How to invest for good
I’m 27, and I’m finally making enough money that I can save a little each month. I’d love to start investing, but the greed on Wall Street turns me off. Also, a lot of big companies are not so great about the environment. But my dad says I’m only hurting myself by keeping all my money in a savings account, and a few dollars sunk into an oil stock won’t really make a difference to the world—but could make a big difference to my bottom line. What should I do?
—Pete, San Diego
I hear you. As a little guy, it’s hard not to be cynical about The System, at least when it comes to investing. But I also get what your father is saying. He doesn’t want you to stunt your financial growth by sitting on your money, when, historically, investing in the stock market has been the best way to make sure your money outpaces inflation. What if I told you that you were both right? (I know, I know, that’s never as satisfying an answer as it should be.)
First, let me say that I’m assuming the money we are discussing here is truly “extra.” If your company has a 401(k) retirement plan, you absolutely need to sign up for it and contribute enough to max out any matching funds. You should also have paid off your credit cards and other high-rate debt, and have money stashed for emergencies. (For more on your money priorities, see this chart.)
When you’re ready, here are three tips for socking away your investing dollars where you can feel good about them.
- Put your money in “socially conscious” funds. Being what’s known as a socially conscious or socially responsible investor is becoming easier as more people choose to support causes they care about (or, just as important, withhold support from companies that don’t reflect their values). Your priorities may include environmentalism, support for human rights, or a commitment to keep your dollars out of industries like tobacco or firearms. There are mutual funds that invest only in stocks that conform to certain principles—but make sure that the companies offering them aren’t charging high fees, betting that you’ll be so focused on your beliefs that you’ll ignore your bottom line. To look for inexpensive options, check out SocialFunds.com. I like the Vanguard FTSE Social Index Fund (0.20% expense ratio), or if you want to invest in an ETF, check out iShares MSCI KLD 400 Social ETF (0.50% expense ratio). It’s harder to be a socially conscious investor in your 401(k), because your options are limited to those offered by your plan. But in the wake of new regulations, that is changing.
- Invest like a local. A growing number of people are choosing to sink their money into businesses where they live. This type of investing got a big boost after the financial crisis a few years ago, when people wanted to help rebuild their communities. There are a number of ways to put your dollars to work on the local level, from regional stock exchanges to more homegrown organizations that allow members to sink their money into promising businesses. For instance, through Cooperative Capital, a startup in Michigan, people can invest in buying, rehabbing, and renting or selling foreclosed homes in Detroit. Some people call this type of investing “locavesting.” You’ll have to do some research about what’s available in your area, and what the rates of returns will be. A good place to see the various options is locavesting.com.
- Do your own research. Investors should always do their homework. That’s doubly important if you want to be deliberate about where your investing dollars go. For instance, the Vanguard FTSE Social Index Fund I mentioned earlier tracks an index of large and mid-size companies that meet “certain criteria related to the environment, human rights, health and safety, labor standards, and diversity.” And it explicitly excludes companies involved with weapons, tobacco, gambling, alcohol, adult entertainment, and nuclear power. However, given your distaste for big banks, you should know that three of the top ten stocks the fund holds are JP Morgan Chase, Bank of America, and Wells Fargo. You can find info like this in a fund’s annual report or prospectus, available online. Be prepared to accept that there isn’t an “ideal” fund out there. That old saying applies: Don’t let the perfect be the enemy of the good.
So, if you’re a socially conscious investor, will you lose out on profits to your conscienceless peers? There are two schools of thought on this. One says you will, but it’s worth it to know you’re supporting your values. The other is that in the long run you’re being smart, because the values you’re supporting with your dollars—like good labor practices—ultimately make for sound businesses as well.