When I first got started investing, I gravitated towards index funds. Index funds, as I learned from the brilliant author of “The Simple Path to Wealth,” are not only easier than picking individual investments, but they’re also smarter. They follow the market as a whole, which has historically gone up. So, the idea is that when you invest in the whole market via these funds, your retirement account balance will typically go up in the long run, too. Index funds have historically shown better returns than portfolios that actively trade individual stocks, and the fees on them are traditionally extremely low.
There’s just one problem with index funds. When you’re investing in the market as a whole, you’re inevitably investing in some businesses with questionable ethics. You might be investing in an energy company that is directly contributing to global warming. You might be investing in a company that contributes towards genocide. Odds are, when you’re investing in index funds you’re unintentionally funding something that goes directly against your personal ethics.
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I got to a point where my bleeding millennial heart couldn’t take it anymore. I started looking at socially responsible investing (SRI) options. SRI means different things to different companies. In my research, I came across a couple of problems.
First, while there are SRI index funds, the entire concept causes a paradox. If SRI index funds are screening companies out when they don’t meet certain standards, are SRI index funds still passive investments? Or are they actively managed? Most investors would tell you they’re actively managed. This is not preferable, as actively managed funds tend to underperform.
Historically, there haven’t been too many SRI index funds available, but the ones that have been around for a while do tend to outperform the market as a whole over the long term. The problem is that there’s not enough data or time logged to tell if this will be a consistent trend.
Another problem that could potentially come up is “sin stocks” — products that tend to cause harm, but that people gravitate towards regardless. The most common examples include alcohol, tobacco and guns. When you set your SRI investments to exclude sin stocks, your portfolio is likely to underperform. However, if you’re screening based on environmental, social and governance (ESG) standards, the results thus far have been arguably comparable to non-SRI strategies.
In the end, I decided I had to make the decision that would make it easier for me to sleep at night. I needed to know I was at least attempting not to fund companies that were killing the planet for my children or playing into slavery overseas. I couldn’t find an SRI index fund with a low enough minimum initial investment that I liked, so I turned to robo advisors who used non-index mutual funds instead until I build up my nest egg.
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I’m not telling you SRI investments are going to be as profitable as your typical index fund. They might not be. But, I am saying that I feel better about my financial decisions when I know I’m at least making an effort to not contribute towards negative outcomes like the global climate shift or crimes against humanity. I’m still saving for retirement. I’m still building wealth.
Even if we had conclusive evidence that SRI investing would slow that process down, it’s a sacrifice I think is worth considering.
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