Moral Screening For Investments (Part 3)

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If you’ve read the Free Report on Biblical Investing, and the first two articles on Moral Screening For Investments, you know that I concluded that it is proper, wise, and beneficial for Christians to employ some type of moral screen in their investing activities.

However, I have struggled with one particular implementation of that conclusion: how to apply it to index investing. I wish that FaithShares or some low cost equivalent was still around. But to my knowledge, there isn’t any such firm around right now. I wish that the Biblically Responsible Investment Institute would get together with Vanguard and become the moral advisor on a low-cost, morally-screened, but otherwise passive index ETF. But to my knowledge, such a product doesn’t exist. So, I’ve been left with a dilemma.

In my time working in the investment management profession (which included working as an investment research analyst for a bank that owned and managed its own mutual funds), I came to the conclusion that actively managed investment vehicles were generally a very bad idea. I wasn’t alone. I worked right beside mutual fund managers that invested all of their personal money in index funds. Yes, you read that right. People that get paid (out of those high fees) to actively manage other people’s money often put their own money into low cost index funds. Personally, I have never chosen to invest in an actively managed mutual fund.* I have always invested in individual stocks. But I have encouraged family members to pursue individual stocks and index funds in the past. The biggest key to success in stock investing is that YOU DO IT. Beyond that, you should keep expenses as low as possible, and hold onto investments for the long term... ignoring all of the noise, and the natural impulses to sell when things sound bad. Indexing is an easy way to accomplish those things.

So, clearly I believe in indexing to a large degree, at least from a purely economic perspective. But without the inclusion of a moral screen over top of the index being followed, indexing ignores any moral component to selecting stocks. Beyond that, there is the risk that the indexes will fail to repeat their past success. History tells us that indexing is, more often than not, an incredibly wise strategy (and the Bible instructs us not to ignore history). However, the Bible also tells us that some uncertainty (risk) will always remain in life, and in investing. This is true with indexing, just like it’s true with everything else. So, while indexing is one of the wisest investment strategies in existence, it’s still not a sure thing.

Getting back to the moral aspects of it, I want to share some recent revelations I’ve had. I recently highlighted Target Corporation stock (TGT) for readers of my Dividend Focus newsletter. I noted in that report that even for those of us who have an issue with alcohol and tobacco profits, I don’t think it’s realistic or reasonable to avoid investments in retailers such as Target just because they sell alcohol and tobacco. I see it as an exercise in gnat straining. However, I still believe that I should avoid investing directly in alcohol and tobacco companies, because to do so would violate the guidance of my conscience.

[By the way, as it turns out, Target stores do not even sell tobacco. I have listed a correction at the bottom of that report.]

But there’s an interesting parallel when it comes to indexing. I’ve been of the opinion that I should personally avoid index funds (or any vehicle that doesn’t have a moral screen) because there is some small percentage of profits coming from companies and products that I don’t personally agree with, such as alcohol, gambling, tobacco, pornography, immoral entertainment, and certain medical related products (such as abortifacients). But, how is avoiding an index fund because a small portion of profits comes from such products any different than avoiding Target stock because a small portion comes from alcohol? Maybe it is different because in one instance I'm making some kind of effort to do the right thing, and in the other I'm saying, "It's all an exercise in futility and possibly legalism, so I'm not going to do this at all." I've mentioned before my own opinion that just because we can't achieve perfection with moral screening of investments, that doesn't mean we shouldn't try at all.

However, when it comes down to it, it weighs more heavily upon my conscience to steer people away from index funds and toward more expensive options just because the expensive options have a moral screening component. Plus, I don’t like the idea of “peddling morality”. I had to constantly ask myself if that’s what I was doing when I started this venture. Helping people invest according to their conscience? Yes, absolutely. I want to do that. Hard selling people on an investment product or strategy through the use of guilt? Absolutely not! Basically, I don't want to call something unclean for another person whose conscience says that it is clean.

Here’s the deal. I think the Bible is very clear on certain things that relate to business and investing. In our investing activities, we should avoid compromising our moral values in the pursuit of more money. That’s the very definition of greed. Greed is not wanting more than we need. If that is the definition, we’re all guilty 100% of the time. Rather, as I study scripture, I interpret greed to be characterized or even defined by a willingness to do immoral things in order to get more money. If I want money so badly, that I’m willing to compromise following biblical principles, including the guidance of my own conscience, in order to get more of it, that means I’ve fallen victim to greed.

I think most of us understand this at a basic level. We realize we shouldn’t cheat employees or customers just to get a few extra dollars for ourselves. We realize we shouldn’t lie. We realize we shouldn’t take advantage of the poor, the addicted, or the desperate. But how all of this applies to investing in publicly traded securities is open to interpretation. There is no scripture which says, “Thou shalt not invest in an index fund.”

Here is the bottom line for me. The most important financial principles for Christians are to avoid debt, give/tithe, be generous toward others, save, invest, and generally to avoid materialism and greed. We should be good stewards of the financial resources God gives us. If we stay in financial bondage, we're dragging ourselves down. We're being ineffective and unproductive. If we make wise decisions with our money, it brings freedom to do a lot more good in the world.

Moral screening of stocks may be a small part of our overall financial approach, at least for some of us. It may not be for others. In the grand scheme of financial and moral responsibility, moral screening of investments is there, but it falls pretty low on my priority list. Don't get me wrong, I think it's wise and good to invest directly in stocks because it is financially attractive to do so, and it's also easy to implement our own personal moral constraints. However, the more I talk to people about these topics, the more I realize it may not be realistic or reasonable for many people to do the work involved. Further, many Christians may have no moral qualms whatsoever about investing through broader investment vehicles that do not operate with moral constraints.

My primary purpose with this website is to help other Christians employ wisdom in making investments. It would be very economically unwise to invest in expensive, actively managed mutual funds just to avoid having a percentage of profits come from certain types of products and companies. But some people will still want easy to implement approaches that also offer a moral screen (e.g. actively managed funds with a moral component). Each person must act according to their own conscience. That is the key. So, I’m going to do my best to help those whose consciences allow them to index, and I’m going to do my best to help those whose consciences tell them to have a moral screen.

For me, and my specific role in helping others, the final instruction comes from Romans Chapter 14:

Romans 14

English Standard Version (ESV)

Do Not Pass Judgment on One Another

14 As for the one who is weak in faith, welcome him, but not to quarrel over opinions. One person believes he may eat anything, while the weak person eats only vegetables. Let not the one who eats despise the one who abstains, and let not the one who abstains pass judgment on the one who eats, for God has welcomed him. Who are you to pass judgment on the servant of another? It is before his own master that he stands or falls. And he will be upheld, for the Lord is able to make him stand.

One person esteems one day as better than another, while another esteems all days alike. Each one should be fully convinced in his own mind. The one who observes the day, observes it in honor of the Lord. The one who eats, eats in honor of the Lord, since he gives thanks to God, while the one who abstains, abstains in honor of the Lord and gives thanks to God. For none of us lives to himself, and none of us dies to himself. For if we live, we live to the Lord, and if we die, we die to the Lord. So then, whether we live or whether we die, we are the Lord's. For to this end Christ died and lived again, that he might be Lord both of the dead and of the living.

10 Why do you pass judgment on your brother? Or you, why do you despise your brother? For we will all stand before the judgment seat of God; 11 for it is written,

“As I live, says the Lord, every knee shall bow to me,
and every tongue shall confess to God.”

12 So then each of us will give an account of himself to God.

Do Not Cause Another to Stumble

13 Therefore let us not pass judgment on one another any longer, but rather decide never to put a stumbling block or hindrance in the way of a brother. 14 I know and am persuaded in the Lord Jesus that nothing is unclean in itself, but it is unclean for anyone who thinks it unclean. 15 For if your brother is grieved by what you eat, you are no longer walking in love. By what you eat, do not destroy the one for whom Christ died. 16 So do not let what you regard as good be spoken of as evil. 17 For the kingdom of God is not a matter of eating and drinking but of righteousness and peace and joy in the Holy Spirit. 18 Whoever thus serves Christ is acceptable to God and approved by men. 19 So then let us pursue what makes for peace and for mutual upbuilding.

20 Do not, for the sake of food, destroy the work of God. Everything is indeed clean, but it is wrong for anyone to make another stumble by what he eats. 21 It is good not to eat meat or drink wine or do anything that causes your brother to stumble. 22 The faith that you have, keep between yourself and God. Blessed is the one who has no reason to pass judgment on himself for what he approves. 23 But whoever has doubts is condemned if he eats, because the eating is not from faith. For whatever does not proceed from faith is sin.

Full Disclosure: Long TGT

*NOTE: Just for full transparency and disclosure here, I have never invested in actively managed mutual funds, with the possible exception of times in which I was participating in employer sponsored retirement plans (401Ks) for which a company match was offered. If the plan(s) only offered active funds, it would have been really stupid to avoid getting the company match just because I didn't like actively managed funds. I honestly can't remember everything I purchased in those plans, though I'm sure that to the extent index funds were offered, that's almost certainly what I chose. But, I've participated in 3 such plans at different employers, one of which was many years ago before I even studied finance in college. What I can say for certain is that, for accounts over which I had a full range of options (such as IRAs, brokerage, and Coverdell savings accounts) I never chose to invest in actively managed funds. I always invested in individual stocks.

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