Prosper With Do-Gooder Investments

published 13 May 2019

Ryan Ermey: Does investing with a conscious mean sacrificing returns? Not if you're Jerry Dodson, whose Parnassus Endeavor Fund has outpaced the broad stock market, along with 98% of the peer mutual funds over the past decade. He joins us for a discussion on investing based on environmental, social and governance factors in our main segment. On today's show, Sandy tells you what to do with your old tax documents, and we unveil a transportation themed edition of Wild Pitches. That's all ahead on this episode of Your Money's Worth. Stick around.

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Ryan Ermey: I'm expecting [something] in the mail. Anyway, we have an opening segment today that is up your alley, and probably something that is affecting a lot of people, which is if you've paid your taxes, which we know that all of you did, you likely have a stack of papers lying around somewhere. I have some dating back a few years, which of course raises the question of what should I keep, and what can I finally throw out?

Sandy Block: People are very confused about it. There's actually some disagreement on the law. But here's the bottom line, when you file your tax returns the IRS has three years to initiate an audit. At the very least, you should hold on to your tax return, and your W-2, and your supporting documents for three years in case the IRS challenges anything on your return. But, in a lot of cases, you might want to hold on to it for longer than that because there are exceptions to this rule.

Sandy Block: One is if you fail to report at least 25% of your income, the IRS has six years to initiate an audit. Now, if you have taxes withheld, and you don't have a lot of investments, and you don't own hotels, you probably reported most of your income and this isn't a problem. But, if you're self-employed, there is a possibility that there is a 1099 out there that you didn't report. Just the rate of audit is much higher for self-employed people, people who file a Schedule C anyway. Yes, if you're self-employed, hold on to your tax returns for at least six years.

Sandy Block: Now, there is no statute of limitations on fraud. If the IRS thinks you cheated on your tax return, it can audit you indefinitely. If you're cheating on your tax returns, you're probably not thinking about that, but I would say if you were particularly aggressive in claiming some deductions, you might want to just hold on to these records forever. There are also some records that you're going to want to hold onto for other reasons, other than the IRS possibly auditing you. There are some records that will be helpful for you filing your taxes down the road.

Sandy Block: One is, if you have investments in taxable accounts and you sell them, keep the documents for at least three years after the sale. You're going to want that information for the basis, for reporting any taxes on that. You might want to hold onto your W-2s for a long time, because in some cases you may be asked to document your income. For example, if you think Social Security didn't give you credit for all of the years that worked. If you own a home and you sell it, hold onto the sale documents and any records of home improvements you made for at least three years after the sale.

Sandy Block: Now, I should here that most people don't have to worry about paying taxes on the sale of their primary residence, because there's a very large capital gains exclusion. But you know what? If you live in San Francisco and you bought your house a long time ago, you might owe taxes on it. Maybe you've rented it out. There might be some reasons that you want that, so it's just a good practice to hold onto those purchase documents, and as I said, records of your home improvements which could cut your taxes if you owe them. Hold onto those for at least three years after you sell.

Sandy Block: Finally, a lot of tax professionals say you should hold onto your tax returns forever. That doesn't mean you need to hold on to every credit card receipt, everything. But, your tax returns really are a good document of where you were in a particular time in your life. You may need them to, for example, apply for a mortgage. My husband and I applied for a home equity line of credit a couple of years ago, and I was really stunned by how many documents they required of us. I mean, we were in pretty good shape. We have a nice house, but we still had to provide a lot of documents showing our income not just for that year, but for past years.

Sandy Block: I don't think you need to hold onto every single receipt that you've ever gotten, and now that many more people are claiming the standard deduction, probably they're going to have a lot fewer records to begin with because you don't have to keep track of those documents. The actual tax return is really not a bad thing to keep around. If nothing else, it kind of gives you a nice snapshot 10 years from now of where you were, and how you managed to live on that amount of money.

Jerry Dodson: It's been very surprising to me, because it's evolved into a mainstream phenomenon. There were very few people that practiced SRI, Socially Responsible Investing, in those days. I'm talking about the ‘80s, early ‘80s. Today, there are literally hundreds of funds that take ESG into account, and it's become part of the mainstream. People accept this as a reasonable way to invest, which has been a very pleasant surprise for me.

Jerry Dodson: In my opinion, it's primarily historical. They're both very similar. SRI, Socially Responsible Investing, have mostly aspects of ESG. E, of course is Environmental; S, is Social; and now the G, is relatively new: Governance factors. Because, SRI didn't take it into consideration as much as ESG does. That's one thing that's in there. Otherwise though, I think it's really historical, and they're pretty similar. It's almost like the Japanese words, Zaibatsu and Keiretsu.

Sandy Block: When I remember writing about SRI 15 years ago, the thinking then was that there was a tradeoff. It made you feel better, but oftentimes the fees were higher and the investment returns weren't as good as just investing in say an S&P 500 Index Fund. Some people said your best bet is just to get the best returns you can, and then give to charity instead of trying to do both. What has changed? And, is that tradeoff no longer the case?

Jerry Dodson: Some people argue to using that tradeoff. For me, I think that it's a better idea to look at it as an investment if you can't get good returns on it. I think that probably maybe you could consider the alternative, which is investing in an Index Fund, and donating the rest of them. We think a little differently about that, because the Parnassus returns have beaten the market. You probably know that 75% of mutual funds don't beat the S&P 500, or the longer time periods.

Jerry Dodson: Parnassus is unusual in they were one of the group that has been able to do this. For example, the fund I manage, which is called the Parnassus Endeavor Fund, has beaten the S&P 500 by about three percentage points per year over time. It varies, of course, depending upon what period you picked. But, over long periods of the last decade or so, it's about three percentage points. We think it's important that we're able to beat the averages. We think that it's possible to do that with ESG.

Jerry Dodson: I think there're certain advantages that an ESG fund has over a non-ESG fund. For example, if you invest in companies that treat their workers well, you're going to have less turnover, you're going to have more motivated workers. There's a lot of advantages to doing that. The same thing as with environmental factors. If you take environmental factors into account, it should mean that the company is less likely to be fined, it's less likely to be sued. Those are the two most important things, is treatment of workers and environmental aspects.

Jerry Dodson: It's pretty difficult for an individual investor to do that. It's not immediately obvious. I've been doing this for 35 years, so I have a lot of experience. In general, I know which companies meet the criteria, which companies perform well, and which don't. So, that gives me an enormous advantage. But, if I were to start this... Let's say I were not involved in this aspect, not involved in business sales, say I was a musician playing for a band and I tried to this type of research, it's really difficult. There are some sources, but for the average person it's difficult. I would recommend they invest in a fund, and hopefully will invest in the Parnassus Endeavor Fund.

Jerry Dodson: Yes, some people have asked, "Why can the Parnassus Endeavor Fund out-perform on such a consistent basis over the market or over the other mutual funds?" Some of it is ESG for the reasons I indicate: The treatment of workers, the environmental factors. But, there's an even more important reason why we out-perform. It doesn't have anything to do with ESG, it just means buying stock throughout a favor. That's when a key skill comes in. If a stock goes down, it usually doesn't go down of its own weight. It goes down because something bad has happened: The competition comes in; If a product that's difficult that's marked an acceptance. There're just dozens of reasons why a stock can go down.

Jerry Dodson: The key skill is to determine whether whatever caused it to go down is permanent or temporary. If it's permanent, you don't want to invest in it. If it's temporary and you think they'll bounce back, then you make the investment. That's the key decision that you have to face. Once you've looked at that, it's hard to do that. After a stock goes down, people are really very nervous about investing in that company. But, that's the best time to do it, when the stock goes down to low levels.

Jerry Dodson: We have the ability to analyze why a stock went down, decide if it's permanent or temporary, and decide what are the prospects for that stock and the company making a comeback. Most people can't do that, more for emotional reasons than intellectual reasons. Even myself, after having done this for 35 years, it's hard for me to do that because after a stock goes down, say "Well, something's the matter here." So, it takes a lot of nerve to invest after it goes down, but that's really the secret of why Parnassus Endeavor Fund's been able to out-perform all these years.

Jerry Dodson: First of all, it's very rigorous practices and goals to address some of the operational aspects. They've helped with energy consumption. Their engines have less greenhouse gas emissions. Also, in their manufacturing process they use waste and recycling. Then, they report their annual … through GRE, which is at the scope, an ultra-project called The Carbon Disclosure Project. It takes surveys, and they collect data through third parties.

Jerry Dodson: Even those diesel engines are not really positive for the environment, if you can get them to pollute less, that is definitely a positive. Cummins also has a global diversity and inclusion team, and they try to give opportunities for women and for minorities. Also, and this is very interesting, they're going to spend $500 million in the next three years on a new electrification project. They're going to try to start producing electric engines. Of course, this would change the outlook very much. So, if you wouldn't have a diesel engine.

Sandy Block: Okay, mine is not so much wild as misguided, because this really... You just wonder sometimes if these guys just scrape the Internet for emails and blast them out, because it's like what has this got to do with what I write about? This one, the title is called The Estate of a Gentleman, who should fetch an excess of $4 million, and I think that's $4 million pounds because this is from England. Which, explains why a lot of the terminology I don't really understand.

Ryan Ermey: That is the conceit behind my wild pitch, and it's actually not dissimilar from advice that we've given for a long time that you can cut an enormous amount of money of your commute if you don't drive it. So, we have a calculator on our website that will calculate how much you can save on your commute by biking. You enter in how many miles your commute is, whether you have to pay any tolls, whether you have to pay for parking. Based on the cost of insuring a car, and paying for gas and all of this, it calculates the enormous savings. We'll link to that in the show notes.

Ryan Ermey: The reason that this pitch is especially wild, is because it is out in conjunction with a new study from the city of Austin done the conjunction with the CDC about over the past three months over these shared electric scooters. So, I guess it doesn't apply to people who own their own electric scooter, but for the ones that are the scooter shares. Injuries, as you might have guessed, are quite frequent. 14 injuries per 100,000 rides, which is high, especially when you consider that the average trip on a scooter is less than a mile.

Ryan Ermey: So, why is this? Well, people don't wear their helmets, is the big one. Not only that, but 70% of the people surveyed claimed to have received training, but 60% said that the form of training that they had received was swiping through the training on the app. The issue with riding your scooter to work is you shouldn't do it if you don't know how to do it safely. You shouldn't be taking your scooter up the shoulder of the highway, obviously. Scooters are also poorly equipped to handle things like potholes or problems with infrastructure. They have small wheels, they're not very maneuverable. A large percentage of the people who crashed their scooters in the study blamed potholes, or cracks in the sidewalk or whatever, which is of course like a poor workman who blames his tools.

Ryan Ermey: That's it for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit kiplinger.com/links/podcasts. You can stay connected with us on Twitter, Facebook or by emailing us at podcast@kiplinger.com. If you like the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.

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Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.