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Let’s talk about diversification

| Sunday, February 2, 2014

Retirement is a concept that probably never crosses the mind of the normal Notre Dame student. We haven’t even begun our careers yet, so why should we be planning for the golden years on the golf course? Well, the fact of the matter is that the moment we all put pen to paper and sign our first job contract (before graduation obviously), we will start hearing things like 401-K, diversification and nest egg. Since my time to spout green propaga … er, I mean “advice,” is limited to your years in college, allow me to talk to you about savings.

I love finance. However, sometimes the media portrays Wall Street’s objectives as opposed to those of tree huggers like me. They are not. Over the past few years, the boom of new green businesses, along with the greater emphasis placed on social responsibility by investors, has given rise to new investing strategies for people who want to do more with their money. Naturally, green investors can buy the stock of green companies. In fact, if you had bought a share of First Solar a year ago today, you would have almost doubled your money by now. However, as I found out during the whole Enron scandal, investing in single stocks is a risky business. Investors like to diversify.

Diversification is a word that every finance major on Notre Dame’s campus, including myself, use on a daily basis to sound smart. However, we never actually explain why it is so important. It is essentially a magical way to reduce the risk of investing and is actually very simple. Diversifying your portfolio is the act of buying stocks in companies that operate in a different industry than the other stocks you own. If you own Microsoft and Apple, buying Ford would be a step towards diversifying your portfolio. This helps because it reduces the effects of firm specific risks. Remember the Enron example? Imagine what happened to my holdings when they came out and said, “Remember all that money we said we made last year? We didn’t actually earn any of that per se.” Now imagine if I put my money evenly into 50 companies. Sure, the collapse of Enron wouldn’t have made me happy, but I definitely wouldn’t have been forced to sell my LEED Platinum house.

Diversification and sustainability have traditionally been hard to merge, but thanks to several new mutual funds, life is easy. Mutual funds have managers that select stocks and diversify for you. You give them money and they invest it for you (sustainably in this case). There are several sustainable mutual funds provided by Calvert, Domini and even Vanguard. These funds take into account not only the profitability of a firm and the prospects of growth, but also the way that corporations invest in sustainable infrastructure and how they make efforts to green their operations. The number of these socially responsible mutual funds has jumped from 173 in 2007 to 250 in 2010. These funds also often screen for other social concerns depending on what issues (other than sustainability, which is obviously your top concern) you care about.

Investing is an exciting tool that will be a necessity for all of us after graduation. It is a tool used by most to secure financial security for the years to come. However, I hope that Notre Dame graduates can also use it as a tool for good.

The views expressed in this column are those of the author and not necessarily those of The Observer.

About Christian Nofziger

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