Each week, we're tackling one of your pressing personal finance questions by asking a handful of money experts for their advice. This week: Investment advice!
This week's question is comes from anonymous via email:
I know I should invest but I don't know how to start. I'm unsure if there's a risk of losing my money like with gambling. I don't know if there's a way to invest and avoid feeling responsible for awful capitalist BS. Like, is there a way to invest without investing in oil, meat, plastic, rare-metal mines where people are paid a dollar a week...?
This is what individual experts have to say generally about an issue that affects each person differently — if you want personalised advice you should see a financial planner.
Investing Is Worth the Risk
There's a lot to unpack here, so let's dive in. The short answer is, yes, investing is absolutely a risk — that's its defining factor. You invest your money because your returns will most likely be higher than if you kept it in the bank (where it will actually depreciate over time).
But a key factor in this is that you don't just put money in the stock market and watch its value go up and up forever. You'll put money in, and the stock market will go up, and you'll have more money. But then the stock market will go down, and you'll have less. That's the way it is, and it's something you'll have to get comfortable with. You can't time it, but unless you have the bad luck of cashing out right after a market crash (which you absolutely should not do), you'll likely come out ahead.
But if risk makes you that uncomfortable, you can tweak how much of your money is in stocks (risky) and bonds (less risky) to make it more conservative. It's not akin to gambling, because you're much more likely to make money. For example, the average annual return for the S&P 500 is around 7%. When people compare investing to gambling, they're most likely talking about day traders, people who go all in on a single company, or people who "invest" in Bitcoin (which I'd call speculating, but that's a topic for another time).
OK, that said: Most people start investing through a retirement account, like a 401(k) or an IRA. These accounts aren't the investments themselves — you can think of them as baskets that hold your investments. You put money into the 401(k), and it is then used to buy into stocks and bonds (and sometimes other assets). But you're not picking individual companies you want to invest in; rather, you put your money into things like index funds, which are composed of a bunch of different companies' stocks.
Index funds are ideal because they are passively managed. They track, well, a market index, like the Nasdaq, S&P 500 or Dow, which you've no doubt heard of. Passive management has been proven again and again to have higher returns than active management (or a person calling the shots), because no person can possibly predict what will happen in the stock market. You want to take human error out of the equation.
You'll pick a few of these to get diversification. A diverse portfolio is important because you don't want to put all of your money in a single company's, sector's, or industry's stock, only to watch it nosedive.
Another option is to pick a target-date fund, which automatically recalibrates how much of your money is invested in stocks and bonds as you get closer to retirement, or through a roboadvisor like Wealthfront or Ellevest.
If you're new to investing, which is what it sounds like, you should start with investing in some index or mutual funds to build up your nest egg. Once you've done that and have a little extra cash, you can start playing around with investing in individual stocks. Apps like Robinhood let you buy stock in individual companies for a low fee. (I've written about other ways to invest when you're ready, but start with a 401(k) or IRA. There are many reasons for this, including that they give you a tax break, whereas other investments do not.)
The Morality of Investing
The morality of investing is complicated, and I've written about this topic in-depth before here. But if you're worried about the ethics of every single company you interact with, then the answer is no, there probably isn't a way to invest as we typically think about it that doesn't benefit from exploitation or immoral behaviour in some way, however you define it.
But to get briefly philosophical, that's true of pretty much anything we consume. The products we use every day are in some fashion exploitative; the art we enjoy is, too. So you have to ask yourself what you will accomplish by not investing. Who benefits? Who loses? Investing is not the same as, say, boycotting a certain company or product, which has a much more immediate effect on a company's bottom line.
OK, all that aside, there are ways to invest only in companies that are theoretically socially-conscious. You're not alone in wanting to avoid giving your money to companies that are doing terrible things in and to the world — in fact, about one-fifth of assets under management are in SRI (sustainable, responsible, and impact investing) funds, and that number is growing every year.
As I wrote, these can include, for example,
the LKCM Aquinas Catholic Equity Fund, which "provides a vehicle for Catholic values investing with the potential for solid investment performance" by monitoring portfolio companies (including Alphabet and PayPal) for their policies on issues including abortion, contraceptives, and embryonic stem cell research. There's the ETHO Climate Leadership U.S. ETF, which is a mid-cap fossil-free ETF that "does not have exposure to the energy sector."
And with the ongoing gun debate in the U.S., divesting from firearm stocks has become a growing activist cause — so much so that Morningstar, the investment research company, wrote a special report on what investors should look for in their portfolios after receiving more and more inquiries from their own customers. Here's a more in-depth look at how to divest from gun stocks.
Benefits and Drawbacks of SRI Funds
No company is ever going to be 100 per cent ethical. They want to make money, after all. And the guidelines used to measure SRIs, which go by another acronym, ESG — environmental, social, and governance — are completely subjective. As I wrote, Apple is often heralded as a socially-conscious company by those measures, but I think we're all familiar with the tech giant's short-comings.
There is some evidence to suggest that companies that have higher ESG scores have slightly higher returns. And while it was often said that socially-conscious funds had higher fees than your standard funds, that may not be true anymore. (It's worth pointing out that these SRIs are what I would consider active investing.)
But to be honest, focusing on the benefits of investing in those products does seem counterintuitive, a way to make it seem like it's all OK and perfectly ethical. It's not. As Henry Blodget, the founder of Business Insider, wrote in The Atlantic in 2007, "If you're going to invest in any free-market enterprise, you're going to have to accept that no matter how enlightened your choices, your money will be supporting wealth disparity, inequality, and other arguably unfair conditions that go hand in hand with a successful free-market economy."
If you want to invest, you have to get comfortable with that, too. And you should. Investing is one of the few ways workers have to build wealth. Will putting four per cent of your paycheck into an index fund over 40 years make you the next Warren Buffett? Of course not. But there are better ways to affect change than foregoing the moderate returns you can make in the hopes that some huge conglomerate will take note (it won't).
You can fight against inequality, gun violence and environmental destruction and still put away money for retirement. Because that's what it comes down to. You, the normal, every day investor, are not investing in the hopes that you're going to become wildly rich, and can then use your gains for nefarious purposes. You're investing because you need your money to keep up with the cost of living, and hopefully grow enough to afford you some peace of mind later on in life. And we all deserve that.