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What is socially responsible investing?

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August 20th, 2013
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There s no denying that money talks in our society. If you want to exercise greater control over what your money says, so to speak, consider socially responsible investing. Socially responsible investing, or SRI, has its roots in mutual funds that excluded companies that sold alcohol, tobacco, and guns, based largely on religious principle. R. Paul Herman, CEO of Hip Investor (hipinvestor.com), an investment management and SRI ratings company, says socially responsible investing has evolved to mean a number of different things. Today, socially responsible investing runs the gamut from funds that focus on environmental protection to others that only include the stocks of companies that make Fortune magazine s list of the 100 Best Companies to Work For.

Not just financial risks

Skeptics might say that taking a softer approach to investing by focusing on ethics and not just cold hard profits could yield lower returns. Herman says that simply isn t true. People who are business-oriented know that there are many risks that are not captured in companies financial statements. In fact, 80% of stock market value is not easily relatable to the financial statements the intangibles are everything from people, which is human capital, to environmental capital like the cleanliness of air and water, Herman says. Socially responsible investing is really a way of measuring risk based on factors that are going to affect your grandchildren, so smart investors use SRI to lower risk and enhance their returns. Ohio financial planner Adam Koos (libertaswealthmanagement.com) has been implementing socially responsible investing for his clients since 2005. He says SRI is a good solution for investors who would like to sleep at night, knowing that the companies they re profiting from are of similar moral philosophies. An experienced advisor can help you find a fund that matches your values. Two of the SRI funds Koos recommends to clients are the Domini International Social Equity fund, which evaluates companies based on social and environmental standards, and the New Alternatives fund, which invests in companies dedicated to alternative energy. Investors who are retired or nearing retirement should carefully consider risks before making changes to their investment strategies. Illinois investment advisor Donald Cummings (bluehavencapital.com) says a relatively safe way to get into SRI is to stick with large cap index funds. He says investors can also practice SRI by purchasing municipal bonds that are specifically earmarked to fund school districts, low-income housing, or other causes that are important to you. Herman says you can ease into socially responsible investing by diverting just a portion of your assets to an SRI fund. For example, if you receive dividend payments, instead of reinvesting that money back into the same stocks, put it to work in a fund that is aligned with your beliefs. Or, Herman says, you can start a family legacy by gifting socially responsible stocks to your family. Just like when you were growing up, you may have gotten some Disney stock; now you might buy some Tesla stock for your grandkids, Herman says.meghan.streit@erickson.com

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