When I began to make investment choices for our future in 2006, I must admit I started with mutual funds. Mutual funds are a made up of a group of stocks, bonds, and/or real estate that has been selected by financial managers. These managers get a cut of your return. The hope is that their expertise in choosing what to buy will make paying them worthwhile.
The beauty of a stock mutual fund is that if one stock tanks, hopefully it will be offset by others that are doing well. Mutual funds offer built-in diversification. So do ETFs (exchange traded funds).
When you buy an individual stock, all your money goes to one place. It's the equivalent to having all your eggs in one basket. If you bought Apple 20 years ago, you would be delighted to have all your eggs in that basket! Sadly, however, Apple is not your typical stock. If only!
(An aside: My unprofessional advice to anyone starting out is this: before you invest in ANYTHING, make sure you have accessible money put away for the unexpected. Having at least 2 months worth of your take home pay set aside in a money market account is a good cushion.
Can you do that realistically? Many young people live paycheck to paycheck, not because they want to, but because they have to. I remember what that is like! If you are in that situation it is especially important that you take advantage of any 401K/retirement savings plans your employer offers. These savings plan offerings are usually an array of mutual funds.)
Back to the topic at hand: what to invest in! I have done a lot of talking about Disney recently, and as you know we own a very small amount of this as an individual stock. But we also own Disney in our mutual funds. Many people own companies in their portfolios and have no idea what those companies are.
So who owns Disney? Probably YOU do, if you have any savings set aside in IRAs, 401Ks, or any other investments. Do you have any funds in Vanguard, Fidelity, T. Rowe Price, Alliance Bernstein, Columbia, ING or Blackrock (just to name a few)? Chances are you own some shares of Disney.
This brings me to the idea of social responsibility. Disney repeatedly makes the cut as being a 'socially responsible' company. Other publicly traded businesses deemed socially responsible by several investment firms-- and there are many-- include companies such as Apple, Whole Foods Market, CVS, Starbucks, Cigna, Nordstrom, Microsoft, Ford, Hershey, Expedia, Google, McDonald's and Loews.
So what makes a company pass the socially responsible test?? According to WBCSD (World Business Council for Sustainable Development),
"Corporate Social Responsibility is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large."
Hmm...well, there are many definitions out there in addition to this one. For me, a company is socially responsible if they treat their employees and customers well. It is responsible if it obeys the law, including ones that protect the environment. I also view animal welfare as important.
A lot comes down to what you feel comfortable owning. Perhaps this is a non-issue for you altogether, and that is for you to decide.
Economist Milton Friedman professed that businesses do not have social responsibilities and that "only people can have responsibilities." That being said, in his book Capitalism and Freedom (first published in 1962), he states,
"There is one and only one social responsibility of business-- to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
I disagree with Mr. Friedman's philosophy that a corporation cannot take responsibility. I do not believe that business's only goal should be to make a profit at any expense. 'The rules of the game' is pretty vague-- what exactly does that mean? The explanation of those rules is also blurry.
It's because of those blurs that rules and regulations have been imposed so that corporations cannot (in theory) hire children to work in sweat shops; they cannot dump pollutants into our streams, rivers, lakes and oceans; they cannot expose employees to hazardous materials without protection; they cannot falsely advertise their products. It's why there's a federal minimum wage law and it's why there are fire regulations. Yes, it is probably easier to run a business without all these pesky rules, but they were set in place to protect people from being exploited.
Because I would like my cake and be able to eat it, too, I believe businesses can make profits ethically. I agree with Kenneth Mason, president of Quaker Oats in the seventies, who said this:
"Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit."
If you have been reading this blog, you clearly know I feel that Disney recently made some corporate decisions that are not within the rules of my game. And I let them know my opinion about that. I'm all for profits, but not at any expense.
The 'Who Do You Love?' question from a few articles ago should come into play when you make your investment choices. Whatever you choose, you should be able to live with that choice. Personally I do not feel comfortable owning stock in tobacco companies. Tyson Foods Inc is another company I just can't fall in love with; their past record of animal abuse and cruelty is just not worth the fact that they have a 5 star S&P rating and are considered a strong buy by several analysts.
Yet I am aware that buried deep within at least one or two mutual funds we own, companies such as these may lurk.
So getting back to choosing between mutual funds and stocks-- begin with looking at mutual funds and/or ETFs before diving into picking individual stocks. Make a list of individual stock possibilities you like, and screen them carefully. I will try to get some screening process ideas in upcoming blog entries.
And take a few minutes to see what companies you have selected within mutual funds, so you have a better sense of what you actually own. This can be done easily online by following the links to a fund's portfolio holdings. I think I will refresh my memory and do the same!