Chapter 21
The Financial/Personal Commitment
In This Chapter
◆ Deciding on socially responsible investing
◆ Placing financial values on personal values
◆ Setting investment and SRI goals
◆ Measuring your progress
If you have gotten this far in the book, there’s a good chance you are giving serious consideration to socially responsible investing in some fashion. As noted in the introduction, this book is neither pro- nor anti-SRI. It has presented the basics of what SRI is and how it works, some benefits and some drawbacks. You should be in a better position to decide if this form of investing works for them or not. It’s not for everyone and if that’s you, at least you are making an informed decision when you move on to another investment strategy or philosophy. Others may have found something that resonates in the socially responsible investing world with the way they believe things should work. If so, you may be ready to make a commitment to SRI.
No rules detail how you invest in a socially responsible way. No regulation says all or even a certain percentage of your investable assets should go to SRI. The decision is entirely up to you. Some investors may want to jump in with both feet and convert all of their investments to SRI. Others may be more comfortable with just a part of their money in SRI investments, at least at first. Social and shareholder activism appeals to some investors—others should be content with investments that are more passive.
Community development investments are gaining popularity and you may find that helping fund projects in your community is immensely more satisfying than owning faceless corporations. The handy thing about SRI is that all different types of opportunities allow investors to a wide choice while still remaining under the same SRI umbrella. You should go into SRI investing with your eyes wide open about potential investment returns that can vary dramatically depending on the form of SRI investment and a number of other factors. You need to think about potential return and your financial goals when you make commitments and changes in your lifestyle that could be upset by a negative market situation.
Deciding on SRI
Using socially responsible investing products for your investments is a major decision and one you and your partner should consider with care. You should feel strongly about some core issues—strongly enough to accept lower than market rates, at times, and willing to stick with your investment plan even when other sectors of the market are rising faster. It is unlikely any investment strategy, traditional or SRI, will be successful all of the time and in all types of market conditions.
Responsible Tip
To borrow a political phrase, the world of SRI investing is a big tent that accommodates a wide variety of investors with different interests and agendas, all calling themselves socially responsible investors.
A major portion of your SRI decision will involve identifying those values you feel strongly enough about to make priorities in your SRI investment plan. Some values clearly lend themselves to SRI investing, while others may be harder to identify as investing goals. Here’s where some reading and research can help you see what investment options are available and what other investors have done. You may also want to decide how much of your investment plan should go into SRI. Some SRI investors view it as a way of life, so it is never a question of what percentage of their assets they will invest—it will always be 100 percent. But it is not necessary to make that complete of a commitment if you are not comfortable, at least in the beginning. Decide what feels right for you and either start at that level or have a plan to be at that level by a certain date.
Red Flag
Your level of commitment to SRI investing is not a reflection of you core values. Money is a deeply emotional issue that most people don’t fully understand. Don’t feel pressured into doing or not doing anything with your money that doesn’t feel right to you. If SRI investing feels like the right thing for you, then proceed at your own speed and comfort level.
Consider How Much You Want to Commit to SRI
Some investors are reluctant to start a new program with all of their assets at once. This is understandable and perhaps even prudent. With the SRI mutual fund market growing in numbers each year, selecting investments is not easy. Even with the rapid growth of funds, there are still not near the number or variety of traditional mutual funds. This means your options in some fund areas may not be large. Investors can get nervous when they have only a few funds to select from in a particular class.
How you decide to begin your SRI investment program is a personal decision that must make emotional and financial sense to you. Just because your brother-in-law does it one way and brags about it, doesn’t make it right for you. To give SRI investing a legitimate chance, however, you should have enough invested to give you a good reading on how you are going to react to its returns (which may be above, at or below normal, depending on the fund and the market).
You should also be aware of what type of SRI investor you are going to be. Some new SRI investors find that following shareholder resolutions is exciting and they can become involved in social activism through a variety of organizations associated with the same values they share. Other SRI investors are content to periodically read news from the fund, but otherwise take a more passive role in their investments. Neither is right nor wrong, but discovering (if you don’t know already) how you will interact with your SRI investments will be instructive in determining how much you may want to commit.
Responsible Tip
Socially responsible investing offers the opportunity, if you want it, to be more involved than other types of investing. SRI investing will raise issues that lend themselves to your personal action as well as what your money is doing through your investments. For example, boycotting products or companies involved with oppression or other human rights violations.
Set Up Investment Plan to Accomplish Goals
If you decide to become a socially responsible investor, you shouldn’t abandon basic investing principals—they’ll work just as well with SRI products as they do with traditional mutual funds. You don’t need to own dozens of mutual funds to have a well-diversified portfolio—four to six funds should cover most investors. Here’s a basic outline of a diversified portfolio:
◆ Large cap growth stocks—You’ll want most of your money here because, over time, this is where the most consistent returns will come from.
◆ Small and mid-cap stocks—These stocks, especially the small-cap stocks, can be vehicles for rapid growth, but they are more risky than large-cap stocks.
◆ Foreign stocks—A small percentage (less than 20 percent) of your portfolio in foreign stocks provides for growth in the global market.
◆ Bond funds—Every portfolio needs bond funds—intermediate and short-term are usually the best. The closer you are to retirement, the larger the percentage of your portfolio should be in bonds.
◆ Money market funds—You can’t have too much cash. Three to six months for emergencies is a minimum, while the closer you are to retirement, the more you may want on hand. Your cash can be in bank CDs (consider a community development bank—see Chapter 8) or U.S. Treasury T-Bills.
Socially responsible investing funds have offerings in all these areas although not extensive choices in small cap, foreign stocks, or bond funds. As the industry continues to expand, count on more funds being added, some of which will begin to fill out those thin coverage areas. See Appendix A for more information on different funds that are available.
Virtually all the SRI funds offer an automatic debit service that withdraws a preauthorized amount from your checking account each month (or other period) and buy additional shares of the fund. This is an excellent investment strategy and one that lets investors build wealth in an intelligent manner that runs itself. The strategy is called dollar cost averaging and it is one of the best tools available to the average investor.
Responsible Tip
Not only are new funds being added, but some existing funds may focus on areas that are important to SRI investors, such as alternative fuels and so on.
def·i·ni·tion
Dollar cost averaging is investing a fixed amount on a regular basis in a mutual fund, usually monthly and through an automatic debit to your bank account. This investment method means you buy fewer shares when prices are high and more share when prices are lower resulting in an overall lower average cost.
Meeting Your Financial Goals
Like any investment program, SRI investing will yield different results depending on market conditions. To achieve your long-term financial goals, you should be prepared to make adjustments along the way. This is true of traditional investing, also. Your long-term results are a factor of the amount invested, the return earned, and the years of compounding. To achieve a financial goal in 20 years (retirement with a certain sum in your nest-egg), you begin with a program that projects out 20 years of an estimated return. Most estimates are never right for very long—the future is too unpredictable. If the return you are earning is less than projected, you will need to increase your investment to still meet your long-term goal. As you go into your investment program, the number of years remaining decreases, so does the compounding. Again, adjustments may need to be made. You may need to take on more risk to earn a higher return to compensate for a shorter compounding period (although this is not usually a good idea as you approach retirement).
Responsible Tip
You can’t escape the math of investments. SRI investors have fewer alternatives to switch to than traditional investors do when adjustments need to be made. This is why they should be extra diligent in monitoring their financial progress and make adjustments as needed.
Socially responsible investing faces the same math. If you are falling short of your long-term goal, something is going to have to adjust. Here is where a shortage of product can hurt an SRI investor. If no funds in the area you need are performing, well, you face the dilemma of sacrificing financial goals or your values. This may become less of a problem as new funds and other products are added. Of course, your SRI investment could take off (some have in the past) and leave you to face an embarrassment of riches.
Active SRI Investors
While you can remain a passive socially responsible investor, you may find it more meaningful (and potentially profitable) if you spend some time with your investments. One big criticism of mutual fund investors (traditional and SRI) is that they don’t know what they own. This doesn’t mean you have to memorize the holdings of every fund you own, but it does mean you should spend enough time studying the list to have an idea of what type of company the fund owns. If you stick with this for a while, you’ll soon spot when the fund manager switches strategy and begins bringing in stocks that don’t seem to fit the previous pattern.
You’ll also want to know what stocks the fund holds to see if it is sticking close to the strategy it advertises in its prospectus. A sharp deviation from the stated strategy, which was why you bought the fund in the first place, may indicate trouble with earnings. Being an active investor, however, doesn’t mean jumping from fund to fund or stock to stock chasing high returns. Investing research over the years has shown that frequent trading is not a recipe for success. In fact, frequent traders are more likely to lose than win. Investors in individuals stocks will pay commissions and possibly high taxes on short-term gains that cut deeply into trading profits. Many mutual fund families discourage and may penalize accounts that attempt to frequently trade in and out of a fund—the process disrupts the funds redemption and cash flow cycles.
Responsible Tip
While active investing may pay off for the attentive investor, there can be too much of a good thing. Most research indicates frequent traders—investors who jump from stock to stock or fund to fund—don’t do as well as investors who make much fewer adjustments. Trading costs, taxes, and fees can eat into any profits traders generate.
Know What You Own in a Mutual Fund
It is very important to have a sense of what stocks you own in a mutual fund. This information is important for two reasons:
◆ Screening—Despite screening, you may find the fund holds companies on a regular basis that you believe do not belong in the SRI fund. This may be portfolio creep, which we discussed in Chapter 20, or it may be the company was not eliminated by a screen and you think it should be. Screening occurs (either positive or negative) in just about every SRI mutual fund. The outside consultants that are usually responsible for this information may not see the company the same way you do. At any rate, screening, especially positive screening is very subjective. If you are a regular observer of a fund’s holdings (since they may change frequently), you will be tipped if a new fund is SRI in it marketing, but much less so in its investing. If you know what types of companies belong in the fund, you will know if the fund matches your values. Critics of SRI, as we saw in Chapter 20, complain the screens are too loose and let companies through that should be excluded. This is a subjective conclusion that each SRI investor must reach. If you are very passionate about your values, you may find the some screens are too loose for your tastes. This may help you decide on one fund over others or you may decide that it will be easier to be true to your values if you invest in individual stocks. Doing your own screening or employing a financial services professional to help you will take more time and expense, however the purpose of SRI investing is to be true to your values. If you feel strongly enough about your values, the extra work and time will not seem burdensome.
◆ Investment overlap—If you own several mutual funds (SRI or traditional), you may believe you have diversified your holdings. Unless you dig deeper, however, you won’t know for sure. It is possible that the mutual funds hold many of the same stocks. This means you have bought the same group of companies under different mutual fund names. Your portfolio is not diversified. A major market direction shift might hurt these companies, thus all the funds that own them. This can be a real problem, especially for SRI funds because their investment universe is limited by screening and many funds use one of a small number of outside screening services. If you owned three large cap growth SRI funds, there would be a good chance a substantial percentage of the stocks held by all three funds would be the same.
Responsible Tip
When you hold several funds that own many of the same stocks, you have voided the market protection of diversification. Owning more than one large cap growth fund is probably unnecessary and a waste of money. Spread your investments over different size companies and industries for the best protection against market changes.
Avoid Frequent Trading
Frequent trading is not a successful strategy for most people. Most investors have better results doing their homework before making an investment and sticking with their decision. Investors in individual stocks are more successful with a careful analysis upfront and a buy and hold strategy. If the economy changes or something happens to the company, they can re-evaluate their position. Investors who chase the latest hot tip are often disappointed because they usually buy the hot tip when it has already been bid up past its true value. At some point, the market will reprice the stock according to its true value and the stock will plunge. This usually catches amateur investors in the classic buy high-sell low position, which is not a way to make money. Trading aggressively is best left to professionals and even they have a difficult being right most of the time.
The same is true of mutual funds, although many will not let you hop in and out of the fund chasing high returns at another fund within the same family. Chasing returns is a bad idea even if the fund would allow it for the reasons list above.
Monitor Progress
As an SRI investor, you should be monitoring you progress on two levels, the first is how your SRI investments are tracking to your values. Secondly, you must also watch how they are working toward you financial goals. This sounds more complicated than it needs to be, however, it is important that you remain engaged with your investments. Part of the socially responsible investing experience for many investors is staying current or knowledgeable on important issues. Frequently, SRI investors become involved in social activism around a value that is important to them. Investing with the value in mind is only one part of how they show their commitment to what is important.
Responsible Tip
A management maxim says: If you can’t measure it, you can’t manage it. The wisdom of this is that you can’t track progress or digression without some way to measure. The same is true of your financial and SRI goals.
Measure Financial and SRI Progress
Tracking your financial progress is important, not so you can brag at the office, but to make sure you can meet long-term goals. For most people, the biggest long-term goal is retirement and building your nest-egg is a job that can’t be put off until tomorrow. If your investment strategy isn’t working as you think it should, making adjustments is appropriate. Some investors find this a challenging task and using a financial professional, especially for this important decision, may be well worth the money. You can go crazy in a very short period if you try to follow the market on a day-to-day basis. In the short-term, the stock market can be a very rocky place with lots of movement in both directions. You should be looking at trends over quarters rather than days or weeks. Even quarters are short by many investment standards. Some argue that an annual re-evaluation is enough. Find a period that is comfortable for you and make adjustments only when you are certain there is a better use of your money in another investment.
Tracking your SRI investments follows some earlier comments in this chapter and others about watching for a change in the character of the stocks added to a fund. Screening is the primary, but not the only way, a stock is included or excluded from some funds. Funds will drop stocks because the company has not followed through on commitments to correct an SRI issue or for some other violation. The investments you should be most cautious of are those added later in the fund’s fiscal year, especially if the fund is struggling. These later additions could be “ringers” designed to boost performance, but have nothing to do with SRI. You will have to decide how you feel about this practice.
Stay Involved and Consider New SRI Opportunities
The SRI market is growing in size and product opportunities. If you remain engaged in the SRI industry and follow the news, you will be aware of new products and opportunities that may be a good fit for your investment style and needs. You can find resources in Appendix A to help you stay informed about socially responsible investing and what is new in the industry. These resources are reliable barometers of what is happening in the SRI market, but they are not regulatory groups. They don’t have any authority to restrict the use of the term “socially responsible investing” as associated with
Responsible Tip
The SRI industry is growing and major investment houses are taking up the banner. This means there will be more options and opportunities in the future for SRI investors. Staying plugged into the SRI community will alert you to new offerings.
specific funds. The bottom line as with all investing is, do your homework before committing any money to a new product.
No Perfect Investments
Finding the right socially responsible investment is the result of defining your goals and doing your homework. That sounds simple, but it can be more complicated than it sounds. As we’ve discussed in several areas already, setting SRI goals is as important as setting your financial goals. Both are required to be successful in SRI investing. The sticky part comes in matching your goals to the proper investment, whether it is a mutual fund, individual stock or a community development project through a local organization.
Some people, who practice SRI investing, have very strong feelings about what and how SRI should be done. Their idealism may make investment decisions difficult by insisting on very strict standards for their choices. While nothing is wrong with idealism or insisting on investments that meet exacting standards, both will limit your ability to look at a large number of options. If your standards are too rigid, you may not find any deals to support. At some point, you need to ask yourself if you are accomplishing anything by holding out for investments that probably don’t exist. (You can legitimately ask the same question if your standards are so loose that almost every company meets your requirements.)
Responsible Tip
French philosopher Voltaire said, “The perfect is the enemy of the good.” He meant that a search for perfection could prevent us from experiencing the good that is present now. The same can be said of socially responsible investing opportunities. Waiting for the perfect one may blind you to the good ones available today.
Identifying the perfect SRI investment could be compared to finding just the right political candidate to support. You may have to hold your nose and vote for the best candidate, even though there is much you wish you could change. Critics of the socially responsible investing industry complain that it has been too quick to settle for companies that make token steps toward improvements in social, environmental, or other SRI goals. As we discussed earlier, when some SRI mutual funds are concerned about performance, they change their standards for companies meet their SRI standards. Accepting less than perfect investments is not the same as lowering your standards to meet some performance goal—it is the recognition that companies are expressions of the humans that manage them and as such will always be flawed to some degree.
The Least You Need to Know
◆ Socially responsible investing involves a personal and financial commitment.
◆ Set up a plan for your SRI investments and decide how much you are going to commit.
◆ Monitor your financial and SRI progress making adjustments to your holdings no more than quarterly.
◆ Acknowledge that there are no perfect SRI investments and find a comfort level with imperfection.
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