Alternatives to Investing in Socially Responsible Mutual Funds

In Investing in Socially Responsible Mutual Funds last week, 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.

Photo by Nicholas T

Related posts:

What is a Money Market Fund?
How to Choose a Mutual Fund
Socially Responsible Investing, Part 1
Socially Responsible Investing