As a consumer, you know that your spending supports the companies whose products and services you choose to buy. It's appealing to purchase items that are not only great products but are also made by companies who have good values (think Ben & Jerry's or Toms Shoes). In other words, consumers can vote with their dollars when they make purchases. The same principle can be applied to investments. That is what the rapidly-growing space of socially responsible investing is all about.
What is Socially Responsible Investing aka SRI?
Socially responsible investing supports an ethical mission or can rule out companies who aren't in line with one's values. This can be for environmental, social, religious or other reasons. Investopedia describes it this way, "Common themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out companies engaged in environmental sustainability and alternative energy/clean technology efforts." This article from Forbes goes into more detail.
What are the upsides of SRI?
The opportunity to align your investments with your values. Knowing you're supporting the types of entrepreneurs and companies that are making the world the type of place you want to live in. Depending on the investments you choose you can be sure you're not profiting from war or benefiting from the degradation of the environment. In other words, you can have a clear conscience.
What are the downsides of SRI?
SRI is often associated with high fees and lower than average returns. Of course, it depends on the specific fund you choose. Luckily, that trend is changing. A book titled, Low Fee Socially Responsible Investing will help you pick a reasonably priced fund that is right for you. Fees are a real concern, according to the author, Tom Nowak, "$100,000 grows to $768,609 over 35 years at a 6 percent annual growth rate. With a 2 percent per year fee, the same $100,000 grows only 4 percent annually to $394,609 over the same 35-year period - 49 percent less!" Fortunately, with a growing number of funds in the space its becoming easier to find funds that have solid performance as well as reasonable fees. Because you are limiting the companies purchased, there is less diversification than in a traditional investment strategy. This is a concern for some investors.
Not only does your spending have an impact on the world but your investments do too. If you're curious to learn more about socially responsible investing check out the Green Money Journal.
This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP.
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