Tuesday, January 30, 2007

MarketWatch, via Yahoo Finance: "It's getting easier to create a socially responsible savings plan"

Looking to try to do some good in the world with how you invest your money? Who wouldn't like to do that? The idea's interesting, and the article discusses the appearance of "socially responsible" choices in 401(k) plans. The link is below.

The first thing I would urge you to notice is that the 401(k) vendor is using the socially-responsible approach as a marketing strategy. This does not make it a bad thing, but it is largely about the use of socially-responsible investing as a successful marketing niche, because of its' appeal to investors who want to do a good thing. IMHO a 401(k) vendor who wants to do a good thing should start with setting fees and fund expenses at the low end of the competitive range. I can find not one word about fees in the article.

There are a few counterpoints in the article, and I will highlight one I think is extremely important: "Some people criticize socially responsible mutual funds for having lackluster performance. However, that isn't always the case." That isn't always the case? Boy, that's a powerful defense. The problem is that often it has been the case. The company most typically excluded by socially responsible mutual funds is Altria, fka Philip Morris. Nobody gets excited about owning the stock of purveyors of cigarettes. I don't -- my father lost most of a lung to cancer. Like many of his generation, he smoked. You should not smoke, but it still is a free country. But I'll admit this, Altria is probably one of the most consistently profitable and best performing long-term stocks you could have owned over the last fifty years, and the company does not stiff its stockholders. Jeremy Siegel called it the best single-company investment in his book The Future for Investors. It returns cash money to investors in the form of dividends. It is an honestly-run company too, as far as I can tell. I'm not touting it. What I am saying is that you could very likely find that many "socially-responsible" or environmentally-oriented companies don't gain in share value over time like Altria, don't pay out dividends like Altria, or have badly inferior records for honestly running their businesses, and keeping conservative accounting standards.

It is no simple call. Indexed products, arguably the best approach available, include the problem companies. Cull out your objectionable companies as you will, and you will very likely pay a price in lower portfolio returns, and still find your "socially-responsible" holdings in the newspaper over and over again after some scandal blows up. There are too few companies out there that will not ever disappoint you in some significant way.

In an imperfect world, I would urge you to try to invest as well as you can, for the best returns -- you'll need them -- and support your favored causes, like smoking cessation and addiction recovery, with your dividends and long-term gains. If you invest unwisely, you may not have the financial means to help your causes.

Otherwise, where do you stop? Throw out the gun makers, the war-mongering defense contractors, the casino operators, the booze makers, the ... carnivore meat-packers, the oil companies, the coal-mining companies, the polluters, the oppressors of poor third-world peoples, the fast-food operators who make America obese, the credit card vendors, the Predatory Retailer who is non-unionized and who stamps out locally-owned stores, the ... list goes on, depending on your own views of what is socially irresponsible. Is this any way to make a sane portfolio?

here's the article:

Yahoo! Personal Finance

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