This post was inspired by two things. First, two months ago there was the tragic mass shooting in Orlando. I saw a number of posts on social media where people were trying to divest their interests from gun stocks. As I noted in a post on Facebook most of my friends had nothing to worry about because the vast majority of mutual funds, including most index funds, don’t invest in gun companies because those companies market capitalization (meaning the size of the company) isn’t big enough to be in most mutual funds. So people had really nothing to worry about.
The second inspiration came from a colleague of my mine who has most of her primary holding in the TIAA-CREF. Specifically, she puts most of her stuff into the social choice equity fund. I have a number of colleagues who do the same thing. They want to feel good about their investments so they put it in this fund. Many teachers have their investments in TIAA-CREF and TIAA-CREF can be a great company. I personally don’t like the choices they have so I switched to Fidelity.
But the point of this post is to address this notion of socially conscious investing. Here is the problem with it.
First, I think many of us want to do right by the world and that includes the way we spend our money, including investments. The problem is that most of us don’t have the time, knowledge, or acumen to be good stock pickers. So picking individual stocks that focus on social justice is out of the question.
Second, if we see a fund like Social Choice we automatically think that this mutual fund invests in companies that do good. And that is certainly possible. I think most companies generally try to do some good. However, it is almost impossible to police every single company and every single holding they have. For example, Google I think is a company that tries to bring good to the world in general. However, because they have grown so big and are everywhere many of my investor friends who want to be socially conscious are suspect. And if they find that Google has engaged in some kind of business practice or associated with a company that has engaged in some kind of shady business practice that gives them fodder to play the “see I told you so game.”
When that happens people would rather put their money under their mattress. It is a zero-sum game. It either has to be this way or that.
Third, the problem with funds like social choice is that the returns they deliver are really not that good. You are better off putting your money into an index fund that buys the entire market (including god forbid companies like Wal-Mart, energy companies and the like) instead of relying on actively managed funds that generally underperform the stock market.
To me the best way to be a socially conscious investor is to try to make investment choices that will maximize your returns (that doesn’t mean investing in shady deals) but then you can use that money for good. I would rather us be our own agents of good instead of relying on others.
That doesn’t mean you have to be stinking rich to do so, but just because you put your money in an investment like a social choice equity or other socially conscious funds doesn’t mean that you are being a socially conscious investor. You can do more good with extra money for your own community, what you invest and volunteer for, than you can with making less of a return.
The Bottom Line: Socially conscious investing is a worthy goal, but it is almost impossible to vet every company, every decision, every item, and discard them out of your mutual fund. If you have time to do that then that is great. You must also be a great stock picker, which 99% of Americans are not. To be socially conscious I still think a portfolio of index funds that maximizes your return so you can take that money and be more socially conscious in your own life.
Make your own conscience consumer decisions. Get directly involved. That is the best way to be a socially conscious investor instead of leaving it to a money manager to take your agency away. There is nothing wrong with socially conscious funds, but you may be doing yourself more harm than good in the long run.