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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 steadfast guidelines.


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.

"The asset 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 adviser."

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 investment advisers.

Not all aspects of asset allocation in IRAs are complicated--some are relatively straightforward.

"Tax-free investment doesn't make sense in an IRA," said Mr. Lent.

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.

 

 
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