So you want to be a socially responsible investor? Good for you! There are thousands of public companies out there, and you can't invest in all of them (unless you opt for a broad-market index fund), so why not park your dollars in the ones with the best reputations?
Let me tell you why: There is a reason not to look only at socially responsible companies when you invest. That's because -- in my opinion, at least -- when you invest, you should first and foremost be looking for the best returns, and you do that by simply asking yourself which stocks (or other investments) are most likely to give you the returns you seek.
Looking for leads
Once you've got a list of strong contenders, you might then consider how responsible each firm is. And remember that few companies are entirely clean. A firm might recycle, and hire minorities, and not pollute, but it might make fatty foods. It's a complex world.
Another approach is to find a group of generally socially responsible companies and then select the most promising investments among them. To get some candidates for such a group, you can look at the companies that managers of some socially responsible mutual funds own.
The Winslow Green Growth Fund (WGGFX), for example, recently had substantial positions in well-known socially responsible companies including Whole Foods
Got the idea? Just look up a bunch of socially responsible funds, and see which companies are in their portfolios, especially those they've got the most money in and those they've been buying recently. Don't blindly buy into any such companies without doing additional research, though. You might also consider just investing in a socially responsible mutual fund, because that will relieve you of having to make all of the buying and selling decisions.
Note, however, that as with most mutual funds, many socially responsible funds don't have market-beating performances, so be picky. It's for this reason that cherry-picking some ideas from within a fund's holdings can be a better investing idea than investing in the fund itself.
If you'd like to find some top-notch mutual funds both inside and outside the socially responsible sector, I invite you to take advantage of a free, no-obligation trial of our Champion Funds newsletter. Analyst Shannon Zimmerman delivers recommendations and updates each month with picks that have substantially outperformed the market, including one of the funds listed above, which is up more than 35% in the two years since it was recommended. Try the newsletter for free, and you'll be able to see all of his picks and how well they've done.
Learn much more in these Zimmerman articles:
And you can learn more about socially responsible investing in these articles:
This article was originally published on Sept. 12, 2006. It has been updated.
Whole Foods is a Motley Fool Stock Advisor recommendation, and AT&T is a former Stock Advisor pick.
Longtime contributor Selena Maranjian's favorite discussion boards include Book Club, Eclectic Library, Television Banter, and Card & Board Games. She owns shares of Yum! Brands. For more about Selena, view her bio and her profile. The Motley Fool is Fools writing for Fools.