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 firms with the best reputations?
Well, permit me to contradict myself: There is a reason not to look only for socially responsible firms when you invest. When you invest, you should first and foremost be 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 firms 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 firms that are generally socially responsible, and then select the most promising investments among them. To get some candidates for such a group, let's see which companies the managers of some socially responsible mutual funds are investing in:
The Ariel Appreciation Fund (CAAPX) recently had 4.8% in Accenture
(NYSE:ACN)and 2.6% in Clorox (NYSE:CLX). The fund has a five-year compound average annual return of 14% and an expense ratio of 1.16%.
The Calvert Large Cap Growth Fund (CLCIX) recently had 2.5% in Apple
(NASDAQ:AAPL)and 2.1% in Hewlett-Packard (NYSE:HPQ). The fund has a five-year compound average annual return of 18% and an expense ratio of 0.96%.
The Pax World Balanced Fund (PAXWX) recently had 1.9% in Cisco Systems
(NASDAQ:CSCO)and 1.4% in Cemex (NYSE:CX). The fund has a five-year compound average annual return of 11% and an expense ratio of 0.94%.
Got the idea? Just look up a bunch of socially responsible funds and see which firms 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 additional research, though. You might also consider just investing in a socially responsible mutual fund, as that will relieve you of having to make all 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. This is one reason why, in some cases, it can make more sense to cherry-pick some ideas from within a fund's holdings than to invest in the fund itself.
If you'd like to find some top-notch mutual funds, I invite you to take advantage of a free, no-obligation trial of our Champion Funds newsletter, which delivers recommendations and updates each month. Foolish fund expert Shannon Zimmerman even has a socially responsible fund among his recommendations, and it's up more than 45% in the two and a half years since it was recommended. Try the newsletter for free, and you'll be able to see all his picks and how well they've done.
Find out more in these Zimmerman articles:
Or learn more about socially responsible investing:
This article was originally published on Sept. 12, 2006. It has been updated.
Longtime contributor Selena Maranjian owns shares of Cemex. Accenture is a Motley Fool Inside Value recommendation. Cemex is a Global Gains and Stock Advisor pick. Try any one of our investing services free for 30 days. For more about Selena, view her bio and her profile. The Motley Fool is Fools writing for Fools.