Feb
10
2025
The S&P 500 Explained and Defined
What is the S&P 500 index? An exploration into the popular market index, along with a look at ways to invest in the S&P 500.
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Feb
10
2025
How Long Should You Hold Stocks?
How long should you hold stocks? Here are six investing strategies to consider when making the decision to hold or to sell.
Read moreFeb
10
2025
What Is a Fiduciary Financial Advisor?
Fiduciary financial advisors are professionals who have a legal obligation to manage assets or give retirement advice with their client’s best interest in mind. Among the guidelines fiduciary financial advisors need to abide by are avoiding conflicts of interest, being transparent (about fees and investments choices), acting in good faith, and being as accurate as possible.
Financial advisors aren’t the only professionals who can have fiduciary responsibilities. Lawyers, bankers, board members, accountants and executors can all be considered fiduciaries. Fiduciary financial advisors cannot recommend investments or products simply because they would pay them bigger commissions. They can be held civilly responsible if they give advice that isn’t in the best interest of their clients.
Key Points
• Fiduciary financial advisors are legally bound to act in clients’ best interest, ensuring transparency and avoiding conflicts.
• The fiduciary standard is stricter than the suitability standard, which only requires recommendations to fit client needs.
• To find a fiduciary advisor, ask about their fiduciary status, compensation, and transparency.
• Compensation models vary: fee-only advisors charge flat or hourly fees, fee-based earn fees and commissions, and AUM advisors charge a percentage of assets.
• Evaluating a fiduciary advisor involves checking their legal obligation, fee structure, and commitment to providing conflict-free advice.
What Is a Fiduciary?
A fiduciary is someone who manages property or money on behalf of someone else. The Consumer Financial Protection Bureau (CFPB), a government watchdog agency, describes a fiduciary as someone who is required, by law, to manage money or property on behalf of someone else to their benefit, not their own.
As a fiduciary, your four basic duties are to act only in your friend’s best interest, manage her money and property carefully, keep her money and property separate from your own, and keep good records. Basically, you are to do your very best to manage her finances honestly.
In this sense, a person who is named as a fiduciary may not have any particular financial planning expertise. Therefore, they may still choose to hire out the actual work of managing the money to a financial expert. In doing this, they are exercising fiduciary responsibility.
What Is the Fiduciary Responsibility in Financial Planning?
Someone who acts with fiduciary responsibility should act in the customer’s best interest. There is no universal standard for fiduciary responsibility because there are multiple agencies that act as regulatory bodies in the financial services industry.
The U.S. Department of Labor (DOL) is one, and the Securities and Exchange Commission (SEC) is another. Additionally, the organizations offering certifications, like the board of Certified Financial Professionals (CFPs), may provide their own guidance on fiduciary responsibility and code of conduct.
In 2016, the Labor Department issued what was called the “fiduciary rule,” requiring that any advisors offering retirement advice must act in their clients’ best interest. The rule was widely challenged from within the industry and subsequently overturned in the courts in 2018.
The DOL has subsequently tried to restore the rule, but the courts have, in recent years, shut down those attempts as well. Investors interested in working with financial fiduciaries are encouraged to inquire directly with various professionals, as there are still some guidelines in effect.
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Broker-Dealer Fiduciary Obligations
In June of 2019, the SEC passed its own version of the fiduciary rule, called Regulation Best Interest (RBI). It says that all broker-dealers (which includes brokers) must act in the best interest of the retail customer when making recommendations, without placing their financial interest ahead of the customer’s.
According to the SEC, broker-dealers must adhere to the following obligations:
Disclosure Obligation: provide certain required disclosure before or at the time of the recommendation, about the recommendation and the relationship between you and your retail customer;
Care Obligation: exercise reasonable diligence, care, and skill in making the recommendation;
Conflict of Interest Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest; and
Compliance Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.
Not everyone is convinced that the new RBI standards do enough to protect the consumer. Additionally, the new RBI rules may have actually weakened the need for some Registered Investment Advisors to work in a fiduciary capacity.
Questions to Ask a Fiduciary Financial Advisor
Because the rules of fiduciary responsibility remain somewhat up for interpretation, the waters remain a bit murky for some retail customers, and the responsibility for finding a fiduciary requires effort on the consumer’s part.
Ask questions, carefully consider investment recommendations, and challenge possible conflicts of interest. It is good to be in the habit of asking the person you intend to work with whether they’ll be acting with fiduciary responsibility. Do not hesitate to ask them outright, “Are you a fiduciary?”
Then, ask them to clarify what fiduciary responsibility means to them, their title, and the institution that they represent. Also, consider how they are being compensated, i.e. what does the financial advisor charge? Much, although not all, can be sussed out via the compensation model.
The Fiduciary Versus Suitability Standard
Previously, broker-dealers may have adhered to what is called the “suitability rule,” as opposed to a fiduciary rule. Although broker-dealers are now technically held to a fiduciary standard, it’s an important word to know, just in case you work with someone who does not fall under the SEC’s regulatory purview. Suitability is not the same fiduciary responsibility.
The rule by the Financial Industry Regulatory Authority (FINRA), a non-governmental regulatory organization, requires that a firm or associated person have “a reasonable basis to believe” that a financial or investment recommendation is suitable for the customer.
The firm needs to make this determination based on the customer’s “investment profile,” which can include age, other investments, financial situation and needs, taxes, liquidity and risk tolerance, among other factors.
How to Find a Fiduciary Financial Advisor
Finding a financial professional that assumes fiduciary responsibility is a great start.
That said, there is more to finding a trusted financial advisor than simply adhering to fiduciary standards. Being a fiduciary doesn’t guarantee that a financial professional offers the right service for you, or even that they’re someone that you’ll want to work with.
For example, a doctor may have a license to practice, but not a good bedside manner. Or, you may need a dermatologist, so making an appointment with a pediatrician won’t do.
Here are a handful of the services offered in the financial help space, along with their respective adherence to fiduciary guidelines.
Registered Investment Advisors (RIAs)
Generally, RIAs manage investment portfolios on behalf of customers. They may or may not offer other services, such as comprehensive financial planning.
Previously, all RIAs were held to a fiduciary standard. Counterintuitively, this may have changed with the new RBI standards, which may have loosened standards for RIAs.
Brokers
Brokers, such as a stock broker, are professionals who buy and sell securities on behalf of clients. Typically, a broker works on some form of commission from the sale of securities.
Before the RBI, brokers were not held to a fiduciary standard. They are now held to the new standards, though it remains to be seen exactly how this will shake out within the industry.
Certified Financial Planners (CFPs)
A CFP® may offer more holistic financial services, such as financial planning, budgeting, and personalized investment advice. Not all financial planners are CFPs — you may want to ask about the credentials of the professional you want to work with.
The CFP Board “supports a uniform fiduciary standard of conduct for all personalized investment advice. This fiduciary standard of conduct should put the interests of the client first, and should include both a duty of care and a duty of loyalty.”
Again, it is important to seek out the professional that will best serve your needs.
If a financial professional suggests a product or strategy, do not be afraid to ask questions.
How Are Fiduciary Financial Advisors Compensated?
Financial professionals are compensated in several different ways:
Fee-only
In this case, you would pay a financial professional, such as a CFP®, a fee to sit down and discuss a financial plan or roadmap. This could be a one-time meeting, or meetings could take place at regular intervals (such as quarterly or annually). If a financial planner is fee-only, then they will not receive any additional commissions on products being sold.
Fee-based
An advisor who is fee-based may charge a fee and collect commissions. This fee could be a one-time or annual fee, or it could be measured as a percentage of assets under management. For example, an investment advisor could charge a 1% annual fee.
Assets under management
Similarly, some investment advisors and planners who manage an investment portfolio may charge a percentage on top of assets that are being managed.
Hourly
Some financial professionals may charge by the hour. This may be more common for financial coaching and planning than wealth management.
Commissions
Commissions typically come in the form of payments to the financial professional, from the company that creates the product. Commissions are common on insurance products, like annuities and life insurance, and some actively managed mutual funds.
It is possible that a financial professional be compensated in multiple ways. Be sure to ask. A popular choice for those just getting started is a fee-only fiduciary financial planner. To find a fee-only fiduciary financial planner, you can likely find many with a simple internet search.
The Takeaway
Fiduciary financial advisors are professionals who are legally obligated to invest money or give retirement advice that’s in the best interest of their clients. Among the requirements fiduciary financial advisors need to abide by are minimizing conflicts of interest and being transparent about how they are compensated. Acting in good faith and giving accurate financial advice are also guidelines that fiduciaries are supposed to follow.
Investors looking for trusted help should try to find a fiduciary financial advisor. Some robo-advisors and online investing platforms offer access to a financial planner who can answer questions for investors.
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SOIN-Q125-031
Read moreFeb
07
2025
What is Greenwashing? Definition, Types & Examples
With the rise of environmental and climate-related concerns, more people are becoming familiar with the term greenwashing — which is when a company markets itself as more sustainable or environmentally friendly than it actually is.
Greenwashing impacts investors and consumers alike because it’s designed to mislead people through a variety of means, including: the use of vague terminology or false labels; making claims about green actions or outcomes that can’t be verified (or are found to be deceptive); using false or misleading research and data.
The term greenwashing is derived from the notion of whitewashing, which is when a company or individual conceals wrongdoings by presenting a cleaned-up, but deceptive version of their actions.
Key Points
• Greenwashing is when a company markets itself as more sustainable or eco-friendly than it is.
• Companies may engage in greenwashing to attract consumers, employees, or investors.
• Greenwashing can also be an attempt to avoid stringent or costly regulations.
• Common greenwashing techniques include misleading labels, vague or meaningless terminology, a deceptive use of data, and more.
• It’s vital for investors, as well as consumers, to look beyond an organization’s eco-friendly claims to verify whether they are adhering to ESG standards.
Types of Greenwashing
For some companies, greenwashing is a means to attract consumer and investor dollars. According to the 2023 Business of Sustainability Index, 68% of consumers said they’re willing to spend more money for environmentally friendly products.
But some companies engage in greenwashing to appear compliant with environmental regulations, which can be stringent and come with hefty penalties — especially now that some countries, like the EU. and U.K., are adopting anti-greenwashing laws.
Before you buy products marketed as sustainable or eco-friendly, or invest in a green company that makes similar claims, it may help to know the different types of greenwashing.
• Greenwashing a polluting product: Companies may attempt to improve the branding of a product by making it seem more environmentally friendly without actually changing much or anything about it.
• False associations: Brands can make it seem like they are endorsed by a third party when they really aren’t, or the third party is simply their own subsidiary.
• Green products from a polluting company: A company might make a product that has a lower environmental impact, such as an electric vehicle, but manufacture it in a way that creates significant waste and greenhouse gas emissions nonetheless.
Again, because socially responsible investing has grown so rapidly, and many companies want to attract the attention of investors and consumers with a green sensibility, there is commensurate growth on the greenwashing side, so it pays to be cautious when making choices.
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Example of Greenwashing
Greenwashing is increasingly on the radar of regulatory bodies that protect consumers and investors. But some watchdog organizations lack the resources to hold companies to account. A few examples of what would be considered greenwashing are described on the U.S. Federal Trade Commission (FTC) website:
• A company labels a trash bag they are selling as “recyclable.” Although this may be true, it’s unlikely that a bag full of trash will be emptied and then recycled on its own. This label makes the product appear to have an environmental benefit, but in reality it doesn’t.
• In another example, a company labels a product as having 50% more recycled content than a previous product did. This makes it sound like a significant amount, but in fact the company may have increased the recycled content from 2% to only 3%, so in reality there has been hardly any change.
• A company labels a product as “recyclable” but they don’t say specifically whether all parts of it are recyclable, just some parts, or just the packaging.
Other real-world examples include: An oil company that’s known for environmental negligence releases advertisements that state their dedication to a carbon-free future — or companies promising to do environmental cleanups, but failing to actually follow through on those promises.
Recommended: A Beginner’s Guide to Invest in Solar Energy
The Negative Impacts of Greenwashing
Although in the short term greenwashing might benefit a company if it leads to more people buying their products, the risk is that a revelation of greenwashing practices could quickly and negatively outweigh those gains.
The Impact on Consumers
If consumers catch on that a company is engaging in greenwashing, rather than adhering to ESG standards, there could be a public relations backlash. Consumers may feel duped, and may express their discovery of a company’s contrary claims in various ways: with other consumers, on social media, writing to elected officials, contacting the Better Business Bureau.
Depending on the scale, and the level of consumer awareness, this has the potential to damage a company’s reputation and trustworthiness, and cause consumers to turn to other brands.
In addition, companies that get caught greenwashing can also face legal ramifications for their misleading claims. And investors interested in true impact investing may take their business elsewhere.
The Impact on the Environment
In the long term, the biggest negative consequence is the actual environmental impact of manufacturing and other business practices that are not, in fact, green or sustainable. By using green claims to bolster their business goals, yet not living up to actual sustainability standards, companies not only add to environmental damage, they hinder efforts to create sustainable products and reach other socially responsible goals.
Companies rely on clean water and air, quality soil, viable supply chains, and a stable climate to operate. A thriving economy requires a healthy planet, and greenwashing ultimately doesn’t support either.
The Impact on Investors
Just as many consumers are seeking a clearer understanding of the environmental claims of various products and consumer goods, investors are looking for ways to vet the claims of financial companies that offer ESG-focused securities, like exchange-traded funds (ETFs) and mutual funds.
This has led some organizations to develop ESG frameworks, in order to provide investors with a way to assess companies’ ESG progress, and use accepted standards and metrics to compare one company to another. Companies that make ESG claims for their investment products can come under regulatory scrutiny, and may face substantial fines.
How to Spot Greenwashing
Many greenwashing tactics can be convincing. Here’s what to look out for when purchasing a product, or investing in a company that claims to embrace sustainability or ESG investing strategies (i.e., environmental, social, and governance practices):
• Vague language: Labels such as “eco-conscious,” “clean,” or “100% sustainable” don’t actually mean anything in terms of a company’s manufacturing processes or adherence to environmental criteria. Be sure to research ESG standards that reflect actual environmental practices.
• Natural imagery: If a polluting company uses marketing images of flowers, trees, beaches, and so forth, they may be trying to appear more environmentally friendly than they really are. Be sure to check whether the company or product lives up to the advertising.
• Fabricated data: Companies might fund research that will provide “results” that make them look better, or make data up completely. In some cases, it’s easy to vet company research or data via the company website or by doing an internet search.
• Grand claims: Some companies may pledge to reduce carbon emissions or announce a net-zero policy (or another ambitious goal), with little to back up the claim.
How to Avoid Greenwashing
Whether purchasing products or investing in companies, if you are looking for the most sustainable options, there are a few ways to avoid greenwashing.
1. Look for Clear and Transparent Language
If a brand makes sustainability claims, look for specifics such as certifications, verifiable third-party endorsements, industry credentials, and details about exactly what the brand is doing.
2. Evaluate the Data
If a brand uses statistics and numbers to back up its sustainability claims, make sure the numbers are backed up with credible data.
3. Compare Similar Products
A company may make sustainability claims when in fact their product has basically the same environmental impact as a competitor’s. Compare ingredients, packaging, and manufacturing information to see whether one product is really better than another.
4. Look Beyond the Final Product
Even if a company is improving the impact of its products, it may not be addressing the waste and emissions associated with its operations or supply chain. If this is the case, they may be just making changes for marketing purposes. Check out a company’s website and/or follow watchdog groups to learn how much effort is going into sustainability at the corporate level.
5. Look for Goals and Timelines
If a company is truly implementing a comprehensive sustainability plan, it would include measurable goals and timelines. Ideally those would be available to investors and consumers on a public forum such as the company website, in the interest of transparency.
6. Verify Ingredients and Materials
Some terminology and product labels can be misleading. For instance, a company might say that their product is made from organic cotton or recycled plastic, when in fact only a small percentage of the cotton or plastic is organic or recycled and the rest is not.
The FDA has no guidelines for what the term “natural” means, and according to the USDA the term simply means that a product is “minimally processed” with “no artificial ingredients.”
Greenwashing vs. Green Marketing
Although greenwashing is when a company attempts to cover up their bad practices, there is nothing wrong with a company telling the story of its environmental initiatives, and the steps it’s taking to produce products more sustainably.
That’s green marketing at its best and most transparent.
How to Recognize Green Marketing
Actual green marketing may include:
• Certifications and endorsements from established regulatory organizations
• Clearly labeled manufacturing processes
• Recyclable, compostable, or biodegradable materials (but watch out for these labels, sometimes a product can actually only be composted or biodegrade in very specific conditions that aren’t realistic).
• Products free from toxic chemicals
• Use of renewable energy
• The use of transportation measures such as EVs
• Purchase of carbon offsets for any unavoidable emissions
• In-office programs and measures such as renewable energy, LEED certified buildings, on-site composting, or elimination of single use plastic
• Doesn’t use too much packaging, and ideally avoids plastic packaging
• Circularity programs that allow consumers to send back the product for repair or reuse
• High-quality manufacturing made to last rather than one-time or short-term use
• Fair trade and ethical labor practices
• Environmental programs outside the company, such as donations or volunteer efforts
Greenwashing Regulations
There are currently no laws in place to prevent greenwashing practices in the U.S. The FTC does have a set of Green Guides, which are not mandatory, but can help companies avoid falling into greenwashing territory.
Globally, the outlook for anti-greenwashing measures is somewhat more robust. The last couple of years have seen a rise in anti-greenwashing policies or preliminary taskforces in various countries around the world.
• The EU Green Claims Directive is a new law that was approved by the European Parliament in 2024, and is now being enacted by member states, with a September 2026 target date for implementation.
• In the U.K., the Green Claims Code is a set of principles that businesses must adhere to, or face regulatory consequences.
The Takeaway
Greenwashing is a marketing tactic some companies use to align themselves with the growing consumer and investor desire for sustainable products and investments. It’s related to the concept of “whitewashing,” which means covering up the truth with a positive-sounding story.
Investors committed to sustainability can look for red flags of greenwashing before deciding whether to invest.
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FAQ
What is ESG greenwashing?
ESG greenwashing is the practice of using marketing tactics to exaggerate an organization’s environmental, social, or governance efforts in order to attract customers, employees, investors, or positive media attention.
What are the three most common kinds of greenwashing?
Three common types of greenwashing are the use of environmental imagery, misleading labels and language, and hidden tradeoffs where the company emphasizes one sustainable aspect of a product — while still engaging in environmentally damaging practices.
What is the role of regulations in combatting greenwashing?
Ideally, regulations against greenwashing practices will deter companies from false and misleading practices. Regulations can establish standards that result in clearcut penalties in the case of greenwashing violations. As of early 2025, there are only a few anti-greenwashing regulations in effect, worldwide.
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SOIN-Q424-106
Read moreFeb
07
2025
Investing in Alcohol Stocks
Investing in alcohol stocks may be appealing to some investors, as alcohol is not only a consumer staple with steady demand, it’s generally considered a recession-proof industry. That doesn’t necessarily translate into stock performance, of course, but it can be one reason that investors find alcohol stocks appealing.
Nonetheless, investing in alcohol stocks can have its drawbacks. Some investors may be turned off by the industry itself. And there are risks that can affect the alcohol industry, too, such as supply chain issues, or even political and societal changes. Don’t forget that during the Prohibition Era in the United States (1920 to 1933), it was illegal to manufacture, transport, or sell alcohol for consumption.
Key Points
• Investing in alcohol stocks may be appealing due to recession resistance and growth in emerging markets.
• The alcohol industry is valued at nearly $2.3 trillion as of 2024, with an estimated annual growth rate of 10.74% from 2024 to 2030.
• Types of alcohol stocks include large multinational corporations, craft breweries, distilleries, and alcohol distribution companies.
• One of the key growth areas in the alcohol beverage market is the expansion of ready-to-drink products (RTD).
• Sector risks include regulatory challenges, changing consumer preferences, competition, market saturation, and ethical concerns.
Overview of the Alcohol Industry
The alcohol industry is large, worth about $2.3 trillion as of 2024. It’s also projected to grow by a compound annual growth rate (CAGR) of 10.74% each year between 2025 and 2032. As a point of comparison, the global pharmaceutical industry is worth about $1.6 trillion as of 2023.
A Broad Sector
The industry itself consists of different types of companies and sub-industries. For instance, there are myriad types of alcoholic beverages, the companies that produce them, and the companies that distribute them.
Alcoholic beverages include beer, wine, ciders, spirits (hard liquor), hard seltzers, and more. Ready-to-drink (RTD) products are proving to be a growth area, with pre-made canned cocktails that combine different beverages and flavors with wines or spirits or ciders gaining market share.
The popularity of certain beverages tends to vary by region. Beer might be more popular among consumers in a place like Wisconsin, with its history of brewing, while wine may be more popular among drinkers in Northern California, owing to its focus on wine production.
Alcohol-Related Investments
The industry as a whole also depends on a network of alcohol-adjacent companies that might appeal to investors. In addition to brewers and alcohol producers, there are companies that distribute beverages or products. There are retail stores that sell them. And there are countless companies in between, too, that do marketing, product development, or other types of work for alcohol companies.
For investors interested in alcohol stocks, that means there’s plenty of opportunity to invest in the industry.
Consumer Staple or Luxury Goods?
Alcohol stocks, although a type of sin stock or vice stock, are generally considered a consumer staple. Because demand is generally steady for alcohol products, even in a recession, alcohol stocks have some of the qualities of other non-cyclical consumer goods like bread or shampoo.
But alcohol purchases also fall under discretionary spending, and as such some alcohol investments can be considered a luxury good.
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Types of Alcohol Stocks
As noted, there are many different types of stocks in the alcohol industry. Those include large, multinational corporations, small craft breweries or distilleries, alcohol marketing and distribution companies, equipment manufacturers, and more.
Large Multinational Corporations
The biggest corporations involved in the alcohol industry can encompass a variety of functions. Some, for instance, may produce alcoholic beverages and distribute them as well. But the main thing to know about companies in this category is that they tend to be publicly held stocks with larger market capitalizations — large- or mega-cap stocks — with branches all over the world.
Craft Breweries and Distilleries
Craft breweries and distilleries consist of stocks that are generally smaller, though many craft brewers have been absorbed into larger companies. But generally, these would likely be small-cap stocks in the alcohol production industry.
Alcohol Distribution Companies
Stocks of alcohol distribution companies would involve companies that move alcoholic beverages from one place to another — generally, from a company producing the beverages to the retailer or wholesaler selling them to businesses or the public.
In other words, these are companies involved in the alcohol supply chain, and can include packaging, shipping, and delivery companies.
Factors Influencing Alcohol Stocks
Since alcohol is a regulated substance, and that regulation differs from country to country (and from state to state), there can be a number of factors that influence alcohol stocks’ valuation from a legal perspective.
For instance, in some states, you can buy a six-pack of beer at a convenience store. In other states, that’s against the law; you’d need to buy beer at a designated alcohol retailer, like a liquor store or beer distributor. With that in mind, those rules and regulations can change, too, and that means that political or regulatory changes could potentially have an effect on alcohol stocks.
Economic Impacts
There are also economic factors to take into consideration. As noted, alcohol has sometimes been called a recession-proof industry, since consumption tends to be steady over time. But significant events, like the Covid-19 pandemic, can dramatically increase or decrease consumption.
In addition, companies involved in the alcohol sector can and do feel the effects of the overall economy. So, if there’s an economic downturn of some kind, there’s a chance that these stocks could see their valuations affected as well.
Consumer Trends
Changing consumer tastes are also something that affects the alcohol industry. That includes the types of drinks that people are buying. Ciders and alcoholic seltzers have become popular in recent years, as an example, in addition to pre-made cocktails and other RTD products.
Demographics can also introduce new factors into the alcohol stocks market. For example, younger Americans (Gen Zers) are drinking less than previous generations — which is something that alcohol companies will need to take into consideration, unless the trend reverts.
Pros of Investing in Alcohol Stocks
For thinking about investing in stocks in the industry, there can be some upsides to adding alcohol stocks to your portfolio. Those can include the potential recession-resistant nature of these stocks, as mentioned above, in addition to brand loyalty, and potential growth in emerging markets.
Steady Consumption
As discussed, like many consumer staples the consumption of alcohol tends to be constant. In addition, there is some truth to the notion that consumers like to drink when times are good and also when times are tough. But it’s not necessarily true that these stocks will be safe havens during economic downturns.
Alcohol stocks may perform better than stocks in other categories during a recession, but there is no guarantee that will happen. This sector is subject to its own risk factors, including ingredient costs, consumer trends, political issues, and more.
Brand Loyalty and Pricing Power
Some consumers exhibit high levels of loyalty to certain brands of liquor, beer, and wine. In fact, research shows that alcohol is one category of consumer goods in which consumers tend to be highly loyal to certain brands.
That can be a good thing for investors to keep in mind, as brand loyalty often translates to sales — but not always.
Potential for Growth in Emerging Markets
There’s also the potential that alcohol companies could find traction, and revenue, in emerging markets. For instance, in recent years, it’s expected that countries like India, China, Brazil, and Mexico will see demand for alcohol beverages increase, which could lead to more sales for alcohol companies — and potentially, returns for investors.
Again, it’s important to bear in mind the inherent risks in any emerging market, which can include political or economic upheaval that may roil markets or impact local consumption of consumer goods.
Cons and Risks
While there are potential benefits to investing in alcohol stocks, there are drawbacks, too. Here’s a rundown.
Regulatory and Legal Challenges
As previously discussed, there are many local, state, and federal regulations that govern the production and sale of alcohol. Those rules differ from place to place, and can take a variety of forms: some dictate how and where alcohol can be sold, for instance, and in some places, there are certain times of the day or week where alcohol sales are prohibited.
In some cases, an entire town may be legally “dry” — and alcohol cannot be sold there (but may be available in a neighboring vicinity).
Depending on the type of alcohol investments being considered, understanding the implications of local laws is important.
Changing Consumer Preferences
Also as discussed, consumer tastes wax and wane — and if some start moving away from drinking alcohol for one reason or another, there could be an effect on the industry at large, and investors. That doesn’t mean that alcohol companies can’t pivot, of course, but keeping up with current consumer demands can and will eat up resources, too, potentially affecting investors.
Competition and Market Saturation
There are myriad alcohol companies out there, big and small. No matter where you are, for example, you’re probably not too far from a bar, a store that sells beer, or some other way to get your hands on a drink.
In other words: the alcohol market is big, and it’s saturated. That can mean there isn’t a whole lot of room for alcohol stocks to grow.
Top Alcohol Stocks to Consider
While there are many alcohol stocks on the market, here are the five biggest U.S. companies by market cap:
• Anheuser-Busch Inbev: The maker of popular brands such as Budweiser, Corona Extra, and Michelob.
• Heineken: Makes Heineken, Amstel, and more.
• Constellation Brands: Produces a wide variety of beer, wine, and spirits.
• Diageo: Makes spirits such as Captain Morgan, Johnnie Walker, and Smirnoff.
• Brown-Forman: Produces spirits such as Jack Daniel’s and Woodford Reserve.
💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.
How to Invest in Alcohol Stocks
As far as actually investing in alcohol stocks goes, it’s not much different than investing in any other type of stock. There are a few ways to add alcohol stocks to your portfolio.
Direct Stock Purchase
You can buy alcohol stocks directly and add them to your portfolio, for starters. That means firing up an existing brokerage account, or opening a new one through a brokerage, choosing the specific alcohol stocks you want to buy, and purchasing some shares (read more about the difference between shares vs. stocks).
ETFs and Mutual Funds Focused on Alcohol
Investors can also add alcohol stocks to their portfolios by purchasing certain ETFs (exchange-traded funds) or mutual funds.
These types of funds can focus or specialize in specific industries, such as the alcohol sector. Investing in mutual funds or ETFs may also be a way to hedge risk when investing in the sector, as funds tend to have a degree of built-in diversification. Not that alcohol stocks are high-risk investments necessarily, but for more cautious investors, funds may be worth checking out.
Analyzing Alcohol Stocks
Doing your homework before buying stocks is important if you’re hoping to maximize your returns, or at least not lose your initial investment. While there’s no guarantee that you won’t, you can do some basic research and due diligence on the stocks that you’re thinking of investing in.
That may include doing some fundamental research, such as checking out the financial metrics and earnings reports of specific companies. It can also involve looking at the overarching trends and risks affecting the industry, too.
Ethical Considerations
There may also be ethical concerns that investors need to contend with as well when thinking about investing in alcohol stocks. Alcohol is a dangerous substance — it’s addictive, is associated with diseases and negative health effects, and more. There’s a reason that it’s regulated.
As such, some investors may not be comfortable with adding alcohol companies to their portfolios.
The Takeaway
Investing in alcohol stocks may be a way to diversify your portfolio, but investors should be aware that there are some unique risks (and potential benefits) to investing in the sector. There may also be ethical considerations investors want to think about as well, though that’ll depend on their individual preferences.
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FAQ
How do economic downturns typically affect alcohol stocks?
Economic downturns may see alcohol companies’ shares lose value, but they may not lose as much value as other types of stocks, since consumers tend to buy alcohol no matter the prevailing economic conditions. There are no guarantees, though, that past trends would continue during future downcycles.
What are the main subsectors within the alcohol industry for investors?
Investors may consider investing in companies that produce the main types of alcoholic beverages, such as beer, wine, or spirits.
How do changing consumer preferences impact alcohol stock performance?
Consumers’ preference can and do change, and that may affect alcohol stock performance in that sales may dip or increase. Further, if companies need to pivot into different products, that may eat up additional resources, affecting stock performance as well.
Photo credit: iStock/mihailomilovanovic
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