What is Socially Responsible Investing?
Socially responsible investing (SRI), also known as socially conscious or ethical investing, in an investment that is considered “socially responsible.” It is the practice of investing your funds in companies that have good social values, such as environmental sustainability, social justice, etc. Investors often put their money toward prevalent issues of the time. For example, these days, more people are concerned about global warming, thus investors may be inclined to invest in companies that fight climate change.
Making socially impactful investments also means avoiding companies due to the nature of their business activities, such as oil drilling companies, or companies that sell tobacco, or promote gambling. Again, many investors may avoid companies that sell guns in lieu of gun control concern.
Socially responsible investors work to promote social and environmental good, while reaping strong financial returns. These are the two primary goals behind SRI:
- Social change
- Financial gain
One downside to social responsible investing is that you’re limiting your investments options. If rewarding ethical companies is your primary objective, understand that your investment income and gains could suffer. A Seeking Alpha poll revealed that such companies underperform when compared on a 3, 5, and 10 year basis. Although there is a lot of data that supports the Seeking Alpha poll, much of it is opinionated and should be looked at objectively.
How the Self-Directed IRA Can Make it Possible
Many investors use their retirement funds to make investments due to the concept of tax-deferred or tax-free growth and compounding interest. Compounding is the process where asset’s earnings from either capital gains or interest, are reinvested to generate additional earnings. This allows your investment to grow faster, whereas investing with personal funds don’t afford the same benefits.
If you have a traditional IRA or even a Roth IRA established at a bank or financial institution, you may not be able to make any socially responsible investments, as they are not considered “traditional investments.” That’s where the Self-Directed IRA comes in. This account is essentially a traditional IRA, but it allows IRA holders to invest in alternative assets. But once again, if you establish your Self-Directed IRA at a bank or financial institution, this is not a true Self-Directed IRA. You will still be restricted to the products they sell, which again, are only traditional investments.
Establishing a Self-Directed IRA with a Passive Custodian
A truly Self-Directed IRA must be established at a self-directed custodian, also known as a passive custodian, like IRA Financial Trust Company. Because we do not sell financial products, we don’t limit what types of investments you make, as long as they are IRS approved and federally legal.
In turn, you have the freedom to invest in the best social impact and nonprofit companies that share the same values as you. The Self-Directed IRA may be the only way for investors to use their retirement funds to invest in socially responsible companies.
Important Note: At IRA Financial, we don’t tell anyone what types of investments to make, only the types of investments you can invest in with a Self-Directed retirement plan.
