Lauren Migaki. Ethical investing is popular with many Americans. But what is it exactly? Knowing where to invest your money these days can be hard. There's bitcoin, NFTs, meme stocks, and if you're looking for a way to put your money where your morals are, there's ethical investing.
But how do you make sure your money is having the impact you really want? And everyone feels they've landed on it at different points. Whatever your cause may be, the idea that the money you invest can generate meaningful change and a profit is mostly referred to as ESG investing. But there are two main strategies for finding a good match.
Option one - choose a mutual fund or exchange traded fund that goes super-specific on one issue. MIGAKI: Or choose a fund that goes really broad, one where, generally speaking, the companies in the fund are doing some form of good.
But you may not agree with all the choices the fund makes. It could include a fossil fuel company that's doing really well on diversity goals or a company whose ethics are in a gray area. Otherwise, those fees add up over the course of decades, especially when we're talking about a retirement plan. THAKOR: That's going to be the best place to start off because it's been vetted by your company while they're wearing a fiduciary hat.
Express an interest in socially responsible investment options for your k. Thakor expects that there will be many more ESG options in the near future, and she says the industry has changed a lot. When she first started 25 years ago, ethical investing was mostly about excluding just a few specific companies. The first part of the portfolio has a higher risk and higher return. There are more ups and downs, but this leads to more money in the long term.
The second part of the portfolio has a lower risk cushion to reduce risk. The worst four-letter word in investing is FEES. Is it worth the high fees? This ends up cutting into how much money you make over time, which is made even worse with compound interest.
Research shows that passively managed funds are the best approach for individual investors. Aim for low cost, broad-based passively managed index funds. There are two categories that you can invest in:. Actively managed mutual funds that you can try to beat the market; with. The fund manager is trying to do better than the overall market.
Passively managed funds, like broad-based index funds that mimic market returns at low cost. These funds try to match the market and they have low fees. Index funds buy an index, which is a list of stocks so you end up owning a slice of each company in that index at a very small cost. To maintain your asset allocation, rebalance your portfolio periodically. This usually means annually or after a big move in the market. Some portfolios automatically rebalance for you if you sign up for this service.
Once your portfolio is set up, leave it alone so it can do its work.
One that is a little more difficult to try and focus on would be clean energy. Is nuclear clean energy, or is nuclear not clean energy? And so you can take a topic that on the surface sounds so simple, but there are differing viewpoints. The way it looks in practice is that you really have to pull back the wrapper and see, what is the specific investment strategy if it's a separately managed account and an institutional manager running those funds?
MIGAKI: I like how you compared it to love because it's like there's a different partner for everyone, and those partners have different things that we look for, right? We all aren't looking for the same thing. And I think the same thing goes with ethics, right? We all have different bars. And so it sounds a little bit like you're saying if you're interested in getting into this, you should kind of pick the thing that you want to prioritize.
Although part of the problem is just because you pick what you want to prioritize doesn't necessarily mean you're going to get that. So if we want to continue on with our love analogy, let's take a dating app. And you swipe right, and the other person swipes right. And you have this image based on the profile.
And then you meet in person. And sometimes, it can be a huge shock. And that's what happens. To give you an example, I've had individuals look at the holdings in a specific ESG fund and say, oh, my God, there's Exxon in here. I don't want Exxon Exxon in here. But it happened to be that, you know, Exxon was rating really well on its DEI policies. The fund came in on that element. And so the thing that I am most worried about - but also most excited about - when it comes to ESG investing is that we are in the early days.
And enough people are interested in it that I think we're going to have some very creative solutions as compared to, what did this look like when I started in the industry 25 years ago? And it typically had to do with religious exclusions. So for a long time, the Catholic Church had a ban on owning any stocks in portfolios that involved its funds that dealt with abortion or birth control-related products and services.
Then more broadly, other groups would start saying, I want no sin stocks - no alcohol, no tobacco. Then we went through kind of this dormant period, which I would say is most of the '90s up until early s. What would happen is if you wanted ethical investing, typically, portfolio managers would say back to you, oh, that's ridiculous.
Just make as much money as you possibly can, and make a difference with your charitable giving. I highlight this 'cause there's a lot of frustration on the part of people wanting to take part with ethical investments and not feeling like they're making a difference. And I just want people to understand things are definitely improving. I definitely think we're at the very early stages. And the reason we're at the very early stages is there is no broad consensus on, first of all, what is an ethical stance in the environmental context, in the social context, in the governance context.
On top of that - and perhaps even more importantly - there is no standardization as to how you measure and monitor that. So the period that we're going through right now is, like, trying to find our ethical investing love language. We're trying to figure out how to define very fuzzy concepts in a way that is measurable, transparent and consistent. THAKOR: It's - one of the ways I have been answering that question is to say that sometimes what we're trying to do is use a point to guide our actions and make sure each incremental next step is one that is beneficial and not detrimental to the goal at hand.
But actually arriving at that point is - like at a point of nirvana is not something that's ever going to happen, you know? So we meditate, right? And we meditate, and we try and calm our thoughts. But we never get to a place where we totally can, you know, quiet down what the Buddhists would call our monkey mind. And so it's the same thing with ethical investing, unfortunately, because one of the key inputs to ethical investing are humans, and us humans are flawed. And so it will never be perfect.
But one of the things that I think the interest, the explosive interest we've had in ethical investing has done is link the word ethical to business. So I hear you. Taking baby steps towards ethical nirvana is better than not trying at all. I am a regular person who knows very little about investing. How do I get started? I find that the investment world can sometimes be kind of unapproachable and scary and kind of confusing. What do I do? THAKOR: The shortest answer is to use a low-cost mutual fund, or ETF, that either focuses on a single issue that you believe in passionately or that has a broad, broad focus so you understand that you aren't going to be able to pick and choose each nuanced concept.
But generally speaking, the investment vehicle is focused on companies that are trying to make sure that their next step forward is closer towards making the world a better place than a worse place. And to protect yourself, take a look at the investment fee. I like to see a fee of no higher than a half a percent on mutual funds and ETFs.
Can we expect similar returns on an ESG-type fund? How financially sound is it to put all of our eggs in that basket? THAKOR: I would say if you are using the broad approach in an indexed manner, you are diversifying your risk dramatically. But the issue of whether or not there is a return penalty to using ethical investing is hotly debated. And it's not an easy question to answer because there are now so many different types of ethical investments.
So, you know, one way to think about it is, broadly speaking, you know, we're thinking, I'd like to retire at X age with Y amount of money. This is how much I'm saving a year. What kind of return do I need to generate in order to get there? And then you can see, did my ethical investments exceed or fall below that return? Are you seeing places where it's become more mainstream to choose to put your retirement in some of these places?
THAKOR: So I've seen a dramatic increase in a interest on the part of employees to have the option to engage in ethical investing in their k , b workplace retirement plans. But you may not agree with all the choices the fund makes. It could include a fossil fuel company that's doing really well on diversity goals or a company whose ethics are in a gray area.
Otherwise, those fees add up over the course of decades, especially when we're talking about a retirement plan. THAKOR: That's going to be the best place to start off because it's been vetted by your company while they're wearing a fiduciary hat. Express an interest in socially responsible investment options for your k. Thakor expects that there will be many more ESG options in the near future, and she says the industry has changed a lot. When she first started 25 years ago, ethical investing was mostly about excluding just a few specific companies.
It cannot erase the very real harms done to the planet and society. It's just something we've done to make ourselves feel better after we've ruined the planet. She says it's a win that the word ethical is even tied to business nowadays. It's just part of doing business. Of course you pay attention to these factors. MIGAKI: And she says while we may not see immediate change, she's heartened to see that folks are at least trying to push that boulder up the hill.
Thakor expects that there will be many more ESG options in the near future, and she says the industry has changed a lot. When she first started 25 years ago, ethical investing was mostly about excluding just a few specific companies. It cannot erase the very real harms done to the planet and society.
It's just something we've done to make ourselves feel better after we've ruined the planet. She says it's a win that the word ethical is even tied to business nowadays. It's just part of doing business. Of course you pay attention to these factors. MIGAKI: And she says while we may not see immediate change, she's heartened to see that folks are at least trying to push that boulder up the hill. If you're interested, go to npr. All rights reserved.
NPR Shop. Life Kit: How ethical investing works Ethical investing is popular with many Americans. Your Money. Life Kit: How ethical investing works. Facebook Twitter Flipboard Email. January 23, PM ET. Heard on All Things Considered. ARNOLD: But of course, the reason that Brigitte and David really don't want me to jump off the stock market roller coaster after it plunges down is that if you sell your stock at the bottom, you are locking in those losses.
If you don't sell, you can ride that roller coaster right back up when the market recovers, which it always has eventually. But if you sell, you are left in a ruined heap at the bottom. And when you sell in the midst of a crisis, you can put yourself in a position where your portfolio will never recover.
MADRIAN: So if you're feeling really emotional about something - you're, you know, really excited, or you're really afraid - that's probably not the best time to make a financial decision. ARNOLD: And we should say that we did this episode before the pandemic, but all this stuff is still obviously very, very true.
I mean, this just happened again, right? COVID struck, the markets crashed, everybody's freaking out, and I'm sure some people were selling stock. That's why the market goes down. And quicker than anybody thought, the stock market roller coaster came roaring back up. And I didn't sell any stock when it fell. You just don't do it. Don't jump off the roller coaster. If you hang in there, you are in much better shape. You can make mistakes.
Putting the money in a savings account might feel safer. But that's like sitting in a parked car. I mean, it's boring, and also you're just not going anywhere. The market, though - honestly, the market is your rocket ship to make money over the long term. It gets the best rate of return. You have to be in the stock market. That said, though, you don't want to put all of your money into stocks because they are riskier. They go up and down more, and there's stocks, and there's bonds, and there's real estate funds.
And beyond the U. How do you figure out the right mix of all these different ways that you can invest your money? And a lot of you out there have questions about this. We heard from one listener named Lindsey back in She and her husband had just opened a bagel shop. My name's Lindsey ph. I live in Medford, Mass. So looking for any sort of good guidance as to what I can do with the money I have that I'm clearly not contributing to probably for a while unless the bagels are laughter selling like hotcakes immediately.
How should Lindsey and the rest of us actually be invested? OK, you're going to want to pay attention here. This is not only tip No. David Swensen did this really cool thing in his book. He made this super-specific cheat sheet basically for how to set up a smart, well-diversified portfolio to earn a lot of money for later in life. And it's so good. Like, when people ask me like, hey, Chris, how should I invest my retirement money?
And I'm like, well, you know, I'm a reporter; I shouldn't tell you exactly how to invest your money. But go look in David Swensen's book. It's on Page He just spells it all out. Here it is. These are the Chinas and the Indias and the Brazils. You can also buy a real estate fund. OK, so all that stuff that David just said - it's a bit higher risk and higher return, as they say, which means that you should make more money over the long term, but there might be some more ups and downs.
And then finally, the last part of David's portfolio is a lower-risk cushion. Treasury Inflation-Protected Securities. We've got you covered. It's all listed at npr. So I didn't even realize that there were fees laughter. So I have no idea. I guess it didn't occur to me that there were fees until, like, right now laughter. Many people don't realize that there are fees associated with their investments. Or if they know there are fees, they have no idea what they are.
And the reason is because the fees are not charged as a separate line item. ARNOLD: In other words, the companies who hang onto your big bag of retirement money - they don't jump up and down and say like, hey, here's how much money we're charging you in fees; check out these big fees. And you don't have to pull out your Visa card and pay them a thousand dollars.
They already have your money, and they just quietly take their fees out of it. Yes, it's disclosed in the fine print, but that's often hard to see. And then another thing happens. When we do find out about the fees, our brains trick us into thinking that the math works out differently than it actually does.
That's not bad. The right benchmark is, what's the return you're getting on that investment? And that can have a huge impact on how quickly your money accumulates. And yet, many people like Lindsey don't even know what the fees are. But once you get this key concept, things click into place. They did for Lindsey. It's big. You're, like, just saying goodbye to that. Is this just collecting information? I'm like, I need to learn this stuff better laughter.
This is our next big takeaway from David Swensen. He says that all the research shows that index funds are the way to go. In other words, passively managed funds. That's kind of a weird word - passively managed. But here's what I mean by that. You basically have two categories of funds that you can invest in. And he's wearing fancy shoes and wearing a suit. And he's hoping that he'll put together this little group of stocks and that they're going to do better than the overall market. And that sounds OK, maybe.
They're not going to be able to beat the market after you factor in the fees that they're going to charge you for their efforts. Broad-based index funds are designed to mimic market returns at low cost. An index fund doesn't pick stocks because it thinks that they're going to do awesome. It just blindly buys an index.
And all it means is it's just a list of stocks. It's just blindly buying them. And at its heart, a broad-based index fund - this is very cool. What it does is it lets you own a slice of all of corporate America at a super-low cost. And if you think about that, you get to bypass all of the Wall Street middlemen and the brokers and the people trying to charge you big fees and some guy calling you, saying, you know, hey.
I got this great stock tip. You know, you should buy this. You should buy that. And you'll be far better off than with the actively managed alternative. He says there's one major investment firm out there that is different from all of the other ones because it's structured, basically, as a nonprofit.
But he says it's just the way it is. Vanguard's founder, Jack Bogle, is like the George Washington for this low-cost index-fund-investing revolution. He set up this company in this nonprofit-style way with the mission to give people a range of index funds and advice that's in the customer's best interest.
And David Swensen says, look; people should know that. ARNOLD: Now, have you ever driven an older car where one of the tires is out of whack and it's, like, wobbling and it's herky-jerky and things just aren't feeling quite right? I work in public radio. And especially when I was first starting out, I actually owned cars like this and drove them, like, for longer than I should have. It was probably dangerous. But that same sort of thing can happen to your investment portfolio. So periodically, when things get out of balance, you have to fix it and put them back into balance.
And you brought up an incredibly important concept in what you just said. And it's the concept of rebalancing. You start out with the pie slices for stocks and bonds and real estate. And they're all the right sizes, where they're supposed to be. But then the world changes, right? I mean, there could be a trade war or trouble in Europe or foreign markets that they start - things happen and stock prices go way up or down and bonds change, too. And those pie slices, they change size. So what you want to do is you want to get them back to where they're supposed to be.
And to do that, what you're actually doing is you're selling stuff that went up in value and buying stuff that went down. Buy low, sell high. That, David says, is a good way to make money. And you don't even have to do this rebalancing thing that often. SWENSEN: At least once a year and, certainly, after a big move in the markets, make sure that your portfolio is where you want it to be. MADRIAN: And if you're in a retirement savings plan, some employers have plans that have an automatic rebalancing feature so that they will - you don't have to worry about it.
They will do that for you if you sign up for it. Do the work. Put the portfolio together. Forget about it until laughter there's a rebalancing reminder on your calendar because obsessing doesn't help laughter. And it's likely to lead to interventions that would be counterproductive. Do what you need to do, and then forget about it until you need to pay attention to it again.
Investing in a smart way can get you set up for whatever the Life Kit episodes that will bring you closer to financial independence. From NPR's Life Kit, Lauren Migaki breaks down how ethical investing works and whether it might be right for you. LAUREN MIGAKI, BYLINE. In this episode we talk to one of the best investors on the planet David Swensen told NPR for our Life Kit podcast episode on investing.