Investing Is Risky and Unethical and You Should Still Be Doing It
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week, the question came from an anonymous email:
I know I should invest, but I don’t know where to start. I’m not sure if there is any risk of losing money like in gambling. I don’t know if there is a way to invest and not feel responsible for the terrible capitalist bullshit. Like, is there a way to invest without investing in oil, meat, plastic, rare metals, where people are paid a dollar a week …?
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Investing is worth the risk
There’s a lot to unpack here, so let’s dive deeper. The short answer is yes, investing is absolutely risk – it is its defining factor. You invest your money because your profit is likely to be higher than if you kept it in the bank (where it actually depreciates over time).
But the key factor here is that you don’t just invest in the stock market and watch its value rise and fall. You invest money and the stock market will go up and you will have more money. But then the stock market will go down and you will have less. This is the way it is, and you will have to get used to it. You can’t timing, but if you don’t have the bad luck of cashing out immediately after a market crash (which you absolutely shouldn’t do), you will probably come out ahead.But if the risk makes you, which is inconvenient, you can tweak how much of your money is in stocks. (risky) and bonds (less risky) to make them more conservative. This is not like gambling because you are much more likely to make money. For example, the average annual return on the S&P 500 is around 7%. When people compare investing to gambling, they are most likely talking about day traders, people who go all-in at the same company, or people who “invest” in bitcoin (which I would call speculation, but this is a topic for another times). Okay, but that said, most people start investing through retirement accounts like 401 (k) or IRAs . These accounts are not investments in themselves – you can think of them as baskets that hold your investments. You put money in 401 (k) and then it is used to buy stocks and bonds (and sometimes other assets). But you don’t choose the individual companies you want to invest in; rather, you invest your money in things like index funds , which are made up of several stocks of different companies.
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. It has been proven time and time again that passive management brings higher returns than active management (or the person requiring attention) because no one person can predict what will happen in the stock market. You want to eliminate human error from the equation.
You will choose several of them to get diversification. A diversified portfolio is important because you don’t want to invest all your money in one company, sector, or industry stock just to see it plummet.
Another option is to opt for a set date fund that automatically reconfigures how much of your money is invested in stocks and bonds as you approach retirement, or through advisory robots like Wealthfront or Ellevest .
If you are new to investing, as it sounds, you should start by investing in an index or mutual fund to earn your nest. Once you do that and have some extra cash, you can start experimenting with investing in individual stocks. Pps like Robinhood allow you to buy shares of individual companies for a small 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 because they give you tax breaks while other investments don’t.)
The morality of investing
The moral of investing is complex, and I’ve written extensively on this topic before . But if you are concerned about the ethics of each individual company you interact with, then the answer is no, there is probably no way to invest as we usually think about it that does not benefit from exploitation or immoral behavior in some way, however you define it. …
But philosophizing in a nutshell, this is true for almost everything we consume. The products we use every day are exploited to some extent; the art we enjoy, too. Therefore, you should ask yourself what you will achieve without investing. Who benefits from this? Who is losing? Investing is not the same as, say, a boycott of a particular company or product, which has a much more direct impact on the company’s bottom line.
Well, above all else, there are ways to only invest in companies that are, in theory, socially conscious. Not only do you not want to give your money to companies that do terrible things in the world and in the world – in fact, about one fifth of the assets under management are in SRI (sustainable, responsible and efficient investing) funds, and this number is growing every year. …
As I already wrote , they can include, for example,
LKCM Aquinas Catholic Equity Fund , which “provides a vehicle for investing Catholic values with sustainable investment potential” by monitoring portfolio companies (including Alphabet and PayPal) for their policies on issues including abortion, contraceptives and embryonic stem cell research. There is the ETHO Climate Leadership US ETF , which is a non-fossil mid-cap ETF that is “not associated with the energy sector.”
And with the ongoing gun debate in the United States, ditching the stockpile of firearms has become a growing reason for activists – so much so that Morningstar, an investment research firm, wrote a special report on what investors should look for in their portfolios after they have received everything. more and more inquiries from our own customers. Here’s a more detailed look at how to dispose of your weapons stockpile .
Advantages and Disadvantages of SRI Funds
No company will ever be 100% ethical. After all, they want to make money. And the guidelines used to measure SRI, which are called by another ESG acronym – environmental, social, and governance – are completely subjective. As I wrote earlier , these measures are often heralded by Apple as a socially responsible company, but I think we are all familiar with the tech giant’s shortcomings.
There is some evidence that companies with higher ESG scores have slightly higher returns. While it has often been said that socially conscious funds have higher fees than regular funds, this may already be wrong. (It’s worth noting that these R&D institutes are what I consider to be an active investment.)
But to be honest, focusing on the benefits of investing in these products does seem counterintuitive – it’s a way of giving the impression that everything is in order and perfectly ethical. Is not. As Henry Blodgett, founder of Business Insider, wrote to The Atlantic in 2007: “If you are going to invest in any free market venture , you will have to accept that no matter how deliberate your choice is, inequality will keep your money going. in welfare, inequality and other possibly unfair conditions that go hand in hand with a successful market economy. “
If you want to invest, you have to get used to it too. And you should. Investing is one of the few ways in which workers can create wealth. By investing four percent of your salary in an index fund over 40 years, will you make the next Warren Buffett? Of course not. But there are more effective ways to influence change than giving up the modest profit you can make in the hopes that some huge conglomerate will take note of it (rather than give it up).
You can fight inequality, gun violence and environmental destruction while saving money for retirement. Because that’s what it all boils down to. You, a normal, everyday investor, do not invest money in the hope that you will become very rich, and then you can use your income for nefarious purposes. You invest because you need money to keep up with the cost of living, and hopefully you will grow up enough to provide you with some peace of mind later in life. And we all deserve it.