition, SocialFunds.com has published a guide
entitled Working with Social Investment Professionals that helps navigate the variables in
choosing financial service providers such as brokers, money managers, financial planners, and
Not all aspects of asset allocation in IRAs are complicated--some are
"Tax-free investment doesn't make sense in an IRA," said Mr.
While this may sound like a no-brainer, it might not occur to those in the midst
of difficult investment decisions that the benefits of tax-free investment are lost in an IRA.
Thus it can be advantageous to use an IRA for investments that incur the highest tax rates.