Can You Reach Your Goals with Socially-Responsible Investments?

Socially-responsible investing is a concept that most of us would love to adopt … as long as it doesn’t cost us. Here’s a reality check: If you’d invested five years ago in shares of Altria Group Inc. (NYSE: MO), parent of tobacco products maker Philip Morris, your shares would have appreciated more than 170%. Casino company Wynn Resorts Ltd. (NASD, WYNN) shares have gained more than 130%. On the other hand, if you’d bought shares of Ascent Solar Technologies Inc. (NASD, ASTI), a developer of solar consumer electronics, you would have watched your shares tumble from the mid-40s to less than a dollar over the same period.
This is not to say that so-called sin stocks (a term generally used to describe companies in sectors such as alcohol, tobacco, gambling and defense businesses) will always outperform stocks of “socially responsible” companies, a sector that is even broader and harder to define. There are darlings and dogs to be found in both categories. Shares of organic food grocer Whole Foods Market Inc. (NASD: WFM), for instance, have more than tripled in five years. SolarCity Corp. (NASD: SCTY) a provider of home solar systems, has more than quadrupled since it went public in 2012.
But consistently investing according to your conscience means not only selecting stocks of businesses you believe in but bypassing the ones, however profitable, that don’t live up to your standards. If this seems difficult to do with individual stocks, it’s considerably harder with mutual funds, when the managers’ notion of responsible investing may not align with yours. But, as some of the examples, mentioned above illustrate, it is possible to at least move in the direction of investing in companies you believe in.
Some tips for getting started:
–Weed out some objectionable stocks. There are many levels to socially responsible investing but at its most basic level, this means avoiding those investments you don’t believe in. Decide what you feel most strongly about, and keep in mind that there may be things more offensive to you than the standard sin categories like gambling and tobacco. Perhaps you want to avoid investing in defense contractors, or companies that make genetically-modified food, or oil producers. While your perspective is unique, one of the most powerful things you can do to clean up your portfolio to your liking is avoid those businesses to which you’re most opposed.
–Decide what you do care about. It’s easy to equate solar power or organic foods with responsible investing but the reality is that all sorts of businesses are having a positive impact on the world. There are companies that make water purification technologies that are dramatically improving health in the developing world. There are manufacturers of run-of-the-mill household products that are making a difference by adopting greener manufacturing processes or higher labor standards. Some companies stand out for paying workers significantly more than the minimum wage. You can’t possibly identify all of these, but you can select some that make a difference.
–Research mutual funds. The good news is that today there are more choices than ever for sound, socially-conscious investments. Investors have whole-heartedly embraced the concept and this has helped direct more money and liquidity toward socially-conscious investments. The iShares MSCI USA ESG Select exchange-traded fund, (NYSE: KLD), for example, invests in companies identified as having positive social, environmental and governance characteristics, and has appreciated 80% in five years.
–Limit expectations and diversify. It’s a golden rule of investing, and diversification can also be a good strategy for putting some of your money in socially responsible investments without becoming too unbalanced. If you’re committed to supporting environmental elements of socially responsible businesses, consider doing so with just a portion of your portfolio . . .  at least initially. This approach brings multiple benefits. For one thing, it helps you avoid putting all your cash in a single sector. But diversifying also gives you a way to accept lower yields on a portion of your portfolio. It’s never advisable to put money into a stock with a poor outlook. But in certain circumstances, it may make sense to put some of your money into a stock with some, but limited growth potential. While we ultimately invest to preserve and grow our assets, our investments don’t always have to chase the highest yields. Modest growth can be a good part of an overall strategy that addresses both your financial and your philosophical goals.

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