A winner at the 2010 Green Book Festival, Socially Responsible Investing for Dummies tells you how to make investments that make money and create change. Look for it at bookstores in now!

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Frequently Asked Questions about Social Investing

Investing seems scary enough these days. It may seem even more intimidating for people who want to be sure that their money not only generates a return, but that it also supports their personal values. Social investing can combine the two goals. Here are some Frequently Asked Questions, with answers, about socially responsible investing. Want to know more? Pick up a copy of the book!

What does social investing mean?

Social investing means choosing financial products that fit one’s morals, values, and goals for a better society. These can include everything: stocks, bonds, mutual funds, real estate, and bank accounts.  The idea is to “go well while doing good”, as the cliché goes. It’s pure capitalism, in which those who provide financing push companies to meet higher standards.

Who cares about social investing?

Anyone who wants to ensure that their money reflects their values. In practice, the biggest social investors are pension plans and charitable foundations that want to generate an investment return as well as a social one. The goals may vary wildly. Some investors want to avoid defense contractors or breweries; others may seek out companies that invest in their communities and treat employees well.

Because social investors tend to do careful research and demand that companies disclose information about their business practices, they can help generate new information that makes financial markets more efficient. That helps all investors.

Isn’t this just for freaky liberal hippies?

Nope. Social investing is pure capitalism, not charity. The people who have the money to invest expect those who need funds to meet certain standards. Some social investors are guided by political ideology or religious beliefs covering a broad spectrum of ideas, but others simply want companies to reveal their business practices and operate for the benefit of shareholders, not managers. After all, isn’t that how it should be?

Of course, if you are freaky liberal hippie, you’ll find a lot to like about social investing.

Are there social investments other than stocks?

Many people think of social investing as being stock market investing because of the number of socially based stock mutual funds available. However, most investors will find a wide range of investments that fit their financial needs as well as their personal goals. For example, community development financial institutions are federally insured banks that concentrate on community lending. You might find that such a bank is a great place for your checking and savings accounts.

What about performance?

Social investing can offer the same performance as any type of investing. Pensions are required by law to be invested using risk and return as the primary priorities, and yet many have managed to meet their legal obligations while also following moral guidelines. A social account that is carefully diversified to ensure good risk and return can perform as well as any other account.

The bad news? There is no evidence that social investing strategies generate superior performance.

How did social investors do in the market meltdown?

In general, social investors performed as well as anyone else, meaning not very well. At the end of December 2008, the KLD Broad Market Social Index was down 37.14%, compared to a 36.72% decline in the S&P 500.

There’s one interesting exception. Muslim investors, who will not invest in companies that pay or receive interest, did not invest in financial companies. Hence, they missed most of the problems with banks and other financial institutions that brought down the broader market.

What’s the key to successful social investing?  

The primary way to succeed through social investing is to do careful research. First, you need to see if the investment meets your financial goals. Then, you need to see if it makes good economic sense. Both steps are necessary.

Once you make an investment, you need to monitor it to make sure that it still meets your needs. You should be involved, too. For example, if you buy stock, be sure to vote your proxy statements. Social investors can make capitalism work for society, but they have to exercise their power.

What are the pitfalls of social investing?

Because social investors are so often guided by their passions, they lose their heads. Just because you love a company doesn’t mean it will perform well. You have to be rational in your investing; you aren’t entering into a friendship when you buy a stock or put money into a mutual fund. Likewise, you have to keep perspective on your social goals. We live in a messy and imperfect world. If you set your standards too high, you won’t be able to put your money anywhere!