IN THE INVESTMENT world, there’s a lot of nonsense and a lot of hot air. But a few people are like the Shakespeare of personal finance: There’s wisdom in virtually every word. Warren Buffett is probably the dean of this group. But another leading light is Peter Lynch, who in the 1970s and '80s stewarded Fidelity Investments’ Magellan Fund with enormous success. Lynch is largely retired today, but his plainspoken advice is as valuable as ever. Below are some ideas he shared in a recent interview published on Fidelity’s website. This advice is especially pertinent today, with the stock market again near record highs. Lynch began with a statement about the importance of mindset: “In the stock market, the most important organ is the stomach. It's not the brain... Over the 13 years I ran Magellan, the market went down nine times 10% or more... It's a question of what's your tolerance for pain.” Lynch makes an important point. Over the past decade, the U.S. stock market has mostly just gone higher. While this has been great for investors, it also carries great risk. Recency bias—the mind’s tendency to extrapolate recent experience—can lull us into a false sense of security. To counter this, it’s important to have an appreciation for the entirety of market history—which includes many severe downturns—and plan accordingly. This leads us to Lynch’s next point: “You've got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that's your answer, you should consider reducing your stock holdings today.” The S&P 500 currently stands at 2952.01—up sharply from its March 2009 low of 676.53. It isn’t inconceivable that the market might decline 10% or 20%. In fact, it did just that late last year, and the same sort of thing—or worse—could happen any time. That’s why it’s so important to try the thought experiment that Lynch recommends while the market is still high. You’d much rather reduce your stock exposure at today’s peak prices than at a much lower level. Lynch provides a further cautionary note: “More people have lost money waiting for corrections and anticipating corrections than in the actual corrections. I mean, trying to predict market highs and lows is not productive.” In simple terms, don’t try to time the market. If you think a portfolio change is warranted, do it today. Don’t wait. Decades of research have shown it’s futile to try to predict where the market is going next. Countless careers and fortunes have been ruined trying—and failing—to predict the market’s next move. All you can do is respond to the facts as they are. To be clear, I recommend selling only if you see a need to. While there are many reasons you might decide to sell—an upcoming expense, rebalancing or a change in your circumstances or goals—you shouldn’t sell just because you think the market is high. Remember that Alan Greenspan’s famous “irrational exuberance” warning came in 1996. Yes, the market did eventually drop, but the decline didn’t start until early 2000. That’s the risk Lynch is highlighting. Lynch’s final point: You should be especially wary of making investment decisions based on economic forecasts. “I think if you spent over 13 minutes a year on economics, you've wasted over 10 minutes. I mean, it's not helpful. Everybody wants to predict the future, and I've tried to call the 1-800 psychic hotlines. It hasn't helped.” Look no further than the past 12 months to see how right Lynch is about economic forecasts. As you’ll recall, the Federal Reserve had been on a course of raising interest rates. Those moves were largely responsible for the market drop in late 2018. But then, this year, the Fed reversed course and started lowering rates again. This has helped drive the market back up. I know not a single person who predicted this seesaw. John Kenneth Galbraith, a noted economist himself, said it best: “The only function of economic forecasting is to make astrology look respectable.” Adam M. Grossman’s previous articles include But Will It Work, Staying Positive and Need to Know. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]

SUPPOSE YOU WERE presented with two prospective investments. On the surface, they look similar, except one has outperformed the other in 12 of the past 15 years. Which one would you choose? This example isn’t hypothetical. The two investments in question are the S&P 500 and the EAFE Index. The S&P 500 is broadly representative of the U.S. stock market, while EAFE stands for Europe, Australasia and Far East. It’s the most commonly referenced index for developed international stock markets. Which has delivered the 12 years of outperformance? As you might guess, it’s the S&P 500. In fact, U.S. stocks have outperformed their international peers, on average, for more than 30 years. Because of this sustained outperformance, many investors have long since thrown in the towel on international stocks. That includes, notably, Jack Bogle, the late founder of the Vanguard Group, who said he never owned international stocks in his own portfolio. In the investment world, the standard disclaimer is that past performance does not guarantee future results. It might seem that investors who limit themselves to domestic stocks are making a fundamental mistake in assuming that U.S. markets will continue to dominate. But those who believe in a domestic-only strategy aren’t just relying on past performance. They cite a number of other reasons U.S. stocks might continue to outperform. First, the U.S. economy, in addition to being the largest, has some unique advantages. It produces more big public companies—especially in technology—than any other country, and that’s a key driver of our stock market. In Bogle’s words, the U.S. has “the most innovative economy, the most productive economy, the most technologically advanced economy and the most diverse economy.” By contrast, many other major economies are struggling with challenges of one kind or another. In Japan, the population is shrinking. In France, workers have been protesting for months because the government has asked them to stay on the job a little longer before receiving their lifetime pensions. To be clear, the U.S. isn’t perfect. But on purely financial measures, the U.S. does stand apart, and that’s a reason many choose to stick only with domestic stocks. In addition, because many of the largest American companies do so much business internationally, an investment in an American company provides a dose of global diversification. Take a company like Microsoft. Nearly half its revenue comes from outside the U.S. For Apple, it’s more than half. For that reason, Jack Bogle and others have argued that there’s really no need to invest in foreign companies to achieve international exposure. Perhaps the most compelling reason some see international stocks as unnecessary: They’re highly correlated with domestic stocks. Asset correlation is measured on a scale from 0 (no correlation) to 1 (perfect correlation). On that scale, the correlation between domestic stocks and the EAFE index over the past 10 years has been quite high, at 0.88. To put this in context, stocks and bonds have correlations that range between zero and 0.3. That’s why bonds are very effective at diversifying portfolios. International stocks, on the other hand, provide some diversification, but according to this measure, it’s modest. [xyz-ihs snippet="Mobile-Subscribe"] For all these reasons, it’s understandable why many investors look at international stocks and ask, “Why bother?” In a recent paper, investment manager Cliff Asness responds to this question. He acknowledges that “international equity diversification has been a losing strategy for more than 30 years.” But he argues that, despite this history, investors should still embrace international diversification. Why? Asness starts by pointing out that a major driver of domestic stocks’ recent outperformance is that they’ve simply become more expensive. That is, their valuations have risen. On this point, boosters of U.S. stocks are quick to argue that domestic stocks deserve higher valuations—because the U.S. economy is different from that of other countries. Compare the top 10 companies in the S&P 500 with those in the EAFE index, and you’ll see a clear difference: While technology companies account for six of the top 10 names in the S&P 500, there’s just one tech firm among the top 10 in the EAFE index. This is relevant because technology companies generally carry higher valuations, and that arguably justifies the richer valuation for the U.S. market. Asness, however, rebuts this argument, pointing out that this valuation gap is a new phenomenon. Domestic stocks haven’t always been more expensive. As recently as 2007, U.S. and international stocks were roughly at parity in terms of valuation. But today, domestic shares are 50% more expensive than their international peers. Because of that, Asness believes U.S. stocks are overvalued and sees international stocks as primed for a period of outperformance. Asness’s second argument relates to the first. While the correlation data cited above indicate that domestic and international markets tend to move together, they don’t move in perfect lockstep. During periods of market turmoil, they do indeed tend to drop in unison. But over longer periods, Asness’s data shows that international diversification does work. Indeed, international stocks have outperformed in three of the past five decades—the 1970s, 1980s and 2000s. The bottom line: International stocks don’t provide the same diversification benefit as bonds, but they do provide some benefit, and with returns that are much better than bonds. No question, international stocks have underperformed for a lot of years, but there’s no reason to believe that they’ll always underperform. Indeed, as Asness points out, there’s a key reason to believe recent trends might reverse: the valuation gap that’s developed since 2007. That’s why Asness says international diversification is “still not crazy after all these years.” I agree, and that’s why I recommend investors allocate at least a portion—I suggest 20%—of their stock portfolios outside the U.S. What percentage of a stock portfolio should be invested abroad? Offer your thoughts in HumbleDollar’s Voices section. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

A FEW WEEKS BACK, I discussed some of the challenges with traditional long-term-care (LTC) insurance: In addition to steep and rising premiums, these policies are complex. Many policyholders have to contend with an annual renewal letter that presents a mind-numbing matrix of options. But there’s more to it than that. Long-term care is also an emotional topic. There’s the expression that personal finance is more personal than it is finance. I’ve been reminded of that over the past few weeks, as a number of people have contacted me to share their stories about long-term care. Some have described frustrations with these policies, including rising rates and bureaucratic obstacles to making claims. Meanwhile, others have hailed LTC policies as lifesavers for their families. As one person put it, it’s been hard enough to manage the health challenges of her husband’s disability. But with LTC coverage, at least they've been spared financial stress, which would have made a bad situation that much worse. As challenging as these policies can be, they can also be immensely valuable. These days, it’s much harder to find a standalone LTC policy. That’s because, as I mentioned in my earlier article, insurers got the pricing wrong when these policies became popular in the 1980s. For that reason, if you have an older policy, it’s often worth trying to maintain it. But if you have to compromise at renewal time to minimize premium increases, this is how I would think about the choices. You could also use this as a guide if you’re shopping for a new policy. Daily maximum. This is the fundamental element of an LTC policy. I’ve seen benefits that vary widely—from just $100 a day to more than $400. That’s an awfully wide range. Here are the factors I’d consider as you zero in on an appropriate coverage level: Cost of care in your area. Christine Benz, Director of Personal Finance at Morningstar, compiles a set of LTC statistics each year. That’s the best starting point for getting a handle on the cost of care. As you’ll see, costs vary widely from region to region. A private room in a nursing home in New York, for example, costs nearly three times what it costs in Louisiana. Health outlook. No one has a crystal ball. But as you get older, this is one area where you have an information advantage relative to the insurance company. Marital status. If you’re married or you have children nearby, they may be able to help you later in life, thus reducing your need for paid care. Also if you’re married, it’s important to note a difference between the needs of men and women. Because husbands tend to be older than their wives and because women, on average, live longer than men, men are generally less able to provide care for their wives than the other way around. This shows up in the Morningstar statistics as well. Women account for nearly 70% of residents in long-term-care facilities and their stays are 70% longer. If you have to choose, you'd want to buy more coverage for a woman than a man. LTC poses the biggest challenge for people who are in the middle financially. If you’re of very modest means, Medicaid might pick up the cost of long-term care. If you’re very wealthy, you likely wouldn’t have a problem paying the tab yourself. My recommendation: Use the statistics referenced above to estimate the cost for a multi-year stay in a long-term facility in your area. Then ask yourself how feasible it would be to cover that cost yourself. Inflation protection. Some LTC policies include inflation protection that’s generous by today’s standards—as much as a 5%-a-year increase in benefits. But this option will make a policy materially more expensive. My advice: If you’re on the younger side, inflation protection is worth paying for. But if you’re older, you might forgo that option since, for better or worse, there are fewer years of inflation to worry about. Coinsurance. Some policies offer a coinsurance option, whereby the policyholder would share the cost of care with the insurer. In exchange, the premium would be lower. Who would this help? If you look at the statistics, you’ll notice that only a small fraction of seniors incur costs in excess of $250,000—numbers range from 9% to 15%. Coinsurance would be a good option for many families in the financial middle—who might be able to afford $200,000 of care, but not $2 million. [xyz-ihs snippet="Mobile-Subscribe"] Elimination period. This refers to the period of time before benefits kick in. Most policies have a relatively short elimination period of 100 days. But this is an area where you might compromise. Unfortunately, there’s no such thing as an LTC policy that provides a multi-year elimination period. I think that’s unfortunate because, according to Morningstar's Benz, that's just the type of coverage many people say they want—basically, catastrophic coverage. Insurers would like to offer it, but Benz notes that insurance regulators won’t let them. Absent that, the best you can do is to choose the longest elimination period an insurer offers. Benefit period. This one is tricky. According to the statistics, the average long-term-care claim is about three years. But that figure is distorted because many policies cap the benefit period. As a result, policyholders contending with these caps try to wait as long as possible—and probably longer than they’d like—before claiming benefits. In other words, the average claim would be longer if insurance policies didn't have these caps. My advice: Try not to compromise on the benefits period. This would protect you in the case of a protracted illness. An added benefit: Premium payments cease the moment you claim benefits. If you have a long or unlimited benefits period, you could claim benefits and stop paying premiums as soon as you qualify for even a modest level of care. If you don’t have a long-term-care policy, what are your options? As I noted, it might not be a problem if you have assets that are either very modest or very substantial. But even if you fall in the middle, all is not lost. First of all, the statistics say you might not need paid care at all. About 50% of people don’t. And if you do, you might be able to afford it out of pocket. Beyond that, Christine Benz suggests some other strategies: If you have home equity, you could plan on a reverse mortgage. If you have a whole-life insurance policy or an annuity, an intriguing option is to swap it for a hybrid life-LTC policy using what’s known as a 1035 exchange. There is, of course, no magic bullet. But it’s worth making a plan. That way, you’ll be ready if the need arises. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

PERHAPS YOU’VE HEARD the story of Ronald Read. A lifelong resident of Brattleboro, Vermont, Read was a quiet man. He preferred flannel shirts and spent much of his career as an attendant at a local gas station. Yet, when he died in 2014, even his closest friends were surprised to learn that Read had accumulated a fortune of more than $8 million. Stories like this appear with some regularity. In 2010, Grace Groner, who was an administrative assistant in Lake Forest, Illinois, left behind $7 million. In 2013, Doris Schwartz, a former school teacher in Pennsylvania, bequeathed more than $3 million. In 2016, Sylvia Bloom, a legal secretary in Brooklyn, left nearly $9 million. In each case, the story in the local paper was virtually the same, highlighting the individual's unusual, and often extreme, thrift. Grace Groner lived in a one-bedroom house and bought her clothes at garage sales. Sylvia Bloom continued taking the subway to work every day until she retired at age 96. Doris Schwartz lived on peanut butter. And Ronald Read used clothes pins to hold his coat closed after the buttons fell off. Read's appearance was so modest that one day a stranger paid his tab in the local coffee shop, believing it to be an act of charity. When Read passed away, The Wall Street Journal's headline read, “Route to an $8 Million Portfolio Started With Frugal Living.” Readers love stories like this. Who doesn't enjoy the image of the humble retiree clipping coupons while quietly amassing a multi-million-dollar fortune? These are feel-good stories that appeal to the American spirit of hard work and self-reliance. That's why, I think, we see them so often. But I also believe these stories are misleading and convey the wrong lesson. To be sure, thrift played an important role in building wealth for Ronald Read, Grace Groner and others like them. But I don't think it’s the only explanation. In my view, thrift is just the superficial explanation that seems to make the most sense. If we take a closer look, I believe there are at least two other factors that are equally important—and you should keep them in mind as you look to build your own nest egg: First, there’s time. All of the multi-millionaires I’ve described here lived unusually long lives. Ronald Read died at 92, Doris Schwartz 93, Sylvia Bloom 96 and Grace Groner 100. That was a key factor for all of them. If you have that many decades, you don't need a high income to amass a seven-figure net worth. Consider someone like Ronald Read, who began working in 1941, when he was 18 years old. Let's assume that in his first year he started out at minimum wage, which was then 30 cents an hour, and that his salary increased over time no faster than inflation. Let's also assume that he saved 15% of each paycheck, which was not too far out of the ordinary back then, and that he continued to save at that rate until he retired at age 65. Finally, let's assume that his investment returns were in line with the overall stock market. Result? By the end of his life, his modest savings would have turned into more than $3 million. That’s the power of time. Lesson: You can't control how long you’ll live, but you should strive to turn time to your advantage. Begin saving as early as you can, even if you’re still in school. If you have children, get them started with their own retirement accounts. As I pointed out in an earlier article, children of any age can contribute to a Roth IRA if they have earned income, even if it's from babysitting or mowing lawns. Second, there’s luck. In the example above, I assumed that Ronald Read's investment returns matched the overall stock market each year. But that overlooks the fact that, when it comes to the stock market, average is not typical. Thanks to investment costs, most investors underperform the market averages in any given year. But there’s always a fortunate minority who outperform. If Read’s investment returns were one or two percentage points better than the overall stock market, he easily could have reached the $8 million that he ultimately amassed, rather than the $3 million I calculated using a 15% savings rate and average market returns. According to The Wall Street Journal's analysis of Read's impressive investment portfolio, it sounds like that’s exactly what happened. Lesson: Don’t assume your future returns will match the stock market's historical average returns, let alone do better. History may not repeat—and you may make investment mistakes. While Ronald Read was fortunate to do better than average, it's always best to plan conservatively: Better to be pleasantly surprised than to come up short. Adam M. Grossman’s previous articles include Slipping Away, Four Thumbs and Looking Sharpe. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]

WITH EVERYTHING that’s been going on recently, one story that’s received less attention is the ongoing spat between the White House and the board of the Thrift Savings Plan (TSP). As of a few days ago, there had been a ceasefire in the debate, but it isn’t over. It’s worth understanding what’s at stake—because the underlying issue has been a recurring theme in the investment industry. If you aren’t familiar with the TSP, it’s one of the retirement plans available to federal government workers. In lots of ways, it's similar to a private sector 401(k). It allows employees to contribute part of each paycheck. The government also makes contributions. Employees can choose from a menu of investment options. The current debate centers on a proposed change to one of those investment options, called the I Fund, which—as you might guess—invests in international stocks. Currently, the I Fund tracks the MSCI Europe, Australasia and Far East index. But a few years ago, the TSP proposed shifting to a new index called MSCI ACWI ex USA Investable Market index. While these names might sound similar, there’s a big difference: The old index was limited to major developed economies, including France, Germany, Japan and Australia. Meanwhile, the new index also includes stocks from 26 emerging markets countries, including Russia, Indonesia and China. To implement this change, the I Fund would have to sell a substantial share of its existing developed markets holdings so it could purchase these new emerging markets holdings. As you might imagine, it’s the addition of China that the administration opposes. But from an investor’s perspective, this is about more than politics. To be sure, I don't love the Beijing government and that’s a valid reason to oppose this change. Opposition, in fact, has been bipartisan. But the concern I want to address here centers on the investment impact. To explain my concern, let me first provide some background: People often laud the merits of index funds—for good reason. Year after year, studies show that most actively managed funds lag behind their benchmarks. As a result, many investors now take it on faith that index funds are the better choice. For the most part, I agree. Unfortunately, index providers are businesses too—big businesses, in fact—and have their own motivations that sometimes put them at odds with the interests of investors. Last year, for example, index provider MSCI made a dramatic change to its Emerging Markets index, boosting its allocation to Chinese stocks. Unlike the I Fund, this index already included Chinese stocks, but this decision increased their representation substantially. Two years ago, China accounted for less than 30% of that index. Today that number is nearly 40% and MSCI has said that it may increase further. To be clear, the composition of indexes changes all the time, as constituent stocks rise or fall in value. But the change MSCI made last year was different. This was a subjective policy change—like Coca-Cola changing its recipe. Some, including The Wall Street Journal, have argued that MSCI made these changes to suit its own business purposes and not for valid investment reasons. Whatever the explanation, I called it out at the time because of the negative impact on investors in terms of both diversification and taxes. Indeed, whether its MSCI’s change last year or the TSP’s proposed change, in both cases the governing bodies are imposing big changes on existing shareholders without giving them a chance to vote or the opportunity to opt out. On the TSP website, there’s just a small, innocuous-looking link that reads “Investment benchmark update,” but no option to remain with the old investment strategy. I asked one TSP participant, who is an I Fund shareholder, whether he had received any communication about the change. His response: "Zip nada nil." To be sure, the TSP board believes that changing the I Fund in this way will benefit shareholders. “Moving to the new benchmark could improve the expected return and diminish the expected risk for participants,” writes Michael Kennedy, chair of the TSP’s investment board. But that’s merely his opinion. It may be an informed opinion, but in the world of investments there are no guarantees. In my view, it isn't right to pull the rug out from under existing shareholders in this way after they’ve already chosen a fund to fill a specific role in their portfolio. This is especially true since there’s such an easy alternative: The TSP could simply create a new fund for investors who want to add emerging markets exposure. That’s very common in other retirement plans. Similarly, MSCI could create a new index for those who preferred a heavier weighting of Chinese stocks in their portfolios. For now, the TSP board has put the change on hold—and that's a good thing. But let’s face it: The outcry is only happening because of the TSP's high profile as a government program with five million participants. In many cases, changes like this sail right through without anyone noticing or objecting. The lesson: As an individual investor, you can't take anything for granted. While index funds have a good—and well-earned—reputation, that doesn't mean they're infallible. Always be sure to look under the hood of a prospective new investment by checking the fund company's website. And make it a practice periodically to review existing investments to make sure no one has quietly substituted New Coke in place of the old.  Adam M. Grossman’s previous articles include Thinking It Through, Regrettable Behavior and Defending Yourself. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]

YOU MAY BE FAMILIAR with the term ESG. This is an investment approach that—in addition to traditional financial metrics—also weighs environmental, social and corporate governance considerations when picking investments. ESG isn’t new, but it’s stirred up a fair amount of controversy recently. As an investor, it’s worth understanding what the debate is about and how you might navigate it. ESG has been around for years, but its popularity has recently hit an inflection point. According to Deloitte, the number of investment firms offering at least one ESG fund has tripled since 2016. One new fund even carries a celebrity endorsement. NBA star Giannis Antetokounmpo has partnered with the investment firm Calamos to roll out an ESG fund. According to Calamos, the goal of the new fund will be to “generate investment and societal returns” and to “inspire, drive greatness, and contribute to a world of wellbeing and prosperity for all.” Those are lofty claims—and Calamos isn’t alone in using that kind of language. As a result, the Securities and Exchange Commission has started taking a harder look at funds that embrace the ESG mantle. Last year, the SEC issued a risk alert for consumers. This year, it took a further step, proposing new rules to police how firms like Calamos market their funds. Under the new rules, firms would no longer be permitted to use the term ESG as freely. Instead, to aid consumers, the SEC wants fund firms to disclose in a standardized format how they’re employing ESG strategies. With the proliferation of ESG funds, consumers, too, have been asking more questions. A common accusation is that many ESG funds are engaged in “greenwashing.” According to this argument, these funds differ only minimally from a standard market index fund—but cost much more. Fund expert Nate Geraci, for example, recently highlighted a group of the largest ESG funds. All were much more expensive than a typical S&P 500 index fund but differed almost imperceptibly from the index. Two-thirds of them had correlations with the S&P of 95% or higher. The implication: Fund companies are taking advantage of ESG’s growing popularity to overcharge well-intentioned consumers. ESG has also become something of a political football. On one side, progressives like Sen. Elizabeth Warren have been pressuring the SEC to impose new environmental disclosure rules on public companies. She wants to make it easier for ESG-oriented investors to vet companies before buying their shares. Meanwhile, Florida Governor Ron DeSantis has gone in the opposite direction, instructing managers of the state’s pension fund to ignore ESG considerations and to focus only on financial criteria in choosing investments. One fund company went even further. In a press release, the CEO of Inspire Investing declared, “We hereby renounce ESG.” With that, his company eliminated the ESG label from its entire lineup of funds. The press release went on to say that ESG had been “weaponized” by those pursuing a “harmful, social-Marxist agenda.” The language was bombastic. At the same time, though, it’s an indication of where things stand in the argument over ESG: There’s plenty of debate—but not a lot of clarity. With all these cross-currents, how should investors proceed? I would start by asking four questions: 1. What’s your most important objective? Some investors choose ESG mutual funds as alternatives to standard index funds because they simply don’t want to be shareholders of certain types of companies. Tobacco is a common example. Personally, I hate that I indirectly profit from these companies when I invest in the S&P 500. That’s one reason you might apply an ESG lens to your portfolio. Other investors go further, hoping to have an impact on companies by allocating their investment dollars to companies they like and away from companies they dislike. [xyz-ihs snippet="Mobile-Subscribe"] These investors acknowledge that it’s hard for any one individual to have too much of an impact. The thinking, though, is that cumulatively investors could make a difference. Here's how that might work: If more investors choose to buy a company’s stock, that can push up its share price. That could benefit the company in a few ways: It could issue more shares at that higher price. Or it could use its higher-priced shares to issue more stock-based compensation to employees. Either way, a higher share price is almost always a good thing for companies. On the other hand, if enough investors shun a company’s stock, that can put downward pressure on the shares and thus deprive a company of these same benefits. Those, at least, are the textbook arguments. Because the investment universe is so large and diverse, it’s difficult to know if any ESG-driven investments have ever made, or could make, a difference. That is, in part, because it’s difficult to know the counterfactual: How much higher or lower would a company’s share price be in the absence of ESG investors? 2. What investment options exist? Perhaps the biggest challenge with ESG investing is that it means different things to different people. The acronym itself, in fact, illustrates the diversity of objectives among investors. A good example is Apple. Some ESG investors like the company because it’s very charitable. But Apple frustrates environmentalists because its products don’t have replaceable batteries. Result: It’s impossible to say whether Apple is a “good” company or a “bad” one. It’s in the eye of the beholder. Gun makers present a similar problem. They’re generally seen as unattractive by ESG investors. But a recent article made an interesting counterargument: Weapons manufacturers also help countries—like Ukraine—to defend themselves. Because of that, perhaps ESG investors should embrace them. The bottom line: If you’re looking to apply an ESG lens when choosing mutual funds, it’s critical to first decide on your objectives. Next, look closely at each fund to see exactly what companies it owns and how you feel about the lineup. Fortunately, there’s a great diversity of ESG funds out there. If you don’t like the way one mutual fund chooses its holdings, it’s possible that another will be a better fit. I can’t emphasize enough that it’s important to look under the hood before choosing an investment. For example, Standard & Poor’s, in a seemingly inexplicable move, recently took Tesla—the leading maker of electric cars—out of its ESG index. That means you won’t find Tesla’s stock in funds like State Street’s S&P 500 ESG fund (symbol: EFIV). But you will find that Tesla is one of the largest holdings in the iShares ESG Aware USA Stock ETF (ESGU). That's because iShares uses a different index. 3. Is performance a concern? To the extent that ESG-based portfolios differ from traditional market indexes, their performance will also differ. Will it be better or worse? That’s an open question. There just isn’t enough data yet to say for sure. Indeed, because there are so many different definitions of ESG, it may never be possible to generalize. But it stands to reason that their performance will almost certainly differ from traditional market benchmarks. As an ESG investor, it’s important to decide how much of a risk this represents. 4. Is complexity a concern? In general, there are three routes to building an ESG portfolio. First, you could pick individual stocks. That would give you the most control over what you own. But I don’t recommend this because of the research required to build and maintain a portfolio, and because of the risk posed by individual stocks. The second option: You could choose a mutual fund or ETF. That's certainly the simplest approach. But as I’ve suggested, it can be challenging to find a fund that perfectly matches your values. Finally, you could go the route of direct indexing. This would allow you to perfectly tailor a portfolio to your own preferences, including or excluding certain industries or even specific companies. There are downsides, though. Holding a portfolio of several hundred stocks introduces complexity. Also, these services are fairly expensive relative to simple index funds, though that may be offset if direct indexing results in lower annual tax bills. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]