Golden rules of ethical investing: here's how to be smart about your money—morally and financially—in today's volatile market - Consumer guide: learn how to be educated consumer

Natural Health, Jan-Feb, 2002 by Daphna Caperonis

NOWADAYS THERE ARE MORE WAYS THAN EVER to grow your money and create positive social change at the same time. The most popular form of socially responsible investing, as it's known, is buying screened mutual funds. When you purchase one of these funds, you're buying a share of companies that don't, for example, dump heavy metals into waterways and do, for example, pay a living wage to all their workers. These screened funds currently number more than 175, up from just 55 in 1995, and Americans have more than $150 billion invested in them.

If you haven't already, you may be tempted to join these socially responsible investors. Yet you may be asking: Is now the right time? Last year was one of the most volatile in the history of the stock market, but financial experts are quick to point to a silver lining. "Stocks are a good deal cheaper than they have been in years," says Eric Tyson, a financial counselor and author of Investing for Dummies (IDG Books, 1999). "As long as you're patient, there's lower risk in investing now."

Keeping today's market and an array of options in mind, we sought the advice of top ethical investing experts. Here are our golden rules for building a golden nest egg.

RULE 1: CLARIFY YOUR FINANCIAL GOALS

Socially responsible investments (SRIs) function like any other financial investment. So before you put your money where your heart is, make sure you know a few key financial principles.

There are two major types of financial investments: ownership investments, like stocks and mutual funds, and lending investments, including bonds and certificates of deposit (CDs). Stocks, or pieces of ownership of a company, allow you to share its growth and profits through dividends or make your own profit if you sell the stock at an appreciated price. (On the negative side, stock prices can plummet and take years to recover--or never recover.) Mutual funds pool investors' money to purchase a variety of stocks and sometimes bonds. (Some mutual funds buy bonds exclusively, making them lending investments, but in this article when we refer to mutual funds we mean stock mutual funds.) Because they invest in dozens or hundreds of companies, mutual funds spread your risk. Additionally, investing professionals manage mutual funds, so you can get the financial advantages of owning stock without spending hours every day researching companies.

Bonds are generally more stable than stocks or mutual funds. If you buy a bond, you promise to lend your money to a local or national government or a corporation. In return, you receive a specified amount of interest. You can also lend your money to a bank through a CD or savings account. (For more on lending investments, see "Rule 6: Get to Know Lower-Risk Options," page 79.)

Over the long term, stock market investors earn higher returns than bond investors and much higher returns than people who keep their money in an interest-bearing bank account. But don't expect to profit by selling stocks shortly after buying them (also known as "beating the market"). That maxim goes for SRIs especially. "You should never buy an SRI fund because you want to beat the market," says Jason Zweig, a columnist for Money Magazine in New York City. "You should buy an SRI fund because you want your money invested in companies whose ethics you approve of." In other words, your dollars do the most for you and the company if they're invested for the long run.

Once you understand investing basics, you'll build a portfolio, or compilation of all your investments. How much money you allot to stocks, mutual funds, bonds, and other investments will depend on a multitude of factors, including your financial goals, your risk tolerance, and your age.

However, you can get a ballpark idea of the right mix by checking out free financial goal planners on the websites of Morningstar (an independent company that ranks mutual funds by their performance; visit www.morningstar.com) or financial services companies like Charles Schwab (visit www.schwab.com). But unless you're an experienced investor, it's a good idea to work with a financial professional. (For tips on choosing one, see "Rule 8: Find a Good Advisor," page 83.)

RULE 2: CHOOSE SCREENS WISELY

The criteria that SRI funds use to make socially responsible investments are called screens. SRI fund managers use screens to include or exclude stocks or bonds based on a company's practices. Screening does have some drawbacks but you can avoid them. First, find out what screens the fund you're considering uses. To do this, request a prospectus (the legal disclosure of the fund's operations and fees) or call the fund manager, whose name appears on the prospectus. Next, here's what you should consider:

The most common screens may not match your social priorities. If you're passionate about diverse issues, you may be out of luck. Tobacco, gambling, weapons, and alcohol were the four screens most often used by funds in 1999, according to a report by the Social Investment Forum, a nonprofit trade group based in Washington, D.C. (Tobacco was banned from 96 percent of screened funds.) Labor issues, on the other hand, were considered by only 38 percent of SRI funds. So if you believe strongly in strengthening the U.S. military budget and in supporting a living wage for factory workers, finding an appropriate SRI may be tough. "Americans are highly individualistic," says Zweig. "If you are an independent thinker, most SRIs are too primitive and monolithic to do the job." You'll have to compromise: Figure out which issues you care about the most, and then look for screened funds that match your goals.