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This article was written by our friends at OpenInvest.
Investing is Anyone’s Game
Investing can seem complicated. Between Wall Street movies and jargon-filled articles, it’s easy to think that it’s only for the elite. But that’s not the case. Investing can be a smart and accessible financial move for anyone, especially with the increase in investment apps.
Think of investing as a way of saving. A savings account is low risk, which means it’s also low reward. But an investment is higher risk, and can provide higher rewards. Anyone can and should open a savings account. And experts recommend that once you’ve reached a level of near-term financial stability, you should start investing.
When you’re ready, investing is a great way to plan for long-term financial goals. An IRA (an individual retirement account) is a special tax-deferred account where you can invest for your retirement (different kinds of IRAs are taxed differently). A 529 is a similarly tax-deferred account where you can plan for your future educational expenses. But with a regular investment account, you can also invest just for you (without special tax benefits). Your investments can help you save for something big like the down payment on a house or a car, or even your next vacation.
The best part is that investing is more accessible (and cheaper) than ever before. Your parents may have a financial advisor that manages their investments. This was the old way, and these advisors typically charge high fees, and require high minimum balances. They then put you into a preset model, which means you don’t get much customization, while they make lots of money. But recent technology is upending the financial advisor industry and providing better options.
Now there are online advisors (or robo-advisors) that provide similar services to an in-person advisor, but for less. Your investments are usually chosen through algorithms that are optimized for your personal situation, and you can keep an eye on your investments and returns on your phone or computer.
Behind Passive Investing
Most casual investors use an investing strategy called ‘passive’ investing. Active investing is when you have some reason to believe that a company will do better than others, so you actively invest in that company. Passive investing means taking a broader view, and selecting some range of companies that you hope will do reasonably well over the long term. Most of the time, that means investing in an index.
An index is a big basket of companies chosen through some rule. The S&P 500, for example, includes 500 of the largest public American companies. Financial actors can create an index fund, where they buy shares of all the companies in an index. They then allow individual investors to buy shares of that index fund. You, along with a bunch of other people, are now invested together in those companies. Their profits directly influence your returns, and your investments contribute to their operations. (If you participate in shareholder actions, you can also vote on how they operate – to varying degrees).
But just who is in that big basket of big companies? It’s not hard to find out, but not many people take the time to look. Along with household-name consumer companies like Apple and GE, your money can be invested in all kinds of other companies and industries: Big Tobacco, for example, or weapons manufacturers, or big polluters. You might be invested in GEO, one of the largest operators of private prisons in America (and globally), or you might be profiting from the surge in gun sales that occurs each time there’s a mass shooting.
A Better Way to Invest
Socially responsible investing (SRI) is an answer to these questions. SRI is a strategy that lets you make the same decisions with your investments as you do with the rest of your money. SRI used to be available only to those with a ton of money to invest, but responsible investing is no longer just for major pension funds, endowments, and the wealthy. Technology is making SRI accessible to the everyday investor. Now anyone can do all of his or her investing in-line with their values.
Online financial advisors with modern algorithms make it possible to maintain a complete and diversified portfolio, while you weigh in on the things you care about. You can track not just how well your investments are doing, but also what kind of impact you’re making in the world.
We young people now are more socially and politically active than our predecessors. We protest, we rally, and we spend our money consciously too. So why shouldn’t that extend to our investments? In fact, Millennials (and women of all ages) are the ones pushing for increased accessibility of responsible investing. A Morgan Stanley study found that 85% of Millennials want to start investing responsibly, and they are twice as likely to divest from a company that they don’t agree with than older generations are.
SRI allows people to advocate for the specific changes they’d like to see in the world, and make a real impact, while making money instead of spending it! The movement to divest from fossil fuels, happening across university campuses, focuses on environmental impact. The recent trend of gender lens investing supports women in business and pushes for more balanced leadership of major companies. There’s even a growing trend of divesting from gun violence, like the New York City Pension Fund recently did.
You don’t need millions to start making a difference. Deciding where your money goes can make a real difference, and it doesn’t have to be at the cost of your own success! Studies over the last four decades have shown that responsible investing tends to work just as well as any other investing strategy (if not better). That’s why these days, 1 out of every 5 dollars is managed under an SRI strategy. If you’re financially prepared to start investing, doing it in a socially responsible way will be good for you and do good for the world.
Author: Jeff Gitlen