Socially responsible investing. For the last decade it’s been all the buzz in financial planning circles. The idea: invest in companies that promote social good (such as environmental protection, human rights, consumer protection, etc.) while divesting from companies that do objectionable things.

I have great respect for anyone principled enough to invest in this way. But there is a downside to this approach that investors and their advisers often deny: Socially responsible investments are not always the most fiscally responsible investments.

Don’t get me wrong. I don’t want you to invest in Club the Baby Seals, Inc. I don’t believe in profit at any cost. I applaud the socially responsible business. I’m simply saying that investors choosing the socially responsible path should anticipate lower returns.

Most importantly, the socially responsible investor may ultimately do less social good than a more fiscally responsible investor.

Here’s an example:

John and his brother Bill are both socially responsible. They care greatly about the environment, particularly the ocean and marine life. John and Bill both invest in stocks. John chooses stocks that will maximize return. Bill practices socially responsible investing. Among his investments, a company that uses dolphin-safe fishing nets. Both John and Bill establish a portfolio with a $100,000 initial investment that they plan to donate to Greenpeace when they pass. Each will live 25 more years.

Bill, the socially responsible investor, will average a 7% annual return. John, the fiscally responsible investor, will average an 11% annual return.

After 10 years, Bill’s socially responsible portfolio (at 7%), will grow in value from $100,000 to $196,715. John’s fiscally responsible portfolio (at 11%) will have grow from $100,000 to $283,942.

After 25 years, Bill’s portfolio will grow to $543,000 which his estate donates to Greenpeace. John’s will grow to $1,36 million. The difference — about $800,000. By choosing fiscally responsible investments, John can make a much larger donation to Greenpeace and ultimately have a much greater social impact. In fact, over the 25 years that John invests, he could cash in some of his portfolio, make donations while alive to Greenpeace or other causes, and still end up way ahead of Bill. Meanwhile, John would be earning enough money to buy the dolphin-safe tuna which costs more than the other kind.

Let me give you another example that is a real-life delimma.  Many people are snapping up hybrid autos.  Saving money on gasoline may be their motive or perhaps the environmental issues are the reason to purchase such a car.  In a recent WSJ article, they did the math on the various hybrid models regarding how long it would take to recover the premium you have to pay under normal driving conditions and $4 per gallon fuel.  The Prius was the best, requiring 3 1/2 years of driving until the premium cost was recovered.  The worst models required more than 7 years.  So unless fuel prices go up or unless you drive lots of miles in a year, the economics really don’t justify the purchase.

So what’s the more “socially responsible” thing to do, get the hybrid or set aside the premium and invest it or give it away?  That’s an individual choice, but donating the money to an environmental cause that has traction might create more good than owning a hybrid.

Again, I don’t begrudge anyone who wishes to invest in companies that are “socially responsible” or for those who drive the hybrids. But in the end, the most socially responsible thing would be to grow your assets aggressively so you have more to give — throughout your life and in a socially responsible estate plan.

Posted in BIG Blog, Guidance