I’m in the process of trying to save up enough money to open a Roth IRA. From everything I’ve learned, an index fund is the way to go. I was all mentally prepared for everything when Done By Forty’s article threw me for a loop. In it, he raises questions about supporting some of the most socially irresponsible companies and not even knowing it…because you’re investing in it through your index fund.
The large consensus from commenters was, “Oh, well, what can I do? Sometimes evil wins, and I want to be invested in things that profit.”
That wasn’t good enough for me. I want to make money as much as the next guy, but I’m not willing to sacrifice the sake of our planet and the welfare of my fellow human beings for extra wealth. So I researched. And it turns out there’s a whole field of investing dedicated to this exact issue. It’s called Socially Responsible Investing (or SRI.)
They Have Index Funds!
If you search for an SRI index fund, you’ll find funds managed with social responsibility in mind. I know what you’re all thinking: does Vanguard have one?
Yes. It’s the VFTSX and you can check it out here. I can’t lie to you…it’s not performing as well as the S&P 500 right now. (In this very moment of writing VFTSX sits at $18,445.26 while the S&P 500 is at $21,907.) But it has a low expense ratio of 0.28%, and no front or back end loads.
“Oh!” you cry. “I knew SRI couldn’t produce the same results I’m getting now!”
Hold on a minute. Vanguard’s fund isn’t outperforming the S&P, but others most certainly are. Take Parnassus (PARNX.) They’ve been steadily outpacing the S&P since we started this slow crawl out of the Great Recession. No loads, and the expense ratio is 0.86%. Over the past 10 years it’s outperformed the S&P 500 by 1.85%. It only has 45 holdings, but it’s record is pretty solid.
Or look at TIAA-CREF’s Social Choice Equity (TICRX) which has a ten year record of +0.15 over the S&P, no loads and an expense ratio of 0.45%.
The point isn’t to tell you which funds to invest in. Let me say that again: this is not an article to reccomend which funds to invest in. Markets are volatile and I only minimally know what I’m talking about. The point is that it doesn’t really take that much research to find an index fund that could allocate your investments into companies that aren’t abusing human beings or killing the planet I want my children to grow up on.
But that’s ACTIVE investing.
Kind of. Not really. The way I see it, it’s the same as investing in any other index fund except you’re banking on the fact that the fund will not funnel money into inhuman work conditions or chemical “spills.” If that’s active, sign me up. But I’m not going to be picking my own stocks. That’s the whole reason I want an index fund…I want someone smarter than I am to capture a snapshot of the market, and if they’re going to do it in a socially responsible way that will promote businesses that are, in fact, socially responsible, that’s the fund I want. Especially since the performance issue seems to be a myth.
But therein lies the moral dilemma of investing in even SRI Index funds: you are letting someone else make your moral decisions for you. Unless you keep up on every investment in that fund, you don’t really know if they’re making decisions you’d agree with. For example, VFTSX’s 4th largest holding is JPMorgan Chase, which is on the list of bad companies that orignally spurred Done By Forty’s post. So without becoming an active investor, there’s really no way to be 100% sure you support where your money’s going.
But an SRI index fund is a hell of a lot better. At least they are trying to implement some type of code.
I don’t care. I’m not switching.
Fine. I understand that. But that doesn’t mean you can’t help make changes for better. Take the investments you have now. And try these things:
- If you care at all about climate change, check out the CDP’s Climate Perfromance Leadership Index. As a stockholder, voice your opinion that you’d like company disclosures and practices to be sufficient to get them into the top performing category (A-Band) on that list.
- File a shareholder resolution. You may have to have own $2,000 in company stock for 1 year+, but you can do that collectively. So find some other people who care. Know that you won’t win majority support, but generally if 20% of stockholders voice an opinion, the company pays attention. I’d argue that this is more powerful than switching the type of index funds you buy. It’s more work, but you’re actually working to change the “evil” part of the company into something good. I’m guessing you’d feel pretty amazing after all that. (All numbers in this paragraph can be found in USSIF’s “Investing to Curb Climate Change.” I’d highly recommend the short read. If you don’t care about the planet, but do want to improve work conditions of people in third world countries, or whatever your cause is, you can apply the same principles and process…just change the motivating factor.)
- Tell the investment management company that you want to see more of a consciousness towards SRI in your index fund. If you have a specific example, site it. Enough people expressing their opinions can really produce a change.
Before I wrap this up, I want to mention Done By Forty’s article one more time. It’s well-written and thought provoking. It’s called Hotel Soaps and Externalities.