All of us want at least two things from our investments: a good financial return and a degree of security. But an increasing number of us are also after investments that are ethical.
However, ethical investing is in the eye of the beholder. One investor may refuse to invest in a defense contractor believing it harms people, while another wants it in his portfolio believing it protects people. You need to determine your own ethical standards.
Socially responsible mutual funds are the easiest way to begin ethical investing and are better suited to smaller investors than are individual stocks and bonds. These funds rely on financial advisors to pick investments that have both a strong financial outlook and which operate in a socially acceptable manner. Keep in mind, however, that you need to understand the criteria used to measure a stock or fund’s social responsibility. One company that provides research to many investment firms recommends a petroleum company. Some believe choosing the most responsible company in all sectors — environmentally and socially — as fitting “ethical” criteria. Others, however, can’t imagine a petroleum company making it into any recommendation for ethical funds. Again, the ethics are in the eye of the beholder/investor. So make sure your investment professional understands your value system.
Even if you prefer to do-it-yourself, your first step should be deciding what ethical investing means to you. Determine what type of risk you can manage and what companies /products you want to avoid. Financial experts also recommend that no matter how much you love a certain company or industry, you must have diversity in order to best achieve your first two goals: good financial return and a degree of security. First, you have to come up with your asset allocation mix — how much you will have in equities (higher risk) and how much in fixed income (generally lower risk). Within the equity side, determine how much you want invested in the U.S. and how much in international investments. Do the same with fixed income. Spread investments over large-cap and small-cap. A simple formula, according to one financial advisor, is to not put more than approximately 5 percent of assets in any one stock. Spread your investments over various companies and across various industries that meet your criteria.
Beware of being “green-washed”: With more people seeking out socially responsible investments, there are an increasing number of products that aim to sound ethical. Don’t get caught up in the hype; check out even these investment products to ensure they meet your ethical standards. Thanks to some reputable websites, researching socially responsible investments is easier than ever.
Financial experts insist that clients don’t need to compromise their ethical standards to invest profitably, though, as with any investments, there are no guarantees. However, the emotional return you get from investing in companies that share your ethical standards is a sure thing.LESLIE GARRETT is an award-winning journalist, mother of three, and author of ‘The Virtuous Consumer: Your Essential Shopping Guide for a Better, Kinder, Healthier World (and one our kids will thank us for!)’. Visit her at www.virtuousconsumer.com.