Mike at Oblivious Investor recently discussed some low-cost socially responsible mutual funds. His article prompted me to write about the issue of faith-based or socially responsible investing, which has been on my mind for quite some time now.
The idea of socially responsible investing has been around for quite some time now, and faith-based investing has seen a lot of growth in the last ten years as well. Investors are showing increasing interest in the concept and many religious teachers are touting the benefits, and alluding to the necessity, of faith-based investing. However, I have found many misconceptions in the arguments of those who support these investing ideas. Personally, I see it as another attempt to pursue righteousness through works and find little Biblical basis for such legalistic views. Here are a few of the reasons proponents give for faith-based and socially responsible investing:
1. When You Invest in a Company, You Help It.
The idea that you’re helping a company because you’re investing in it is completely flawed. The only time this matters is when a company makes a public offering of its stock. In that case, the money raised from selling the stock does go directly to the company. But if you’re buying the stock on the stock exchange, your money does not go to the company whose stock you’re buying. It goes to the investor who owned the shares you just purchased. From the company’s point of view nothing has really changed except the name on the stock certificate.
“But if everyone sells a company’s stock it’s share price will go down. That’ll show them!” It’s true that if a company’s stock price goes down, it will probably affect the company’s ability to borrow money and will impact those employees (mostly officers) who own stock or stock options. However, the idea that you can affect the stock price of a company is absolutely ridiculous. Which brings us to point #2…
2. You Vote with Your Investment Dollars. (Sell the company’s stock, and you’ll show them you don’t support them.)
Even if all the Christians in the world refused to buy the stock of “sinful” companies, we would see no change in the corporate world at all. If anything, these companies could become even more “sinful” because no Christians would have an ownership voice in how the companies are run. For every Christian that sells a company’s stock, there will be a non-Christian who will buy it up (especially if it is a good value). And we haven’t even looked at the fact that most stock price movements are caused by institutional investors – not individuals with $50,000, $300,000, or even $1,000,000 portfolios. The “big guys” are trading billions of dollars and your investment choices will have little impact on them or the stock market.
3. If You Invest in Companies That Sin, You’re Investing in Sin!
This claim is absurd for two reasons. First, it relies on the validity of #1 (above). Second, it has no merit even on its own – your investment in a specific company is not causing any more or less sin than if you don’t invest in it. This idea also alludes to the conception that you have control over how your money is spent. This is true only until you spend it – whether on something “holy” or something “sinful”. After that, however, you have no idea how the next person will use it. They may spend it in an even more righteous way than you did (maybe they’ll actually feed the hungry with it…) or they may use it in the most sinful way you can imagine.
If the proponents of faith-based investing actually followed this argument to its full end, they’d never watch television again. You do more harm by supporting sinful television shows through your viewing habits than you do by investing in sinful companies. First, the television networks raise advertising money because you watch their shows, which leads them to produce more of the same types of shows. And second, these shows can actually affect your conscience and beliefs and tempt you to sin in ways that investing in a specific company cannot. I’m not saying you should seek out sinful business to invest in. But if your portfolio holds 1.3% of Exxon because you invest in index funds, you’re not going to be more likely to sin because of it. But if you pollute your mind with shows that do not glorify God, you’re giving Satan a much easier way to tempt you.
4. Faith-based or Socially Responsible Investing Is Good Stewardship of Your (God’s) Money.
Take a moment to consider the prudence of investing in faith-based mutual funds where you pay 5% up front as a “sales load” (commission to broker) plus annual expenses of 1.45%. The fees for righteous investing are outrageous, and there’s no way I can consider it good stewardship to spend that extra money on something that has negligible benefits for actually improving the world. And don’t think that you’ll get better stock selection because you’re using these highly paid professionals “with a conscience”. Take a look at the actual holdings of some of these faith-based mutual funds and you’ll find some of the same companies you would in an index fund. For example, the MMA Praxis Value Index Fund holds Time Warner, which owns HBO, which in turn shows adult entertainment. I’m sure there are many examples from a variety of faith-based funds, but this one highlights an important reason you shouldn’t get so focused on this idea. The corporate world is so convoluted and full of subsidiaries of subsidiaries that it’s difficult to really know what a company is involved in.
It doesn’t get much better if you decide you’re going to buy individual stocks you’ve researched for their righteous actions (or at least non-sinful actions). First, you’re going to need to buy “round lots” (multiples of 100 shares) to avoid paying an artificially inflated price. Then, you’ll need to buy at least 30 different stocks in different sectors to create your diversified portfolio. Also, don’t forget your trade commissions – at least $7 per trade, probably more if you don’t shop around. And we’re just talking about U.S. stocks…the transaction costs for international companies can be much more, not to mention the difficulty in obtaining accurate research about their business practices.
The only socially responsible fund that comes close to having the same low fees as an index fund is Vanguard’s FTSE Social Index at an expense ratio of 0.31%. But it’s still likely that some of the companies in that fund will violate your personal morals, so you’re still back where you started.
5. Can You Own Those Companies with a Clean Conscience?
This is the only valid argument on the side of faith-based or socially responsible investing. If the Holy Spirit convicts you about owning specific companies, then there is no reason you should own those companies. But do not try to further justify your reasons by using the claims above – they are illogical and have no factual support. And do not place the burden on other Christians by preaching that they should do the same. God has provided no clear teaching on the matter in the Bible, and adding legalistic rules to faith in Jesus does not glorify Him at all. If you still feel compelled to invest according to these “faith principles”, that is fine. But do not condemn or judge others because they do not follow your opinions in such trivial matters.
The Holy Spirit has revealed nothing to me about investing in index funds as being evil. If anything, we’d be better off spending our time focusing on showing God’s love and sharing the news about Jesus rather than worrying about how our money is invested (especially when it doesn’t really affect the world). The whole concept of faith-based investing reminds me of when Jesus blasted the Pharisees for straining out a gnat but swallowing a camel. We are still finding ways to emulate the Pharisees today – using legalistic rules to justify ourselves as righteous while neglecting the things God really cares about. We worry about investing in sinful companies, but we’re fine with planing for an early retirement or a second home when people (including Christians) are starving and homeless. Which do you think God cares more about?
Where Does Your Righteousness Come From?
Just as Paul asked the Galatians to remember how they became righteous, I ask those who preach faith-based investing the same question. Did your investing habits condemn you or save you from your sin? Do you claim your righteousness and holiness based on how you choose to invest your money? Let’s not forget that we place our faith in Jesus Christ – knowing that it is by grace we have been saved through Christ’s death.
Nowhere does Christ preach such a legalistic faith as the one faith-based investors would like us to follow. What did He teach us? To love God and to love each other. His teaching focused not on the possible actions of others, but on our own actions and our own thoughts. Which is the more loving act? To invest in companies that will make us feel better about getting rich, or to give generously to those in need while remembering the gift of Jesus?
If you want to see real change in the world that will glorify God, then do the things you support. Give your time and money to causes that promote your values. And instead of relying on your investment dollars to change people, spread the Gospel. It’s the only force that will effect any lasting and truly good change in the world.
If you enjoyed this article, you might also be interested in:
- Weekend Reading – 08/14/09
- Investing Basics: What Is a Stock?
- Weekend Reading – 11/20/09
- How to Invest for Retirement: A Diversified Investment Portfolio
- Investing Basics: What Is a Bond?
August 7th, 2009 at 10:05 PM
Thanks for the discussion on faith-based investing. As someone who spent the last 5 years researching this issue and written two books (The Faith-Based Millionaire and The Faith-Based Investor) I disagree with many of the points here. You’re reasons for not being involved in faith-based investing simplifies the issue. It’s more complicated as this is a spiritual issue between you and God.
The real heart of faith-based investing is about the desire to deepen your relationship with God by being more obedient to His principles. You control what you can control and there are things out of your control. As an investor you CAN control whether you invest in companies that support your faith or ignore that choice.
Last year a church was given a million dollar donation from someone who won the lottery. They refused the donation because of their biblical beliefs. They were passionate about helping those trapped in a gambling lifestle (They have a gambling recovery ministry). You can participate in owning companies that are morally polluting our culture or choose to invets in companies making a difference.
As a Christian you have two choices: invest in a way that glorifies Him or seek the world’s way. The definition of what glorifies God is a spiritual issue between a person and God. Is the Holy Spirit convicting you in this area? With advances in research and tools available it is easier for one to include faith and values in the investment decision making process.
I’m not a fan of mutual funds, but there are a few good mutual funds that do screen for faith-based issues. Timothy Plan, Eventide Funds, and Ave Maria come to mind. Beyond that I believe the true path to riches is owning individual companies (your own and that of others – companies you would be proud to own).
I personally created http://www.faithbasedinvestor.com as a way to help individuals have a list of companies making a positive difference in this world while avoiding companies morally polluting our society. By the way our faith-based portfolio is up nearly 40% year to date and are top two picks each month are up over 70%. You can have profits and principles!
Don’t think Christians can make a difference lobbying corporate America? Christians took on McDonalds last year and got them to stop supporting homosexual causes. It can work if enough Christians are willing to stand for God’s principles and will be vocal about it. God is victorious.
Many Blessings,
Jay Peroni, CFP
President & CEO of Values First Advisors
August 10th, 2009 at 3:47 AM
[...] 1: Faith-Based or Socially Responsible Investing – Delusions of Righteousness, posted by Provident [...]
August 10th, 2009 at 2:20 PM
Jay,
Thanks for taking the time to stop by and leave your comments. I appreciate your thoughts.
I’ll still have to respectfully disagree with you though.
First, I think there are much better ways we could use our time and resources to deepen our relationship with God. We struggle so much with the heart issues we’d be better off focusing on those things first.
Second, while you can control which companies you invest in, you are not actually changing anything in the world. All the time spent focusing on your investments will make very little impact in the world. (I’ll address the issue of lobbying companies later.) This aspect of faith-based investing boils down to the idea that it’s important to control how your money is used. The truth is you can only control what you do with it (i.e., whether you are sinning or promoting sin with it). Beyond that, you have no control over what the next guy does with it despite what he might claim he’ll do.
Third, many of the companies you discuss in your sample monthly newsletter don’t actually do much of anything to “make a difference” the way most faiths would define such an action. They’re just companies that are less sinful than the others.
Regarding your website, you make it clear that you have a vested interest (i.e., conflict of interest because you’re asking for paid subscriptions to your advice) in convincing people they ought to invest according to their faith. That conflict of interest detracts from your message. You’re willing to try to persuade people they should follow your investing principles, but you only provide the actual advice once they cough up the money. If this is such a spiritual issue for you, why not give away your newsletter for free?
Regarding your investment performance, I have two comments. First, pride goes before a fall. Second, there is ample academic research to prove that such performance is not sustainable over long periods of time and is easily attributable to luck (and the recent upswing in the market). Your track record on your website seems to only go back until January 2009. Let me know how it’s going in January 2039.
Finally, regarding your McDonald’s example, lobbying a company has absolutely nothing to do with investing in it. Lobbying a company is all about threatening to find ways to reduce their revenues unless they change their actions. This is the real secret to affecting the corporate world. With no revenue, the company will not last long regardless of how many or how few investors it has. Actually, this is the only way you’re going to make a difference in any company. In truth, owning the sinful companies will give you more of a voice in the management of the company. Not only can you threaten their revenues, but you can also speak at shareholder meetings and vote for the people who are on the board.
If Christians (or adherents of any other faith) actually want to do good with their money by affecting the corporate world, they would do better to focus on lobbying and boycotting the “sinful” companies than worrying about their investments. I’m not saying go out and buy the Vice Fund, but no Christian needs to feel farther away from God because they own 0.10% of a sinful company in their index funds.
A Christian who invests in index funds and does not waste time or money worrying about faith-based investments but instead spends time in prayer, reading the Word, and actually helping others and sharing God’s love will do far more good and be closer to the Kingdom of God than someone who strains out the gnats of the investment world and swallows a camel in failing to actually do the deeds of faith. Sharing the truth of the Gospel will do far more to impact the world and people than worrying about exactly how your money is invested.
August 13th, 2009 at 12:48 PM
Paul,
Great discussion here. I agree with you in term your argument vs Jay’s. I don’t necessary choosing side here, but at least on this argument, I agree with Paul. Jay’s intention may be good, but I still disagree with him. I invest primarily on Vanguard Index Funds. I don’t own individual stocks, mainly because I don’t have time to do enough research on multiple stocks to create well diversified portfolio. I agree with Paul that to create closer relationship with God, for most people, the time is better spent on other things.
For me, I think most Christians don’t have time to fully research on stocks, thus I think they are better of investing on Index Mutual Funds. Crown Financial Ministries, founded by late Larry Burkett, has great information for Christian in term of being better steward on our financial life. One old article from crown.org can be found here
http://www.crown.org/LIBRARY/ViewArticle.aspx?ArticleId=260
The article mentions that individual stocks could potentially be one of the worst investments. And I would never suggest anyone to pay for newsletter so they can invest in whatever the newsletter suggest. If they simply follow the suggestion from the newsletter, how is that helping in creating better relationship with God? I also would be interested in knowing how Jay’s performance against the benchmark is over longer period of time. I have issue with benchmark being S&P index too, since I don’t think most people should invest only on S&P 500 index. But that is a different discussion and for comparison purpose, S&P 500 index may be the easier and better option still. I would be interested in knowing the performance of Jay’s picks in 2008. I don’t know when Faith Based Investor was created, but I am sure Jay has been picking stocks for a long time.
Anyway, I want to say it again, Paul, good job!
August 13th, 2009 at 1:00 PM
Mr. Bee,
Thanks for taking the time to share your thoughts and comment! I’m glad you enjoyed the article. I don’t have much to add to what you wrote. I just wanted to say thank you!
August 17th, 2009 at 9:03 AM
Hi Paul.
a) Thanks for mentioning my discussion of the topic, and
b) Thanks for helping to break down precisely why many of the arguments don’t make sense.
Also, regarding your argument #1 above: I often find the “But if everyone sells a company’s stock it’s share price will go down” claim to be particularly faulted. Reason being that even if the share price did go down, that would only hurt the current investors in the company. Future investors’ returns would actually be improved for their “sinful” investing due to having paid less for the stock.
August 17th, 2009 at 11:16 AM
Mike,
Thanks for taking the time to check it out! Attempting to artificially lower a company’s stock price does nothing but make it a better value to other investors – investors who don’t care about being socially responsible or who don’t have any kind of faith at all.
January 22nd, 2010 at 7:09 PM
Isn’t there an argument to be made for not wishing to receive dividends from companies that make those monies from activities that are undesireable?
January 28th, 2010 at 12:38 PM
Rob,
What exactly would the argument be? Screening out those companies does nothing to make you more righteous or holy. It does nothing to reduce sin in the world. The time, effort, and resources you’d spend trying to find “good” companies would be much better spent actually doing good and sharing God’s love. Christians will have a greater impact by doing good rather than trying to control other people’s sin.