When Should You Say No to Socially Responsible Investing
Thanks to millennials, more investors are concerned about the companies in which they choose to invest. Investing, for many, is not just about big growth and beating forecasted projections. Some investors want to know that the businesses they invest in are doing good by society and the environment. So, many investors avoid stocks that are deemed harmful such as defense companies, tobacco stock, gun manufacturers or oil producers.
A socially conscious investor would seek businesses that believe in improving the environment, giving back to the community and playing a role in improving society. However, while socially responsible investments will make the investor feel better, they may not be the best way to invest money.
There Are Many Ways to Define Socially Responsible Investing
According to critics, there is no clear way to define a socially responsible investment. Building a stock portfolio with socially conscious companies is not a science, it’s subjective. Even if all of the investment are made in socially conscious companies, it’s hard to define “social responsibility.” These variations make it difficult to generate a cohesive investment strategy.
Advocates of socially responsible investing claim that companies that care about the environment or society, should in time see an increase in share prices. However, there is a flaw in this concept. Just because company recycles or gives back to their community, it does not mean there will be a boost in their stock price. Stocks rise and fall based on increased sales and earnings, whether the company is socially responsible, or not.
The Price of Socially Responsible Funds Is Not The Cheapest
The fees you pay for an investment are important especially when choosing a socially responsible (SRI) fund. The costs vary, as they do for traditional funds. This means that some SRI funds cost more than others. When you pay the lower fee for a traditional fund, you run the risk of investing in big oil or a gun maker, which the fund manager may feel is a socially responsible company.
To ensure you are not exposed to these types of investments, you will have to pay for an SRI fund where the fees may eat away at your profits. Even ETFs, which often have lower fees than mutual funds, may be higher when the fund in an SRI. This means socially responsible stocks may be costlier than investing in funds that may contain so-called bad companies.
Your Socially Responsible Investing Could Shut You Out of Market Gains
It’s great to be passionate about an idea or belief, however when it comes to investment people need to remember the purpose of an investment. People invest to make money. Sometimes a person can get caught up in the social or environmental elements on an investment that they miss run-ups in other industries. They are missing out on investments that could have made them money, which they could have used to donate to their cause. If you look at oil companies, last year oil prices plummetted which led to a downturn in many oil-producing stocks. But these stocks have rebounded. An investor who balks at oil investments would have missed this run-up in share prices.
The Bottom Line
Socially responsible investing has its place in a portfolio. However, you can’t focus merely on company’s social behaviors and actions. You have to gauge how socially responsible a company needs to be for you to be comfortable. If you invest in an SRI, you may be overpaying. Also, if you focus on a company’s social behavior and nothing else, then you may miss gains in other industries. Remember, if you make money from your investments you can give to charities that can help with social and environmental issues.