Are Ethical Funds Important to You?

There is a saying that ethics and capitalism are two separate entities and one should not dictate what the other does. Of course, in reality most big corporations do their very best to act ethically, but often their capitalistic drive subordinates what the worlds views as ethical behavior. Look at Wal-Mart (an easy target) that buys merchandise that is cheaply made as a result of poor working and living conditions in third-world countries. Look at General Electric that builds refining equipment that is sold to areas where there is no potable water. Look at Phillip Morris, which manufactures a product that is known to increase the likelihood of cancer (alternately, beer producers also create a product that can increase certain types of cancer). All three of these companies are huge players domestically and in the countries where they operate. And all three can be considered unethical, depending on where one draws that magical line.

Although none of these companies are considered high risk investments, many ethical funds would not include them as past of their portfolio. Which brings us to the first question you should ask yourself:

1. Does my retirement look differently if I invest ethically? For most, that answer is not. In other words, you will always need $X in order to retire; that figure does not get reduced if your investments are considered ethical. In the dollars and cents world known as your retirement, ethical investing plays no role. It does not get you bigger discounts at the movie theater and it certainly does not allow you to retire ten years sooner (unless, of course, those ethical investments outperformed even your expectations).

2. What is considered ethical? All of the three companies cited above can also be considered heroic companies for a lot of the good that they bring to the world. Reinvesting their profits to improve quality of life, whether here or abroad, says a lot about the company. But is that enough to make them ethical or, more likely, less unethical? Some fund managers will say yes while others will disagree. That is the problem with ethical investing: it is such a flexible target that some would not even call it a target at all.

3. Emotions and investing do not mix. One of the fundamentals of successful investing is to never get emotionally involved with an investment. As romantic as this might sound, the fact is that many people fail to cut their losses because they "love" the company in which they have invested. Ideally, if an investor loves a company he or she should purchase its products, which is different than investing in it.

Remember, investing in a stock is about earning money, not so much about being saving the world. And even if it were, the line between ethics and capitalism is so fine that it often becomes impossible to see in the first place. While this does not suggest we need to support those companies by personally buying their products, using them to generate a profit the same way they use our planet allows us to achieve our financial goals.

Chris has more than 17 years of financial services experience. As a regular contributor to the Mutual Fund Site, he recently wrote about alternatives to Dividend Funds for those who are bearish on the popular sector. He also manages a website about Novaform Mattresses at NovaformMattressSale.com.