Vail Valley: Can ‘socially responsible’ investing help you meet your goals |

Vail Valley: Can ‘socially responsible’ investing help you meet your goals

Charlie Wick and Tina DeWitt
Vail, CO, Colorado

Over the past several years, you might have heard about socially responsible investing, sometimes known as “sustainable investing” or “ethical investing.” Probably the most common way to take part in this type of investing is through socially responsible mutual funds – but are these funds suitable for your overall financial goals?

Before you can answer that question, you need to become somewhat familiar with how these types of mutual funds operate. Basically, the managers of socially responsible mutual funds seek to own companies that, in various ways, may promote such things as human rights and environmental and consumer protection. These managers also typically screen out companies involved with the military, tobacco, alcohol and other industries associated with products or services that may be controversial.

So you may ask yourself, after these qualifications are imposed and screens are applied, can socially responsible mutual funds still find the right investments to earn a reasonable rate of return?

The answer is yes: Although past performance is not a guarantee of future results, many of these funds have the potential t generate returns comparable to those of non-screened funds.

Furthermore, the performance of socially responsible mutual funds can be tracked and measured against other funds with similar objectives. Socially responsible mutual funds even have their own index – the Domini Social 400 Index. While this index is not managed, and you can’t invest directly in it, you will find it a useful tool should you decide to invest in socially responsible mutual funds.

But there is at least one potential drawback to investing in socially responsible mutual funds – lack of diversification. The problem isn’t so much that an individual socially responsible fund may not be properly diversified, although that could happen given the necessity to screen out entire industries. The bigger issue is that the universe of socially responsible mutual funds is much smaller than that of other funds, and socially responsible mutual funds by definition resemble one another to a certain extent.

Consequently, you may have a hard time achieving a diversified portfolio of socially responsible mutual funds across different asset classes – small, mid-size and large companies, value stocks, international stocks, etc. – which is so important when investing.

Of course, diversification by itself cannot guarantee a profit or protect against loss. However, the more asset classes you can diversify into, the better opportunity you have to help reduce the effects of volatility on your portfolio. This helps explain why socially responsible portfolios tend to have more volatile returns and are more susceptible to sharp downturns during bear markets than non-socially responsible mutual funds.

Before you invest in a socially responsible mutual fund, or any mutual fund for that matter, be sure to read the prospectus carefully because it describes the fund’s investment objectives, risks, and charges and expenses. In the investment world, knowledge is power.

Ultimately, in evaluating socially responsible mutual funds, you must decide just how much your sense of social responsibility will affect your investment choices. So take your time, evaluate all the factors involved, consider the alternatives – and make the decisions that are right for you.

Mutual funds are offered and sold by prospectus. You should consider the investment objectives, risks, and charges and expenses carefully before investing. The prospectus contains this and other information. Your Edward Jones financial adviser can provide a prospectus, which should be read carefully before investing.

Charlie Wick and Tina DeWitt are financial advisers with Edward Jones Investments. They can be reached in Eagle at 970-328-4959 or in Edwards at 970-926-1728.

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