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The Math of Socially Responsible Investing
[/fusion_text][fusion_text]There has been a lot of innovative work done with Socially Responsible Investing in the last five years. It used to be that we thought we were doing well if we could align 25%-30% of a portfolio with a client’s values in a cost effective way. Now we’re getting close to the ability to do it well at 100% (not there yet). That’s really cool.
Today, I thought I would take a step back and review what can be accomplished by investing “responsibly.”
Quick caveat, I’m going to oversimplify things and assume that you can perfectly design a portfolio that avoids all “bad” companies (your definition) and still build a diversified portfolio. There are lots of limitations to getting there, but what if you could?
You could definitely sleep better at night knowing that you aren’t supporting industries or companies you don’t agree with. In my mind, this is the most important reason to invest responsibly. You don’t have to worry about making a buck by selling cigarettes to minors or participating in for-profit prisons. Your exposure to those things was small to begin with, but having 0% invested there is a lot better.
If enough people come on board with screening out companies, you can effectively lower the value of the “bad” companies. The price of a stock is determined by how much people are willing to pay for it. If less people are willing to buy it, the price will be lower.
Okay, but what does a lower stock price mean? It’s hard to say because I have yet to see lack of ownership bring a company down. It could be that you are just creating an opportunity for others to make greater profits by lowering the stock price. If the company continues to make the same profits and the price is lower, the returns will be higher from that point on for those who are invested.
Don’t let that get you down. Remember, running a four minute mile was impossible…until it wasn’t. In theory it’s possible you could get enough people to shun ownership that it impairs the company’s ability to raise money in the future. It’s just going to take a lot more similarly minded people to do it with you.
More importantly, if you feel strongly that you don’t want to contribute to the success of an immoral company, don’t do it. Math also says you don’t give up much, if anything, in returns by investing “responsibly.”[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.