As an example of living the FI principle, every so often people ask me “what is this investing thing you speak of – isn’t it all just a grand casino”. And I point ’em right over to that Monevator fellow who has done most of the hard work, specifically to the passive investing section. Although for a few pints I will talk the specifics of their situations I try and emphasise it’s all ideas and DYOR and all that – everybody is different ,in philosophy, temperament, risk tolerance and lifestyle. However, there are some things people often miss – a few people at The Firm were pointed at investigating AVCs and some others to consider a SIPP. Pointing people at passive investing is pretty much like buying IBM was in the old days – nobody gets fired for it, though it’s curiously passionless at times.
And then every so often somebody comes along and throws you a curve-ball – in this case it is Mrs Ermine, who is looking at pension investing, and to date the general answer has been something like Vanguard Lifestrategy 100 – do so for 20 years and you’d expect to get about the amount you put in monthly back. This is because of the 5% SWR limit and ignoring compounding, as a rule of thumb it’ll do. This is part of her pension savings, Mrs Ermine is far more entrepreneurial that I am so some of the assumptions one makes for wage slaves don’t really apply.
Unlike myself, Mrs Ermine thinks about the wider issues and comes to the conclusion that she wants to invest ethically. This is totally outside my ken. First thoughts are that it obviously reduces the action space somewhat and therefore will intuitively underperform. It also immediately debars you from index funds; you’re becoming an active investor if you decide that fossil fuels are a no-go area, f’rinstance, along with the whole Guardian thing. I know some other PF bloggers have given this some thought – Keeper of the Cauldron on fossil fuels and on wider ethical considerations here. The search for ethical solutions seems to take Cerridwen into racy territory – Abundance crowdfunding strikes me as having a risk profile way ahead of publicly quoted equities and terribly difficult for members of the public to qualify the risk balances.
Now I have to admit that the cynical me doesn’t see a world of people deciding to leave fossil fuels in the ground unless something cheaper and hopefully less polluting comes along. I only have to see the 4x4s on the school run, listen to the increasing racket of jets in the sky and look at the concomitant scarring of our evenings with vapour trails and how quickly no third Heathrow runway at the start of the Coalition became a firm proposal for one to think that this is the wrong side of the bet, and that’s without the increasing power drain of IT since you’ll only prise smartphones from the cold, dead hands of the addicted consumers. I’d be surprised if this happens in my lifetime, and to be honest, if it does, I think all our investments are going to be written off in such a zero-growth or negative growth world. Capitalism needs growth like a vampire needs fresh virgin blood. It’s perfectly possible to postulate successful zero or low-growth economies, and indeed we seem to be going ex-growth as it is, but they don’t look like industrial consumerism, and they don’t have endless smartphones, city breaks and foreign holidays in them for most people.
But this isn’t my fight. To invest ethically you have to decide either what is ethical, or conversely what isn’t. At the moment Mrs Ermine is in the latter camp – fossil fuels and industrial agriculture are what she wishes to avoid. It’s probably not exhaustive – indeed one of the issues of ethical anything is that it’s fundamentally difficult to be a blameless consumer if you chase anything to its logical conclusion. One should probably add CAFOs to the list, so Smithfield Foods probably fall into the beyond the pale category as well.
An Ethical Investor is an Active Investor?
To my eyes the two go together, although I’d like to hear different. By definition you’re selecting a subset of the investable universe. Now one option would be to be a stock picker, but that’s probably not how Mrs Ermine wants to spend her time, so it’s probably along the lines of this list of ethical funds. Now I don’t do funds unless they’re index funds and the history of non-index funds isn’t illustrious. I observe that Vanguard do offer a couple of socially responsible index screened funds in this list but again, what does that mean? Are there options for ethical investment trusts?
The investment return is low enough as it is – that 4-5% real return hasn’t got much fat in it. To combine active investment and artificially reducing the investment universe seems to be a tough headwind to fly into. Even in the ITs – take Impax Environmental f’rinstance – over the last 5 years the improvement in NAV seems to have been buried in the -12% discount to NAV.
The whole thing does my head in and I have no idea where one would start. The Ermine, with the libertarian social bias is not going to be an expert in this sort of thing but hopefully some readers have given this some thought. Am I missing any rich seams of knowledge or obvious goto places for ethical investment at low cost?