Agent Ethics
Financial Ethics
Chapter 5
Ethical Investing
Ethics is a subject that has more questions than answers. Much of the basic ethical questions are touched by factors that vary from culture to culture, religion to religion, and even by factors of self-interest.
Ethics and money are seldom linked. In some circles, it might be argued that money and ethics are simply incompatible, but we do not believe this to be true. In fact, it might even be more important to inject ethics into investing since money is often a factor in unethical behavior. Many people are more aware today of the dilemma of profiting from enterprises whose goals, methods, or products are inconsistent with personal ethics.
Injecting ethics into investing goes farther than simply avoiding those investments, which are openly and obviously against personal views. Ethical investing means that one must investigate companies and products so that both positive and profitable choices may be made.
To link your money (investments) and your personal code of ethics together, some assumptions must be made.
1. Every investment has some sort of ethical dimension.
2. Investors can (and perhaps should) apply their ethical standards to their own investment strategies.
3. Lastly, investors who apply their ethical criteria may even be more successful than those who do not.
The first and second assumptions cannot be proven since they are philosophical in nature, but the third assumption can be based on fact or available data.
Many investors and investment counselors have thought that anything unrelated to financial a criterion that limits investment choices must also limit the available return. Actually, this is not true. Many investment professionals have begun reporting that investments made according to one's ethical preferences are actually doing significantly better than the average account. Joan Bavaria, president of Franklin Research and Development Corporation, stated: "I started running money along ethical guidelines more out of personal interest than in response to requests, although there was that too. After about two years, I realized that my ethical accounts were doing significantly better than our average account." US Trust Company of Boston cites similar experiences, as do other investment companies.
Investing In Familiar Products
Investors are most comfortable investing in companies and products that are familiar to them, which is not surprising. Confidence is easier when the products we use are also where we place our money. People who advise clients on financial matters have long experienced people who say such things as "I don't like that company and I don't want to invest there" or "find me something in the computer industry" or whatever industry the investor is familiar with. Few people considered this strange, yet when ethical investing began to develop, there was a certain amount of resistance.
One of the most widely accepted approaches to investing is what might be called the positive approach. Put your money in companies you know and understand. Many Wall Street companies choose to deal in specific types of stock selection, for example, and no one thought that was odd, yet when ethical investing began to develop, it was met with many vehemently negative responses. Part of this negativity was due to the conception that it would add many hours of work for the professionals charged with making the investment selections. As one top trust officer stated: "Don't expect me to run around looking for termites in the woodpile."
It can, in fact, add hours of work if data is not readily available. The ethical investor must determine which companies are engaging in activities that he or she does not agree with and must also identify those companies that are complying with their beliefs. In short, it depends on available information. Some money managers simply do not wish to step outside of their comfort zone to see what information is available. There is actually more information available than many of these money managers are aware of. Sometimes a money manager is simply not open to new avenues of investing, having become overly familiar with what they are already doing (and feeling comfortable with what they are doing).
Searching for Compatible Companies
Many companies are already strongly into their own ethical investing. If the investor's views correspond, investing might be very easy. Morality in Media, for instance, focuses on companies that sponsor sex-laden TV shows. By looking at the information this organization has compiled, an investor could choose who to avoid and who to invest in. There are groups that monitor just about everything.
The key to investing as your ethics dictate is finding those companies whose views match your own. It is often easier to find those companies whose views are opposite (which does at least tell you who to avoid). Typically, the only thing that is printed in investment news magazines or papers have to do with investment performance, but not necessarily where those investments are located. It should be noted that ethical investing is a very personal decision, and as such, there is no right or wrong answer. It is a personal decision based on personal beliefs. It is interesting to note that when it is possible to show a client how to invest in things that match their ethical beliefs, they are much more likely to invest.
Money is a deeply personal subject. Our finances are so personal that few people are willing to share the details with anyone other than their accountant. Even family members often know very little about each other's financial matters. Our finances are, in many ways, a reflection of who we are. As such, we are very protective of our decisions. Ethical investing allows us to promote that personal reflection in a way that makes us feel good about ourselves. The good news is that it also allows us to have a very favorable return at the same time if good judgment is used.
Personal Involvement
Nothing happens unless the clients get involved personally in their own money management. Encourage our clients to make their own money decisions? Absolutely! Clients who understand and agree with their investing decisions become lifelong accounts and are the least likely to sue (because they made their own decisions).
Think of the word invest. It is used in a variety of ways which often projects personal involvement. "I invested four years in my education." "I've invested my entire life in this goal." The word can mean something far more than a simple money transaction.
Investment options are far broader than many people realize. Of course, there are simpler investments such as passbook savings accounts, but there may also be much more complicated investment structures. Even where one chooses to have a savings account can impact others since many banks loan specifically for certain types of people and development.
Not long ago few investment counselors were interested in ethical investing. Even now it may be difficult finding counselors who are willing to invest specifically how the client desires. More and more firms will, however, do the type of investigation required to invest according to an individual’s ethics. Even so, agents must still do a certain amount of their own investigation in many cases. Clients may also need to do some personal investigation. Perhaps his or her counselor is not able to put the amount of time into the process as is necessary, or perhaps the advisor charges extra for that type of work. It must also be pointed out that no matter who advises the investor, the investor is ultimately responsible for making the final decisions on ethical investments.
If you are the investment counselor, your clients may not fully accept that approach. We know that counselors can be sued for negligence, so you will want to document your homework. Ethical investing tends to emphasize quality and that is often the goal of the investor as well as complying with their personal standards. Quality is stressed whether it happens to be in annuities, life insurance, stocks, or bonds. Once you have discovered a financial institution that gives both quality and investment return, you are likely to use the institution over and over again, so your time in finding it will eventually be well rewarded.
Forcing Change Through Investing
General investing has seldom been considered from an ethical standpoint, but that is rapidly changing. In fact, it has become such a force that even countries have had to change their policies as a result. So massive was the financial withdrawal from South Africa at the time, for instance, that they were forced to change their social policy.
Although money is often thought to be an evil thing, money can actually do more to persuade than almost anything else. South Africa was an example of the ability money had to force social change. Since nearly everything we do has some type of following consequences, why not allow investing to make a statement? Why not withdraw money from companies and corporations that follow practices we find unethical? Why not invest in those we agree with?
Initially only a small group of professional money managers offered ethical investing opportunities. The majority of money managers initially felt that it would be too time consuming to research companies from an ethical standpoint. They are rapidly changing that train of thought.
It was also initially believed that following an ethical trend of investing would mean a lower rate of return (a lower interest rate). That too has not turned out to be the case. In many instances, in fact, ethical investing has actually given a better return. That probably explains why more and more money managers are willing to deal with investing from an ethical standpoint.
Socially Responsible Investing (SRI)
What exactly do we mean by ethical investing? Often called socially responsible investing (SRI), it means putting your money where your heart is; investing in the things you believe in and avoiding those things you oppose.
|
Socially Responsible Investing (SRI) means putting your money where your heart is. |
It should be noted that few investment vehicles would satisfy a person completely. Especially if the company is large, there are likely to be pockets of business that do not conform to one’s ethical ruler. However, it is possible to invest in companies that primarily follow what one believes in.
Ethical investors must usually do more investigating before investing. Perhaps this is the very reason their investments do better overall. Any investor would be foolish to invest in a company that seems to be poorly managed, whether the company is ethical or not. By doing the extra research that ethical investors tend to do, they are more likely to uncover poorly managed companies.
Investors can either do the research themselves or hire a professional money manager who has done, or is willing to do, the research. Any investor seeking a financial manager needs to be sure they have found a professional who understands their goals. A manager who is simply agreeing in order to get the business will not be suitable. Ideally, the manager should have similar feelings so that he or she understands the investor's position. Understand that the money manager does not have to agree on the ethical issues themselves, but he or she must feel that ethical investing is desirable.
The Avoidance Investor
The most common approach to ethical investing is the avoidance approach. Under this method, investors merely avoid putting their money into a company or corporation that practices what they consider to be unethical standards. What those unethical practices are can be anything from lack of necessary actions to intentional actions.
Investment counselors often prefer to work from the avoidance approach because it takes up less of their time. It is easier to identify undesirable companies (versus researching those companies that participate in approved areas). Simply, the investor states those industries or companies that they wish to avoid for whatever reasons. Then the investment advisor scans the current investments for any undesirable industries or companies.
There are two ways to choose companies when avoidance investing:
1. Identify those companies participating in undesirable investing or hiring practices and avoid them entirely, or
2. Identify those companies practicing desirable business practices and invest actively in them.
For example, if the issue is minority hiring, the investor could avoid companies that appear to try to hire only whites, or he could seek out companies that actively recruit minorities. In the first situation, the investor is avoiding companies by what they do not do. In the second, he is seeking companies by what they do. If the investor actually employs both strategies, he will avoid the middle of the road companies: ones that do not avoid hiring minorities, but at the same time does not seek them out either. Avoidance investing is a passive form of investing because it does not seek to change the companies, merely to avoid allowing them the use of the investor’s money. In effect, the investor is saying: “Not with my money, you don’t.”
In most cases, however, the avoidance technique is not used to call attention to the activities of any given industry or firm, but rather a refusal to profit from their activities. In fact, the avoidance technique rarely brings forth any public awareness. Avoiding certain industries or products is certainly the easiest way to approach ethical investing. It is simply easier to find those companies that do things wrong than it is to find companies that do things right.
It must be noted that the avoidance technique is not fail-proof. Since little research is involved in the avoidance technique, the investor may still find themselves investing unwittingly in companies that go against their ethical desires. In addition, research is often what brings about the most satisfying financial results. Of course, the sums that most people can invest will not affect any company one way or the other. Most people do not have the power to bring about any real change in the industry. As we previously stated, it is more a matter of not profiting from those industries that offend us. Also, the avoidance technique only says what you will not invest in. It does not give any direction to companies that you will invest in.
Positive Investing Approach
The positive investment approach is generally used in conjunction with the Avoidance Technique. In other words, not only are some companies and products avoided, but also others are actively sought out. Those companies actively sought out are generally industries or products that enhance the quality of life in some way. The quality of the goods and services of these companies are high, and the companies practice good relations with their workers and the surrounding communities. There is the assumption that a company or industry that promotes good work relations and produces a high-quality product or service is likely to produce a superior investment return. In many, many cases, this assumption is correct.
One might ask, "Is not investing for financial gain a goal of self-interest?" Yes, it is and there is nothing wrong with investing for the goal of a financial gain. It would be foolish to do otherwise. Ethics can still be a part of a financial gain and should be. A degree of ethical self-interest is necessary for both our culture and our political position to continue. There is no reason why one cannot benefit themselves and others at the same time. In fact, many businesses have been built on the concept that what is good for the consumer can also be good for the business. Sears, Roebuck & Company was built on this philosophy. The company helped farmers adopt improved agricultural methods and set up 4-H clubs to teach farming techniques. The end result was improved agricultural methods such as contour farming and education for young people. At the same time, Sears grew.
By living one's life according to their own beliefs while taking a positive investment approach, one can demonstrate what is important to them while still securing their financial future. Choosing investments according to benevolent self-interest simply makes sense because the investor will pay more attention to investments that reflect their own beliefs. Investment professionals have long recognized that informed and careful investors do better.
It should be recognized that a company or product's merits do change. What seemed right to buy at the time may not always remain "right." Therefore, that means not only buying in an ethical fashion, but also selling when it seems right to do so. Ethical merits of investments may change just as financial merits may also change and, of course, both must be considered.
|
Ethical merits of investments may change just as financial merits may change. Both must be considered. |
The National Council of Churches has put together these criteria for their investment needs:
1. Do the products meet government standards?
2. Is their labeling adequate and easily understood?
3. Will the products last for a reasonable amount of time?
4. Does the company actively recruit women and minorities?
5. Is the company pioneering safe alternative energy sources or studying ways to reduce the demand for natural resources?
6. Is the company researching the development of new products or means of production that will enhance the quality of life?
While this list of criteria for investments may not exactly match each person's concerns, it is a good starting point. It also points out another need for the individual investor. Each person must know precisely what he or she does or does not want in his or her investments. An investment counselor cannot adequately help them meet their goals unless he or she has a specific set of rules to go by.
Ethical investing means making decisions. Sometimes the choices to be made are not easy ones. A company may have both good and bad points. For example, a company might engage in weaponry contracts, but at the same time be promoting housing for low-income people. A company may be considered environmentally irresponsible, but at the same time be campaigning for equal opportunities in the workplace.
There is no getting around it. When the Positive Approach is taken to ethical investing and all the research is in, seldom is a company totally black or white. Most major companies are diversified and that means you might agree with some aspects but disagree with others. As a result, the investor must put all the pieces together and see what aspects outweigh others for the final determination. These decisions will actually lend themselves to a better investment portfolio since the investor will be well aware of what the investment entails.
The Activist Investor
The activist investor would use both Avoidance investing and positive investing. They would avoid the companies that obviously do not practice their desired morals AND seek out companies that do. Activists want social change. They want companies to see issues the way they see them. When companies refuse to consider their views, activist investors may even be willing to force change, where possible.
|
The activist investor wants social change. |
Some investors want to do more than avoid bad or unethical companies and invest in good or ethical ones. Their desire is to bridge changes bringing the perceived bad over to the perceived good. Therefore, they take the activist approach.
This is probably not realistic for many investors for varied reasons. First, the average investor will not be able to invest enough money into the firm. Without a large voting bloc, the opportunities to bridge change will be limited. Even so, there are many ways to bring about change in any given industry. Time given is often a powerful tool. People with little financial support can bring about great changes if they are willing to put the time and energy into the types of campaigning necessary.
The Activist investor concentrates on corporations that influence national policy on issues they are concerned about. That might be a company that already agrees with their views, or even companies that do not. They devote their time and energy to bringing about whatever change they feel is necessary.
The Activist starts from one basic fact: shareholders own the company. That means that the management supposedly works for them. At least once per year, shareholders have the right to elect directors and to propose and vote on resolutions relating to corporate policy. If the owners fail to exercise their power to direct corporate policy, they waive a powerful means for change. It is likely that few shareholders actually do exercise this right.
Corporations operate on a one-share, one-vote system. In other words, if an investor holds 10,000 shares, he or she then has 10,000 votes. It should be realized, however, that thousands or millions of shares may exist. 10,000 shares may not influence the decisions of the corporation in the least if the other 300,000,000 shares vote differently. Even so, it is possible for relatively small shareholders to make their voices heard and maybe even sway policy to some degree. Small organizations, such as the Sisters of Loretto, have used shareholder resolutions and participation at annual meetings as mechanisms to educate and open up company policies.
Gadflies
Such small shareholders who actively pursue change are often referred to as gadflies. The dictionary defines gadflies as insects that bite and annoy livestock. The critics of the activists claim that, while they are ineffective, they are an expensive annoyance. Whether the activist investor is ineffective may be debatable, but it is true that over the last twenty years, corporations have spent millions of dollars on lobbying, lawsuits, and regulatory actions attempting to limit the so-called gadflies' influence, so apparently they have successfully annoyed someone.
|
Banks, trust companies, unions, mutual funds, money market funds, college endowment funds, and other large pools of money as investors are called institutions. |
Often these so-called gadflies have been most effective in simply showing others in the corporation how to effectively influence company policies. Usually, this is aimed at much more powerful investors who are often referred to as institutions. They include banks, trust companies, union and corporate pension funds, mutual funds, money market mutual funds, college endowment funds, and other poolings of money. In other words, institutions are typically made up of many people who have put their money together to form one major voting bloc.
Because of the institutions size, they often are able to have great power when it comes to influencing corporate policies. In 1980 private pension funds alone held over $400-billion. By 1995, they totaled more than $3-trillion. Preliminary data for 2020 show that pension funds held over $35 trillion of assets worldwide at end-2020, exceeding 2019 levels despite COVID-19. [1] As you might imagine, if such a large institution wants to know what a corporation's equal employment policy is, that corporation does respond.
Simply put, gadflies are often able to teach powerful institutions that corporate management does not always know what is best. Until corporate gadflies demonstrated this, institutions tended to automatically vote with existing management. It has become known in the past two decades that such support can no longer be taken for granted.
|
Gadflies are often able to teach powerful institutions that corporate management does not always know what is best. |
Initially, gadflies were not taken too seriously. They were, to be sure, an annoyance, but many of the major corporations did not feel that they would ever gain enough power to greatly influence policies. However, the gadflies realized something that the corporations apparently did not. Institutions are made up of people and people can be influenced. In many cases, institutions listened because they were made up of people who invested in them. If a measure of their investors were concerned, then that institution also became concerned.
In recent years, we have seen corporations themselves become activists. Sometimes it might be for a self-interest directly related to their business, but other times the corporation may be acting for what they perceive to be the good of the surrounding community. Often corporations are taking a role in referenda and this is often troubling to smaller groups who have a stake in the outcome since corporations often have much more financial support.
More troubling than corporate participation in referenda, however, is the increasing power of corporate political action committees, often called PACs. Their powerful emergence is one of the great unintended consequences of the effort to clean up campaign financing in the wake of the Nixon debacle. It was intended to allow corporations a means of participating in elections, but what no one foresaw was the enormous amount of money corporations were willing to dump into the elections of politicians.
There are many ways that individual investors can affect change. We discussed the effect the withdrawal of massive funds had on South Africa. Rather than lose the financial backing the government needed, they dismantled their policy of apartheid. Investors who own shares use the power of their vote to create change. Pioneered by Ralph Nader, investors buy shares of stock in companies whose business policies are not consistent with the views of the investor. Each share of stock is allowed a vote, so one share of stock provides one vote; five shares of stock would allow five votes and so on. Each shareholder has the opportunity at least once a year to elect directors to the company’s board and vote on policy resolutions. Corporations are required by law to hold annual meetings for this purpose. Under specific conditions, the shareholders may also propose resolutions, which must then be voted on.
It was the ability to propose resolutions that the activist investors saw as their avenue to change. The companies themselves often did not appreciate these proposed resolutions, because it brought the company bad publicity in many cases. No company wants the public to focus on bad environmental issues or animal testing, for example. Activist shareholders pool their share votes to meet eligibility standards enabling them to propose resolutions (in 1983 the corporate community persuaded the Securities and Exchange Commission to restrict access to the resolution process).
|
It was the ability to propose resolutions which the activist investors saw as their avenue to change. |
Most votes are completed by proxy, which is a sort of absentee ballot. It allows shareholders to vote without actually attending the meeting. Most shareholders tend to vote with the recommendations of the board of directors. Their recommendations accompany the ballots that are sent out. Therefore, change by resolution vote is certainly no guarantee that it will pass. However, if the shareholders take the time to actually read the resolutions, it brings to surface the issues desired by the activist investors. Even if the resolution does not appear to have any chance of passing, it can embarrass the company into changing its policies.
Many activist investors work with progressive organizations whose causes are similar to theirs. These shareholders propose resolutions for the organizations. In 1987 People for the Ethical Treatment of Animals (PETA) worked with shareholders of some of the major cosmetic companies, including Gillette, Bristol-Myers Squibb, Schering-Plough, and Johnson & Johnson. The aim of the resolutions was to eliminate animal testing. The publicity that the proposed resolutions generated did cause some changes, although they were slow in actually implementing them. In 1990 Colgate-Palmolive became the first company to allow data to become public regarding their animal testing.
Ethical Investing For Profit
It is unlikely that even activist investors do not care about the return on their money. While top returns may not be their main priority, activist investors still want to know that they will have financial security in their later years. It is, as we said, possible to invest ethically and still make adequate returns.
Investing In Small Companies
Small companies often offer the promise of the best returns. However, small companies also tend to carry greater risks. In most investments potential of higher returns also means higher investment risk.
Small companies, simply because they are small, tend to be more in line ethically than larger companies. Activist investors often favor small companies because they are part of local communities. Anytime a company is involved with the community, it is more likely to reflect the local goals. Also, small companies tend to be more oriented to a single purpose. This allows its business practices to be purer. Because the company is small, there has been little or no diversification. Therefore, the ethical direction of the small company is easier to determine. In addition, most new jobs are currently created by small companies rather than large ones. As a result, investing in small companies promotes the local community through employment. Finally, most new American products and services originate with smaller companies.
Because smaller companies so often are the ones who promote new ideas and services, they are also the most likely to experience rapid growth, which is good for the investor. Of course, it must also be recognized that rapid growth is not guaranteed. If a financial crunch occurs, a smaller business is less likely to weather it. Larger companies have more financial resources and more diversification, which cushions them in bad times.
|
If a financial crunch occurs, a smaller business is less likely to weather it. Larger companies have more financial resources and more diversification. |
From an ethical standpoint, there is another factor to consider. Smaller companies are more likely to be bought out by bigger companies. The very reason the ethical investor purchased the stock could be wiped out if purchased by a large company. In early 1990, Carme, who produced only cruelty-free products was bought by International Research and Development Corporation. They do animal testing for multiple companies. Investors who had purchased stock in Carme simply because they did not test on animals suddenly owned stock in a company that does.
Some companies, large and small, are dedicated to specific goals, some of which may match those of the investor. Sometimes there are even exceptional companies to choose from. Ben & Jerry’s Homemade Ice Cream is an example of this. Created because of a love for ice cream, their goals were personal. Besides making good ice cream, they wanted to have a certain atmosphere about their company. They wanted to be the most charitable company, they wanted to be the best employers in Vermont, they wanted to be instrumental in social change, and they wanted to have a “fun” company. One of their recipients of the “1,000 Points of Light” campaign was Dr. Patch Adams of the Gesundheit Institute, who was played by Robin Williams in a 1998 movie.
Mainstream investors and mainstream money managers primarily rely on numbers. This is not bad, of course, since the numbers give an indication of future performance. However, numbers in themselves are only part of an investment’s picture. Therefore, investors who look beyond the numbers at ethical factors they consider important will end up with a fuller look at their investment. Because many companies have more than one business line, the investor is likely to find both good and bad in the companies they investigate. This is especially true of larger companies. Socially responsible investors will have to make some personal decisions. They may have to do some prioritizing of their own: which is more important? Cruelty free products or avoiding companies who make war products? The environment or minority hiring? For some investors, the decisions will be few because their goals are focused on one or two issues. For others, it will be very difficult because their goals are so broad and multifaceted.
Investing for The Long Term
Most investments are intended to be long term. The exceptions would include Certificates of Deposit and money market accounts. Ethical investing is also a long-term investment unless some stock or bond changes hands or the company changes focus. Even then, the funds themselves are earmarked for the long term. Many people move their money among stocks and mutual funds routinely, so there is no reason not to do so with ethical investments as well. However, excessive movement is seldom good.
Early Ethical Investment Trends
Ethical investing is not new. Although there was no widespread desire to invest ethically twenty or thirty years ago, ethical investing has occurred as far back as the early 1900s. The early ethical investors primarily were concerned with certain types of sin, namely alcohol, tobacco, pornography, and gambling. Back then, their definitions may not have been the same as ours, but their desire to be true to their own convictions still existed.
Ethical investing primarily grew from the sixties and seventies. The Vietnam war sparked many socially responsible investors. Their opposition to the war was so intense that they refused to allow their money to support it in any way. Students even demanded that their universities pull funds from any war-associated company.
Today there are all types of investments that meet the needs of the ethical investor. Virtually any type of investment can be screened to meet specific criteria.
Where Does One Begin?
As we know, there are multiple avenues for investing. Each has its proper place, but no one vehicle is right for everyone and every situation. An ethical criterion does apply, however, to every type of investment vehicle. Some types of investments are common and, therefore, known to most people. That would include such things as bank accounts of the saving variety, stocks, money market funds and insurance investments. The fact that most people have heard of them does not mean that they are understood. When you ask a client "Have you heard about annuities?" and he or she nods in the affirmative, do not think that the client also has an understanding of them.
There are some basic elements that always need to be explained. If you are worried that you might offend a knowledgeable person, simply state something to the effect of "If I am repeating what you already know, please excuse me. I want to be sure that I am doing the best job possible and this is part of that job."
|
An investment vehicle is any medium which may be used to produce an effect, which will hopefully be a profit, rather than a loss. |
Because investment tools are so numerous and diverse, investors tend to refer to them as vehicles. A vehicle simply means any medium for producing effects. In this context, the desired effects are profits. So, a vehicle is an investment, which produces some effect, hopefully a profit. Understand that the effect could also be a loss, although that is not the desired effect.
Some types of vehicles would pose some problems for the ethical investor. For example, an investor who is an environmentalist probably would find few oil investments in which he or she would feel comfortable.
Two Basic Categories of Investments
There are two basic categories of investments: debt and equity. Either a loan is made to a company or a division of government (debt) or the investor buys a part of a company (equity).
If a debt vehicle is purchased, such as bonds, commercial paper or banknotes, a loan is made. If equity is bought, such as common stock or shares, part ownership in a corporation is made. The value of the interest depends upon the company's success. If the company is successful, the investor has a right to share in the profits, but only after debt holders receive their interest and principal payments. Unlike debt, the investor's ownership interest entitles them to a voice in the company's affairs (he or she could become a gadfly!).
The terms capital gains and income describe how one makes money on the investments. If the investor sells for a profit, the difference between what is paid and what is received at the time of sale (after deducting brokers' commissions) is a capital gain. There is a formula for calculating a capital gain or loss. It is:
Sale price minus purchase price,
minus commissions on both the purchase and the sale
equals either a capital gain or a loss
(depending upon the final figure).
Any interest or dividends received are also ordinary income. Investors can get both income and capital gains from many, but not all investments.
Know Thyself
Most of us have probably heard the saying "know thyself." When it comes to ethical investing, this certainly applies. No matter how profitable a company may be, it must fit the individual's needs if ethics are to be part of their investment goal.
Imagine this scenario:
Maggie wants to become an ethical investor. She has read a recent magazine article on the concept and was greatly impressed. She calls George, her investment advisor.
Maggie: "George, I am so excited about an article I just read. It concerned ethical investing. Have you ever heard of it?"
George: "Yes. As a matter of fact, I have several clients who do just that. What type of investments did you have in mind?"
Maggie: "I just told you. Ethical investing."
George: "Yes, ethical investing, but what type of investments are you considering?"
Maggie: "I don't know what you mean. Isn't there a division on ethical investing?"
George: "I have to know what your ethics are, Maggie. Otherwise, there is no way that I can help you. Do you want to work for the environment, for animal rights, for the poor, or something else? You might even have several goals that we can work with. In fact, most of my ethical investors have two or three areas that they approve of."
Maggie: "Look, the reason I went to you is so that you could guide me. I don't see why this is becoming so complicated. Just put me into some ethical investments."
As you can see, Maggie has no real concept of what ethical investing is. The only course George can take is to ask a few basic questions and then try to do the best he can since Maggie really is not interested in becoming a true ethical investor. It is likely that she merely likes the concept of it but is not actually dedicated to the goal of ethical investing. Maggie has not defined her personal investment goals so she cannot actively participate in ethical investing.
|
The two most common investment goals are growth and income. |
To work with ethical investing, it is necessary to know some basic concepts. The two most common investment goals are growth and income.
Growth describes investments held for their appreciation in value rather than the income that might be produced. Investors do not expect to profit from this type of investment until it is sold at which time a profit will hopefully be realized. A growth investment is a long-term commitment in most cases.
An investment intended for income, on the other hand, is generally something that produces income on a regular basis, often monthly. It may also produce a profit when sold, but that was not the primary aim. Income investments tend to produce smaller profits when sold than would a growth investment. Most investors tend to seek one or more of each type of investment rather than limit themselves to one or the other. As with so many things in life, balance tends to be the key to successful investing.
Investment Portfolios
|
Liquid assets are those that may be turned into cash easily. |
A portfolio holds all of the investor’s liquid assets. Liquid assets are those that may be easily turned into cash. Liquid assets might include such things as cash, stocks, bonds, money market and mutual fund shares. Non-liquid assets include such things as the investor's home, pension plans, antiques, and fine art. Some types of insurance products may also be included. Non-liquid assets play a direct role in how liquid assets fit into one's portfolio.
A portfolio is strongly influenced (or should be) by the investor's age. A person who is still in their prime earning years will invest differently than a person who is nearing retirement.
The vast majority of investors do not have any specific pattern of investing. How they invest is often determined by who happens to ring their doorbell. For the ethical investor, this method simply will not work. It is impossible to achieve an ethical investing goal by making rash investing decisions. Ethical investing involves developing a financial strategy that fits into an individual’s ethical personality and goals. Sometimes such an investor actually seeks an advisor who shares similar sets of ethical values.
Appraising Oneself
It must be noted that being an ethical investor is more difficult than merely being a financial investor. Certainly, the ethical investor also intends to do well financially, but not by sacrificing their beliefs. To be an ethical investor, one must be focused and disciplined in thought and action. Individuals, such as Maggie, do not possess the nature or personality for such investing because they rely upon someone else to make their investing decisions for them.
Do you feel that you might want to invest ethically? If so, the book, Ethical Investing by Amy L. Domini and Peter D. Kinder, says to ask yourself these questions:
1. What is your appraisal of yourself as an ethical investor? Does that appraisal affect the way in which you want to manage your personal portfolio?
2. What do you need from your assets in both the short and the long-term range?
3. What is the starting point? It does make a great deal of difference if you already have done some investing or if you have done none at all.
Appraising oneself may not be an easy process, but it is worthwhile. It means that you must spend some time thinking about who you are, your current and future financial needs, and your environment. It generally helps to put your thoughts regarding these matters down on paper. Seeing them in writing often helps to organize your thoughts and recognize those traits that are wished for, but not necessarily possessed.
Of course, the first thing to determine is which ethical goals are important to you. These should be prioritized since it may not always be possible to consider all your ethical goals. Besides your ethical goals, consider also your ethical objections. These are often different. For example, you may have a goal of helping the hungry, but you may object to using animals in product testing. Both may be factored into your investing, but to do so, these goals and objections must be recognized and prioritized into your investing strategies. The more clearly you are able to state both goals and objections, the more likely you are to find investments that satisfy your ethical desires.
Once you clearly know your goals and objectives, you must consider your financial resources. Do not simply consider where you have invested, as in stocks or money market funds. All your resources need to be identified. Even such things as where you have chosen to live can be a reflection of your ethical investing.
|
Even such things as where you have chosen to live can be a reflection of your ethical investing. |
If you intend or desire to manage your own portfolio, you must consider how much time you have. Management must have a certain amount of time if it is to be done right. This time element is precisely why many investors prefer to hire a professional.
Perhaps just as important as the time element is one’s emotional ability to handle investments. Personalities differ and some people simply do not have the emotional personality for investment management. Investments have ups and downs. If the financial "downs" of the investments will also bring down the investor, then it is probably not a wise idea to be their own manager.
Your emotional personality may also need to be considered before you jump into any type of investment. If you simply are not comfortable with stocks, for example, then you may want to avoid them entirely. However, you must realize that to be a truly ethical investor, some amount of personal involvement is a necessity.
|
Organize investments chronologically according to expected financial results. |
Once you have zeroed in on your investing desires, worked through a self-appraisal and made a list of your short-, medium-, and long-range goals, you must organize them chronologically according to when you will expect your portfolio to produce a given result. After all, even ethical investors can expect to have financial success in their investing. By making a chronological chart, you will be better able to evaluate which investments were right and which may no longer be.
Considering Current Financial Status
Nearly all investors must consider their current earnings in their investment projections. Few of us are lucky enough to simply have a large amount of money to work with without consideration as to current living costs. Several things must usually be considered: estimated current earnings, job security, effects of the national economy, variable-rate mortgages (if applicable to your situation), and possible recessions in the investor’s work field. There may be other factors that would apply especially to your situation and some of those we have listed may not apply.
Your immediate living needs must always be considered. It is not feasible to invest to the point that you are not able to pay current obligations. Look at several things in your current situation. Will you need college funds for your children soon? Are you considering buying a first home or trading up from a current home? Will you soon be having children (taking away a second income)? Is your income tax bracket going to be going up this year or next? Whatever your current needs are, or may soon be, must be considered.
Future Financial Concerns
You will also need to consider future concerns. Such things as retirement income, college education for you or family members, expected medical costs and other factors must all play a part in your investment goals. Of course, it is necessary to know where you are now financially in order to evaluate where you might be in the future. We have all known someone who had grand retirement plans but had no idea how those plans were going to be realized. If you question these people, they often become defensive or vague. In other words, they do not have plans, but rather dreams. All of us need dreams in our lives. In fact, dreams are often the first step to realized goals. Many of our great leaders and educators began with only a dream. For a dream to materialize, however, action must at some point begin. If action never begins, a dream will remain just that, a dream.
Our point is simple; planning is absolutely necessary, but actions must follow the plan laid out. Evaluate where you are now. Be precise. This evaluation can end up being a lot of work, but it is necessary work. List your liquid assets and be sure to include everything. Make note where each asset is located. Also list your non-liquid assets and note what and where they are. Make a note of the percentage of each. If most of your assets are liquid, you may draw up your portfolio management plan and begin investing as you ethically desire. If much of your assets are non-liquid, it may take more work and be more difficult to begin ethical investing. This might especially be true if much of your non-liquid assets are in areas you do not desire to remain in.
It is likely that your initial investing did not have an ethical angle to it. Therefore, you did not consider whether you agreed ethically with the types of investments you ended up in. For example, suppose you bought your home because you loved its features, and you could afford to live there. You did not consider if the neighborhood reflected your ethical views. Chances are, you had no idea what type of views existed in the neighborhood. Now that you have lived there, you realize that most of the neighbors do not share your opinions on minorities and you are distressed that there is bigotry in your neighborhood. Your home is one of your biggest investments, so to be a truly ethical investor, where you live must be a part of your desires. You have several options. You may sell your home and buy in an integrated neighborhood. Or, if you do desire to remain in your home, you may become active in integrating your present neighborhood. You might also choose to rent out your home and live elsewhere until the area becomes more in line with your ethical opinions.
When you move into ethical investing, there will be several such decisions if you have already made previous investments. Of course, if you are just now beginning to invest (starting out fresh), it will be much easier to tailor your investments to your current desires. We say "current" desires, because, as you mature, it is likely that your investing desires will change from one set of ethical requirements to another or to shades of your initial desires.
Some of your current assets may not be in your control. Even if this is the case, you still need to list them when you are making your asset inventory. In some situations, even if you do not have any direct control of an asset, you may still be able to voice your opinions and preferences. If you are a beneficiary of a trust, for example, it is possible that the trustees might heed your desires and at least avoid some types of investments that you feel are objectionable.
If you plan to manage your own portfolio, it is wise to ask for advice from others such as your tax accountant or estate professional. Even if a fee must be paid for such advice, it is often well worth the money spent. Tax professionals are especially valuable because they may be able to guide you in directions that you did not even consider.
Two Portfolio Constants: Change & Deliberateness
Realize that portfolio management has two constants, one of them being change. The company you invest in today may change its business philosophy tomorrow, thus no longer fitting into the desired ethical requirement. The second constant of portfolio management is deliberateness, which is a characteristic that must be developed. Many words could be used in place of deliberateness. Dedication would also work well. The point is you must stick to the goal of investing regularly in whatever fields are desired. For millions of people, investing (which is saving) never happens because they quit as soon as it becomes a little bit hard. When there is no money for a special vacation, they quit saving. Of course, they always intend to resume their investing, but usually they never do. The hardest part is always staying dedicated to the goal. It might mean occasionally giving up something you would like to do or like to have. In the end, of course, it will all have been worth it. Even so, it is hard for a 30-year-old to stick to the goal of saving for retirement, especially when there are so many material things he or she would like to have today. Along this line, be sure to avoid the trap of listening to "get rich quick" schemes. Once a pot of gold is partially built up, there will be many who are anxious to be your "best friend."
This brings us to another point. Part of the reason so many people fail at saving is because they do not give themselves small goals to reach along the way. Everyone needs an occasional reward for his or her hard work. By building in smaller goals that are reached on a regular basis, long-term goals may be easier to stick to. No matter how noble a goal, we all need encouragement.
Once you have become a dedicated investor (which is a dedicated saver), you are likely to be adding to your portfolio from time to time. You are likely to be using the same formula over and over again. Each time you move additional funds into an investment, however, do reconsider the things that might change your circumstances. This would be the economy, job security, and other factors that might make it necessary to change an investing pattern from time to time. It is always necessary to remain flexible. Not only might company policies change that would affect how you look at them from an ethical standpoint, but immediate circumstances might also affect your investment patterns. If your job security is not certain, for instance, rather than lock money up in an investment, you might want to hold it in a savings account as a deeper cushion against an uncertain future.
|
Not only might company policies change that would affect how you look at your investments from an ethical standpoint, but immediate circumstances might also affect your patterns. |
We need to emphasize a very important point here. We have been talking about the client who primarily manages his or her own account. It is certainly possible to be an ethical investor without managing one’s own accounts. In fact, the majority of people hire a professional to handle that chore for them. Managing a portfolio is, indeed, a chore. It takes a lot of time (if it is to be done correctly) and a lot of homework. For many investors, this just is not feasible for many and varied reasons.
If you are a person who simply does not desire to handle your own accounts, do not feel guilty. Find a professional that you trust and that will honor the wishes of ethical investors. More and more professionals are doing so.
Ethical Banking
Few people consider the banks they use for their checking and short term savings accounts from an ethical standpoint. Generally, we tend to pick our bank for the location or because our car loan is located there.
When we deposit our paycheck in a bank, we are allowing them to use our money for their needs. In effect, we are “loaning” them our money. The social implications have to do with how our money is used. Very few banks invest according to any social criteria. Nor do they lend on the basis of social criteria. Luckily there are variations that depositors can take advantage of.
CREDIT UNIONS
Of all the banking institutions, credit unions are most likely to match an investor’s ethical requirements. In addition, they often offer the best interest rates and lowest-priced loans. Because credit unions are formed to represent a specific group of people, their charters have a “common bond.” The common bond may be quite loose, such as a union group, or much more defined, such as teachers. Some of the common bonds may even have a social purpose, such as gay and lesbian people.
In addition to the traditional credit unions, there are also community development credit unions, called CDCUs. CDCUs are intended to help disadvantaged communities, which tend to be primarily low-income. Traditional banks generally ignore or under service poor communities. They are happy to take their deposits, but reluctant to give these community members loans. Therefore, traditional banks are more likely to extract money than to spread it out among the poor. By law, credit unions can lend only to their depositors (their members) so a credit union located in a poor neighborhood will also be loaning out to those same people.
Poor or lower income neighborhoods are especially hurt by companies that overprice their services. This would include check cashing companies, short-term loan companies (usually for 30 days or less), and even loan sharks. All these entities charge too much for the services they give. No one should use these companies, of course, but poor individuals often feel they have no other choice. When a CDCU exists in the neighborhood, there is less likelihood that the people in the community will use the companies that take advantage of them. In addition, credit unions provide other services including money management training.
|
When a CDCU exists in the neighborhood, there is less likelihood that the people in the community will use the companies that take advantage of them. |
Not everyone can join just any credit union. There must a common bond, under the law. Even so, there is enough variety that just about anyone can find a credit union to join. For some, the only common bond is the county in which they live. Even some religious groups have credit unions. In addition, most credit unions allow relatives of members to join.
MINORITY OWNED BANKS
Some traditional banks have attempted to become more socially conscious. Some of these are minority owned. These often tend to be more responsive to the needs of minorities and disadvantaged people. Those who wish to support these banks should use their services, not only for checking accounts, but also for such things as IRAs, Certificates of Deposit, and money market accounts.
Of course, there are responsible banks that are not minority owned. However, traditional banks who demonstrate their desire to benefit the communities are usually small when compared to national commercial companies. It is more difficult to deal with a socially responsible bank unless one happens to be located nearby. However, for those who are determined, it can be done.
Socially Responsible Credit Card Companies
Who would have believed it? The possibility of a socially responsible credit card company! This would apply to many types of credit cards, but primarily they tend to be store cards. Sometimes the consumer finds it is best to buy from locally owned stores if the store owners are part of the community. Anytime the owner is involved in the community, his or her business practices will likely reflect that. It also supports the local economy.
United Insurance Educators, Inc.
Telephone: (253) 846-1155