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"Socialism failed because it couldn't tell the economic truth; capitalism may fail because it couldn't tell the ecological truth." - Lester Brown

Alternatives to Investing in Socially Responsible Funds

By , October 24th, 2007 | 9 Comments »

socially responsible

In Investing in Socially Responsible Mutual Funds, I explained that most socially responsible funds provide subpar returns compared to traditional funds. I also talked about how you may not agree with many of these funds’ definition of socially responsible. If you’d like to invest only in companies you support or try to achieve better returns than the mutual funds, consider these alternatives.

Pick Your Own Stocks: To find socially responsible companies, you can start by perusing the lists of companies included in the various socially responsible mutual funds. You could also check out the Domini 400 Social Index made up of 400 companies that meet selected social and environmental criteria, look at GreenFestival’s partners/sponsors, or simply research companies you are already familiar with and like. Benjamin Graham’s classic, The Intelligent Investor, is a good place to start learning how to evaluate stocks that will serve you well over the long term.

Of course, successfully investing in individual stocks can be challenging for the inexperienced, and some studies suggest that your stock investing results will be similar whether you spend hours researching your options or draw them out of a hat.

Why Socially Responsible Investing Might Not Matter: I hate to say this, but investing responsibly might not have the impact you think it does. When you buy stock (or a shares of a mutual fund consisting of multiple stocks), you’re purchasing existing shares from another investor. Purchasing this type of stock does not give any new money to the company whose stock you are purchasing, so whether you purchase it or not does not have any impact on that company’s operations. The only time when your investment gives money directly to a company is when you participate in an initial public offering, or IPO.

The main reason you might want to invest only in companies you feel are responsible is so that you do not profit from the unsavory practices of other companies. If a certain company were involved in a foreign war so that they could get access to that country’s oil, and the company’s access to that oil caused your stock to go up, then you would essentially be profiting from a war. If you don’t want an increase in your portfolio to coincide with the death of innocent people, then you might want to avoid owning this company. If you don’t buy that stock, the company will still steal the oil — you just won’t make any money. Even if lots of people don’t buy that stock, the share price will drop, making it an attractive purchase for less scrupulous investors. In this situation, you are profiting from a company’s operations, but you are not directly supporting them.

Invest in a Better World: Because a company will carry out its operations as usual regardless of whether a few socially conscious investors buy their stock or not, a better way to have an impact is by voting with your consumer dollars. Simply put, give your money to companies whose business practices you support, and don’t give it to companies you hate.

If mutual fund or stock investing isn’t for you but you still want to put your money where your mouth is, here are a few options. While your return on some of these “investments” may be hard to quantify, if you believe that a rising tide lifts all boats, you should see positive effects from these choices in the long run:

  • Purchase free trade chocolate, coffee, and other items.
  • Don’t buy items produced by dangerous, destructive, and irresponsible industries.
  • Buy used.
  • Buy sweatshop-free clothes and shoes.
  • Donate your time or money to charity.
  • Contribute to a scholarship fund for underprivileged students.
  • Do volunteer tutoring work.
  • Work for a non-profit.

To sum up our two part series on socially responsible investing, here are your options when it comes to harmonizing the way you use your money with your beliefs and your desire to succeed financially.

1. If high returns are more important to you than investing responsibly, stick with the wide array of high quality traditional index funds that offer low expenses and sound returns. Then, find other ways to support the causes that are important to you, which might be the best way to vote with your dollars, anyway.

2. Balance your desire to have a clear conscience with your desire to succeed financially by putting part of your money in traditional funds and part of your money into the best socially responsible funds you can find, even if it means you have to sacrifice some returns. Give it some time and see how things go. If you’re happy with the results, add more money. If you aren’t, you can always take your money back out.

3. Only invest in socially responsible funds, because you just can’t stomach owning companies whose business practices make you scream, and accept that your returns will probably fall in the 6% to 8% range at best. Keep in mind that what seem like very small percentage points today really add up over time and can have a detrimental effect on your long-term wealth accumulation.

4. Get cracking on the ton of research it will take to get good at picking your own stocks (or find some willing monkeys and a dartboard). This option makes the most sense for those who are very particular about their criteria for social responsibility or for anyone who already has strong stock-picking skills. Consider using the money you’d normally mark for donations to invest responsibly. This way, even if your investment performs poorly, you’ll have no less money than you were expecting to.

5. Avoid the markets altogether and invest in other ways, such as investing in your education, finding a socially responsible bank, buying a home, or purchasing an apartment building. When shopping, give your consumer dollars to companies you want to support.

Conclusion: If the low returns and high fees of most socially responsible mutual funds aren’t making you happy, or if you don’t want to own some of the companies these funds own, consider investing in the individual stocks of companies whose business practices you support. If you aren’t up to the challenge, there are still plenty of other ways to follow your moral compass. Your own beliefs and the amount of time and effort you are willing to spend researching your investments should ultimately determine where you choose to put your money.

Image courtesy of carf

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  • nanamom says:

    I also only use socially responsible mutual funds. WE make sure they do not invest in companies or funds that have tobacco, gambling, pornography, or alcohol. We get less return if you look at the financial part but we are doing what we believe the Lord would have us do.

  • Jason says:

    I feel that “Socially Responsible” investing was developed by financial advisors for the express purpose of tapping into the money that conservatives and environmentalists were keeping out of the market.

    People invest in these stocks, or funds, with some belief that their actions will help that company and hinder other companies, but the truth is, like you said, it doesn’t matter to the company. The truth of the matter is that vice is profitable and that the government’s attempts to regulate vice is counter to the founding principles of this country. If you are investing for your long-term future, then the best avenue for your investing is in “vice” companies such as Phillip-Morris. The fact of the matter is that they generate some of the best returns around.

  • Debbie M says:

    Some of my least favorite companies appear in socially responsible funds in spite of things like monopolistic behaviors, so I don’t go there anymore.

    One advantage of those funds, though, is that they have clout when speaking to business leaders. The guys in charge of those funds can tell a company head that if only the company would stop or start doing something, the fund would love to invest in their stocks. And they get some real results this way.

    If you are buying your own stocks, you can also write to the company as a stock holder and request some changes. And as a stock holder you get voting rights, and if anything relevant ever comes up for vote, you can have some say.

    Mostly, however, I agree that the easiest and best ways to make a real difference are to research where and how to spend our money and how to donate our time and money.

    If people quit buying a company’s stock, the price will plummet, but that won’t drive the company out of business. It just means they can’t sell more stocks to get more money and that the bigwigs who get paid partly in stocks will get less money. And all of that is extremely unlikely because giant mutual fund companies and retirement fund companies will snap up whatever you won’t take.

    But if people quit buying a company’s products or services, that company will go out of business. And if you pay more for better products and services, more people will be willing to provide those.

  • Georgia says:

    I think that avoiding the market all together is the best way if you want to be socially responsible or picking individual stocks you believe in.

  • anonymous says:

    I agree with Jason. Sorry to be blunt, but SRI is a product invented by Wall Street to make money for Wall Street at the expense of naive investors.

    I object to this language: “If high returns are more important to you than investing responsibly, stick with the wide array of high quality traditional index funds that offer low expenses and sound returns.”

    As you’ve pointed out in this article, investing in socially “responsible” companies bears no relation to “investing reponsibly”. In fact, based on the diminished returns investing in socially responsible companies correlates more closely to investing *irresponsibly*. It would be irresponsible of a financial advisor to recommend these funds to their clients.

    You are far better off investing in an index fund and using the increased profits you reap over a SRI fund to buy products from socially responsible companies.

  • Barry says:

    Study after academic study has proven that investing in socially responsible companies and/or mutual funds does not mean sacrificing returns. In addition, the screening out of irresponsible companies is only one small component of socially responsible investing (SRI). Positive screening, e.g. investing in alternative energy, organic foods, etc. is a very large and important component of SRI. Moreover, shareholder advocacy efforts by the SRI community have made significant inroads into changing corporate behavior, particularly in Europe. Finally, and maybe most importantly, SRI includes community investing/microfinance which provides needed capital to underserved communities and entrepreneurs both domesticallly and abroad.

  • Lance Wilcox says:

    There are two assumptions at work in this article and the comments, both of which are simply false and need correction. (1) SRI was emphatically not invented by financial advisers to increase sales. They originally appeared in reaction to the divestment from South Africa in the 1970s and have gained adherents since, prompted in part by the egregious behavior of many American corporations (ExxonMobile, Wal-Mart, the tobacco industry as a whole) and, more recently, by concerns about the environment. Since most are no-load, in any case, most financial advisers gain nothing by them. (2) The returns from SRI are, as studies have repeatedly shown, entirely on a par with those of non-SRI funds. Morningstar has nothing but praise for Pax World Balanced Fund, giving it five stars. There are socially responsible ETFs, furthermore, with expenses around 0.5%. I would agree, however, that you probably have more direct social impact by placing your savings in community service banks, like ShoreBank of the Self-Help Credit Union, than in stocks or bonds as asset classes. I use SRI funds in part because the thought of paying for retirement by profiting off the likes of tobacco companies makes my stomach turn.

  • Cliff says:

    Thank you for having this discussion.

    I have felt for over 15 years that it is important for people to align their money with their values from the way you shop to the way you invest. It helps create the kind of world you want to live in.


  • Carnival of The Capitalists: October 29, 2007 » The StartUp Blog at PartnerUp says:

    […] L. Fontinelle presents Alternatives to Investing in Socially Responsible Funds posted at Saving Advice […]

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