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Uncomfortable with investing in companies for ethical reasons

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  • #16




    I am a year from graduating from residency and earning an attending‘s salary. I have been reading about saving for retirement in the WCI book and Bogleheads guide to investing. I am convinced about indexing as the main part of saving. However I have run into a hurdle.

    For ethical reasons there are many companies that I would not want to be connected with or profiting from – armaments for example. Thus having an index fund that will have hundreds of companies will almost certainly involve these companies. I am wondering if you have any suggestions about how to achieve the goals of using index funds while avoiding some companies.

    Obviously people may disagree with the tenet that you should not profit from a companies whose practices you disagree with but this is very important to me. I realize this. I think it is a worthwhile discussion but not the question here
    Click to expand...


    iShares has some good ESG ETFs that are not too expensive.  ESG is kind of high-level when it comes to designing purposeful portfolios.  You can dig down deeper and do socially responsible investing and/or impact investing, but these options get more expensive.  Heck, there are companies like SEI who design Sharia, Baptist and Catholic portfolios.  They are not cheap but they are an option.

     

    The nice thing is those companies who score high on the ESG ratings typically do better over the long-term than their peer group.

     

    Oh, and on the flip side, there was an ETF geared toward buying tobacco, alcohol, pornography and more companies years ago.  It did well, but could not get enough dollars invested to make its SINdex worthwhile.

     

    Finally, kudos for you to put your money where your beliefs are!

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    • #17
      As mentioned above, there are funds that cater various interests for ethical or religious reasons.

      You could also choose individual stocks, provided you select enough businesses (research says at least 20, but preferably many more) in varied industries to provide a decent level of diversification.  A good financial advisor could help you with this.

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      • #18
        To echo what others have said, this isn't worth your time.

        Your stake in a company through a mutual fund isn't what is allowing that company to do bad things. You own fractionally none of it from a statistical standpoint. It's the littering equivalent of dropping a paper gum wrapper on the ground once every 3 months.

        This is also an area where your instincts are very likely to be wrong. I say this as a point of discussion not trying to start a flame war but I think you can make a very solid case that Walmart is much more "evil" than a company that manufactures military hardware. Again we could go on and debate that point, the larger point is that this is an area where you could spend hours agonizing about personal feelings and end up in a position that is actually less ethical from a utilitarian point of view.

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        • #19




          I am a year from graduating from residency and earning an attending‘s salary. I have been reading about saving for retirement in the WCI book and Bogleheads guide to investing. I am convinced about indexing as the main part of saving. However I have run into a hurdle.

          For ethical reasons there are many companies that I would not want to be connected with or profiting from – armaments for example. Thus having an index fund that will have hundreds of companies will almost certainly involve these companies. I am wondering if you have any suggestions about how to achieve the goals of using index funds while avoiding some companies.

          Obviously people may disagree with the tenet that you should not profit from a companies whose practices you disagree with but this is very important to me. I realize this. I think it is a worthwhile discussion but not the question here
          Click to expand...


          There are a lot of investment options out there for those that want to express there social views in their investments.  Endowments and Ultra-High Net Worth individuals are very focused on this space. Terms you will here are Socially Responsible Investing (SRI), Environmental, Social, and Governance (ESG) and Mission Related Investing (MRI).  Some investment managers take this very seriously, others use it as more of a marketing ploy as SRI has been a buzz word the past 10 years.

          You do tend to end up tilted away from the traditional benchmarks, and you are probably going to pay a higher manager fee, but you can earn close to market returns in the SRI space.  The key is finding the funds that have decent returns, low fees and are actually looking for quality companies instead of just screening out one or two positions out of their non-sri fund.

          Unfortunately, most normal people are priced out of best social options.  Aperio, for instance will run a custom separate account in both the US and International space to allow you to express your social views.  There fees are around 30 bps if I remember right, but they have $1,000,000 minimums so that is probably a few years away.  Breckenridge will run a separate SRI Muni account for 18 bps and I believe the minimum on that is $100,000, which is pretty reasonable.

          For now, I'd recommend allocating a small portion of your portfolio to SRI or better yet causes you specifically believe in.  Once you have a more established investment balance, you will have more doors open to you and can customize your portfolio to match your personal views.

           

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          • #20
            There are a ton of "screened" index funds from State Street that church funds (and others) use. That's really common among faith-based pension plans and endowments. I'm not sure if they are available on retail platforms. I should have done some research, but I'm going to run for a flight...

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            • #21
              Avoiding funds because they contain certain stocks of companies you object to doesn't make sense on several levels. First, as others have noted, you're not funding them. Second, you're not funding them. And third, you're not funding them.

              If you want to make a difference in a particular cause I would suggest either boycotting that particular industry or company (realizing the effects on other industries or companies), or advocating for the government to do the job it consistently fails to do - hold companies/people accountable for externalities that they create. Good luck finding a politician who knows what an externality is, let alone hold anyone (including themselves) accountable. So you're left with the most capitalist option - exercising your free market choice to support or punish a business you disagree with.

              On a personal note, I'd suggest reading Lt Col Dave Grossman's book "On Combat". Are you a wolf, sheep, or sheepdog?

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              • #22




                I am wondering if you have any suggestions about how to achieve the goals of using index funds while avoiding some companies.
                Click to expand...


                I'd suggest you read this WCI post. You should define your IPS (How To, and Why?). You should then invest accordingly.

                For example, if your goals is FIRE by x/age, and you seek to have a broad, diversified stock market fund/set of funds, with low fees, then you'd invest accordingly. Meaning, you wouldn't invest in a fund just becasue because it has gun manufacturers in it, you might choose other funds because it doesn't have such companies AND it has broad market exposure AND low fees. Aka, it meets your criteria, follows your IPS, to help meet all of your goals.

                If you add limiting criteria, fine (that's up to you), but follow the same process.

                And welcome to the forum!

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                • #23




                  I am wondering if you have any suggestions about how to achieve the goals of using index funds while avoiding some companies.
                  Click to expand...


                  The two main options are investing in individual stocks or some sector funds that avoids those industries you don't want to contribute to. A broad index fund will contain those companies and removing them is akin to active investing rather than passive investing of all companies.

                  Secondly, there are no truly bad companies. Take the armaments sector that you don't want to support. Boeing may make the fighter jets that kill people but also makes the 787 dreamliner that carry people with better fuel efficiency and thus helps reduce the rate of Climate Change. United Technologies makes engines for commercial as well as fighter jets. If you exclude such companies, what you are left with may not produce the market returns.

                  As others pointed out, invest in the broad sectors like total stock, US and international. Use a portion of the profits to fund your causes, whether they be gun control or helping wildlife etc. That might produce better results overall.

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                  • #24




                    Obviously people may disagree with the tenet that you should not profit from a companies whose practices you disagree with but this is very important to me. I realize this. I think it is a worthwhile discussion but not the question here
                    Click to expand...


                    I get the feeling we might have ambushed you and you went radio silent. That was not my intention at all. I would definitely be interested in what your thoughts are as you wrestle with this issue. Personal finance, is well, personal 

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                    • #25




                      I am a year from graduating from residency and earning an attending‘s salary. I have been reading about saving for retirement in the WCI book and Bogleheads guide to investing. I am convinced about indexing as the main part of saving. However I have run into a hurdle.

                      For ethical reasons there are many companies that I would not want to be connected with or profiting from – armaments for example. Thus having an index fund that will have hundreds of companies will almost certainly involve these companies. I am wondering if you have any suggestions about how to achieve the goals of using index funds while avoiding some companies.

                      Obviously people may disagree with the tenet that you should not profit from a companies whose practices you disagree with but this is very important to me. I realize this. I think it is a worthwhile discussion but not the question here
                      Click to expand...


                      You're free to invest however you like. You should be aware of a few things before you go down this road however.

                      # 1 Your fees are likely to be higher and your returns are likely to be lower. You will be donating money to Wall Street that could have gone to provide for your favorite charities doing good in the world.

                      # 2 Your "bad companies" are completely different from someone else's. And the chances that your list overlaps precisely with that of a mutual fund manager is essentially nil. The world is a very gray place.

                      # 3 Your money isn't going to the company and its founders unless you're buying it at an IPO. It's going to the last guy who owned it, probably a mutual fund or pension. You're not hurting anyone or affecting anything by avoiding investing in the stock of a "bad company."

                      Here's a post about socially responsible investing: https://www.whitecoatinvestor.com/low-fee-socially-responsible-investing-an-oxymoron/
                      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                      • #26




                        I am a year from graduating from residency and earning an attending‘s salary. I have been reading about saving for retirement in the WCI book and Bogleheads guide to investing. I am convinced about indexing as the main part of saving. However I have run into a hurdle.

                        For ethical reasons there are many companies that I would not want to be connected with or profiting from – armaments for example. Thus having an index fund that will have hundreds of companies will almost certainly involve these companies. I am wondering if you have any suggestions about how to achieve the goals of using index funds while avoiding some companies.

                        Obviously people may disagree with the tenet that you should not profit from a companies whose practices you disagree with but this is very important to me. I realize this. I think it is a worthwhile discussion but not the question here
                        Click to expand...


                        You can do it with an IRA taxable or self directed 401k, but you will pay more and likely earn less. Tis the pay off.

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                        • #27
                          I was not scared away ITEngineer. Hahaha. I really appreciate all of the advice everyone gave. Super helpful. I didn't respond because my wife just had our third child and we spent a couple days in the NICU under the bili lights so it has been really busy.

                          I had heard about the specific socially responsibly mutual funds. I was most familiar with those at Ave Maria. I agree that they seem like a sales strategy to take advantage of investors. At the same time they not completely off the radar to me because they allow me to avoid some companies. I was especially excited to hear about the index options that are out there.

                           

                          One other thought I have about all this is: maybe I don't need to use the stock market to save for retirement. My wife and I have a modest lifestyle and I expect 50,000 dollars a year at retirement will be sufficient for us. Using WCI's recommendation of the FV function in excel I calculated that if I invest just 20,000 a year for 35 years and get a return of only 4% that I will have saved ~1,800,000 by retirement. My calculation for 30 years of retirement shows I only need 1,500,000. So I wonder if I could hit 4% return and avoid the stock market all together.

                          Any thoughts?

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                          • #28
                            Unlikely to be possible. And with 3 kids your spending will go up, not down.

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                            • #29




                              I was not scared away ITEngineer. Hahaha. I really appreciate all of the advice everyone gave. Super helpful. I didn’t respond because my wife just had our third child and we spent a couple days in the NICU under the bili lights so it has been really busy.

                              I had heard about the specific socially responsibly mutual funds. I was most familiar with those at Ave Maria. I agree that they seem like a sales strategy to take advantage of investors. At the same time they not completely off the radar to me because they allow me to avoid some companies. I was especially excited to hear about the index options that are out there.

                               

                              One other thought I have about all this is: maybe I don’t need to use the stock market to save for retirement. My wife and I have a modest lifestyle and I expect 50,000 dollars a year at retirement will be sufficient for us. Using WCI’s recommendation of the FV function in excel I calculated that if I invest just 20,000 a year for 35 years and get a return of only 4% that I will have saved ~1,800,000 by retirement. My calculation for 30 years of retirement shows I only need 1,500,000. So I wonder if I could hit 4% return and avoid the stock market all together.

                              Any thoughts?
                              Click to expand...


                              Sure, you save enough money and spend little enough, you don't have to use the stock market.

                              I think I'd probably invest in real estate before I did that though, at least if you're okay with policies like throwing people out on the street if they don't pay their rent.

                              I mean, what are you going to invest in? Buy treasuries? Do you agree with everything the US government does? I mean, they drop bombs on people. Or corporate bonds? Same issue with buying stocks. How about muni bonds? Do you agree with what state and city governments are doing? CDs? Do you agree with what banks are doing? I mean, it just goes on and on and on.

                              I think there's something to be said for getting over the idea of trying to enact social good while investing, but if you can't, just buy a socially responsible fund, accept the likely lower returns, pat yourself on the back that you tried to do a lot more than most investors, and move on.

                              https://www.whitecoatinvestor.com/the-reason-you-take-market-risk/
                              Helping those who wear the white coat get a fair shake on Wall Street since 2011

                              Comment


                              • #30
                                To play a little devil's advocate to some of the responses there, while you are not directly funding companies on a secondary market, the existence of this secondary market allows companies to raise money in IPOs. Arguing otherwise is similar to being a vegetarian and eating steak because the animal is already dead.

                                Also if you avoid certain sectors you are less diversified, but that doesn't guarantee you'll do worse. I'm sure those endowments avoiding oil companies outperformed over the last 5 years.

                                 

                                Not saying you should or shouldn't do this.

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