The goal of most investors is to make as much money as a you can, while taking the least amount of risk. But what if your objective was entirely different? What if, for example, you wanted others to benefit from your investments?
That's the objective for a growing slice of the socially responsible investing universe. For this installment of Investing 101, we sought insight from Shari Olefson, an advisor and author of the book Financial Fresh Start, who says its not just about the bottom line, it's about impact and responsibility too.
1) What is socially responsible investing?
There are two distinct types of socially responsible investing, or "SRI" as it is often called. The first kind tends to focus on only owning stocks that are deemed to be "green" and pose no societal threats. As you might expect, the debate over what is - or isn't - environmentally harmful, or trying to reach consensus over which industries or companies qualify as SRI's, can be quite fierce.
The other, newer type of SRI takes a more proactive approach. As Olefson explains in the attached video, "it's investing for an impact," not just investing to grow your wealth. Instead of looking for personal gains, she explains, the objective tends to be more "outward facing" and supportive of a particular cause or country or class of people.
These miniature aid programs are called microcredit or microfinance and offer an opportunity to "really put your money where your mouth is," and for as small a commitment as $25.
2) Where can I find social investment opportunities?
Thanks to new technology and the web, Olefson says the internet is "bursting with opportunities" and microcredit has quickly grown to become a $25 billion industry. She offers Kiva.org as one such site that allows you to shop for a borrower that you feel you want to help out. For its part, Kiva's marketing tag line is "loans that change lives" and the site claims to have facilitated over $450 million of loans in 70 countries. Other popular SRI funds can be found at Calvert, Domini or TIAA-CREF (TICRX).
3) What Are The Risks?
Olefson says investors can take comfort in the fact that Kiva, for example, has a near-perfect repayment rate, meaning almost 100% of people who have loaned money get their money back. In the case of traditional SRI funds, which invest in stocks and bonds, there is obviously exposure to the ups and downs and vagaries of the stock market, as well as the surrender of almost all say over what is bought and sold in the portfolio.
Also, she warns that because the loan sizes are often very small, the implied interest rate can seem exorbitant to many Westerners, in as much as a $5.00 fee on a $25.00 loan is the equivalent of a 20% mark-up.
4) How Does it Work?
Given that every investor has different objectives and needs, Olefson says one big benefit of the new social investing world is that you can decide not only where, but how long, you want to lend out your money. She says you can structure things to suit your needs and "can get your money back in a matter of months or a few years."
She also says that, in some cases, gift cards are available for those who want to easily share their social commitments with loved ones, who in turn will have to decide what to do with the money once it starts to be paid back.