Is it worth paying a premium to invest in a socially responsible mutual fund? The securities industry thinks so. Some of these funds have front end sales loads as high as 4.5% and yearly expense ratios over 2%.
You have a conscience. You have to wonder if the fund families pitching these funds do.
These exorbitant fees are contrary to the basic principles that guide Smart Investors. We know that there is a direct relationship between low fees and high returns.
So what's a socially responsible investor to do? Fortunately, you can salve your conscience and still be a Smart Investor. I explain how in response to a question on this subject from a concerned investor.
Is war with Iran inevitable? If so, how should you adjust your portfolio?
Finally, what's my take on the troubling devaluation of the dollar?
Please keep your questions coming in. They are excellent. Just add a comment to this blog.
Question From Treerunner:
Hi Dan,
The other week Arianna Huffington blogged about the importance of Naomi Klein's new book, The Shock Doctrine: The Rise of Disaster Capitalism. As you likely know, this book describes how the current political and climactic situation around the globe has given rise to a new sort of hyper-aggressive profiteering on the part of a number of companies. While there are a handful of companies that stick out like a sore thumb, there are many more that are involved to some degree or another with this same issue. Aside from Arianna's post, John Cusack and others have blogged about the same topic. It seems the 'military industrial complex' is a major issue these days.
Since many Huffington Post readers are very concerned about this issue, and since you are offering financial advice for these same readers, would you be willing to offer some advice for those of us who would like to learn more about 'social' or 'green' investing? For many of us finding that right fund for our portfolio is not only about performance, fees and expense ratios, it's equally as much about those harder to measure qualities that help us sleep at night.
You have a big chance to bridge a major disconnect between the Business section of this site with the front page.
Please let us know your thoughts on this, thanks.
Thanks for this thought provoking question.
Many investors have a social conscience. Over $2.2 trillion is invested in socially responsible funds. There are several hundred funds that market themselves as "socially responsible." Many of them are exploiting the "socially responsible" mantra as a marketing gimmick to accumulate assets and charge high fees.
There are pluses and minuses to investing in socially responsible mutual funds.
The benefits are obvious: Taking a principled, ethical position. Placing ethics above profits. Making a positive statement.
The negatives are more subtle: It can be difficult to find a fund that is consistent with your ethical objectives. While the studies are conflicting, the constraints placed on these fund managers and the cost of running these funds, make it more likely that they will underperform not only the market but their own benchmarks.
You should consider whether you could have more of an impact by contributing directly to causes you support or by boycotting the products of companies you find offensive.
If you decide to invest in a socially responsible fund, do so "responsibly." Avoid expensive actively managed funds and check out index funds and Exchange Traded Funds (ETFs) that embrace socially responsible investing. These funds have very low expense ratios and no loads. If their ethical screening is consistent with your goals, they can be a very wise choice.
Here are some recommendations:
Vanguard FTSE Social Index Fund (VFTSX). It tracks the FTSE4Good US Select Index. It has no load an a low expense ratio of 0.25%
TIAA-Creff Institutional Social Choice Equity Retail Fund (TICRX). While not technically an index fund, this fund screens the Russell 3000 and selects those stocks that meet its social criteria. It has no load an a low expense ratio of 0.40%
There are four PowerShare ETFs that focus on the environment:
* PowerShares WilderHill Clean Energy (PBW)
* PowerShares Cleantech (PZD)
* PowerShares WilderHill Progressive Energy (PUW); and
* PowerShares Water Resources (PHO).
Each of these ETFs has an expense ratio below 0.75%.
There are two "iShares" that track well-known social indexes:
* iShares KLD Select Social Index (KLD); and
* iShares KLD 400 Social Index (DSI).
Both these ETFs have an expense ratio of 0.5%.
All of these funds are worthy of serious consideration by investors looking for socially responsible funds.
Question From Madprophet:
Mr. Solin, a question for you.
Forgetting all the political diatribes, where would you put your money if you believed the U.S. will attack Iran in the next 4-8 months.
I am trying to figure out the shot-term and long-term effects.
I am imagining a scenario where the U.S. initiates some air attack of indeterminate magnitude, and Iran counters by sinking tankers in the Strait of Hormuz with anti-ship missiles, resulting in 20% of the world's oil supply being shut off for some period of time.
Clearly, there are a lot of "if's" in that scenario, but I am trying to envision what would happen, besides oil futures going insane.
A very intriguing question.
Smart Investing means not trying to make predictions about future events. The track record of those who have tried is pretty dismal.
Instead, look at the reaction of the markets to similar events.
This history tells us that the markets are extremely resilient. The markets fully recovered, and were in positive territory, one year after each of the following events:
* Operation Iraqi Freedom
* The Oklahoma bombing
* The U.S. invasion of Iraq
* Iraq's invasion of Kuwait
* The Iran hostage crisis
* The resignation of President Nixon
* The Vietnam war begins
* The assassination of President Kennedy
* The Cuban missile crisis
* The attack by Japan on Pearl Harbor
* The invasion by North Korea of South Korea
Six months after the attacks on the World Trade Center, the markets fully recovered, although they retreated modesty at the one year mark, only to continue the recovery thereafter.
Based on this history, I would be confident that the markets would recover from an attack on Iran, but I would want to be sure that I could withstand the inevitable short term downturn in the stock market.
Therefore, I would want an asset allocation that permitted me to hold on to my stocks and wait out the recovery. This is no different from what investors should do in the ordinary course, and not in contemplation of any imminent disaster.
Question From Triestina:
As you can see from my name I have ties to Trieste, Italy. Any thought on the future of the dollar vs. the euro?
I am guided by the following observation by Bill Bernstein, one of the best financial minds of our time, and the author of The Intelligent Asset Allocator:
There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor -- the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know.
I am the fourth kind of investor: an investment professional who knows I don't know, and whose mission is to convince investors to ignore those who say they do know.
I don't know. No one does.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.