Author Topic: The ethics behind index funds  (Read 15394 times)

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
The ethics behind index funds
« on: December 04, 2013, 04:58:45 PM »
I've been thinking for some months about this issue, and I am actually surprised about the fact that there are no threads on this topic.* Since I started reading MMM's blog, I've been thinking about index investing and it's pros/cons. I guess we all know the pros, but I can't get over its ethical and moral implications.

I have investigated a little bit about it, and I know about social indices, but in indices like the S&P 500, there are many companies whose practices are, in my opinion, contradictory with many ideas of the "mustachian philosophy". We all know that many of these economic giants are not precisely taking care of the Earth, or helping turn the world into a better place.

Now, I have read things like "when you buy shares in a company, you are not actually giving them money, blablablá". Yeah, I know, but you help rise the value of the stocks, rising then the value of the company in the markets. I know too the "when you own shares in a company you own a part of it and can influence their decisions" answer. That's true, but with index investing you don't actually own a piece of the company, you just give Vanguard (or whoever) your money, and they track the index. But (correct me if I'm wrong), you don't have any power to decide anything. You may say that you are taking money from them and using it to make something better... But what did they do to get that money? What did they do with the money you gave them?

So I just wanted to discuss this issue with you people - I have always wondered what MMM thinks about it.

* I have searched in the forum for a similar topic with no success. Excuse me if there's one already.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: The ethics behind index funds
« Reply #1 on: December 04, 2013, 05:13:43 PM »
If this stuff bothers you, buy social indicies.  I want nothing to do with tobacco or defense contractors, but I just buy the indicies because the social ones inevitably leave out industries I am fine with and think are great investments (oil and gas, alcohol, etc.).

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1082
Re: The ethics behind index funds
« Reply #2 on: December 04, 2013, 05:18:55 PM »
Leaving aside the other issues, while you generally won't have any vote with respect to underlying companies within your mutual fund investments, you can pick a mutual fund manager with a voting record that meets your approval.

E.g., see this earlier post: http://www.mrmoneymustache.com/forum/investor-alley/active-vs-passive-management/msg101155/#msg101155

iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
Re: The ethics behind index funds
« Reply #3 on: December 04, 2013, 05:24:12 PM »
I've been thinking for some months about this issue, and I am actually surprised about the fact that there are no threads on this topic.* Since I started reading MMM's blog, I've been thinking about index investing and it's pros/cons. I guess we all know the pros, but I can't get over its ethical and moral implications.

Yes, it comes up every month or two, then invariably degenerates into someone accusing someone else of being a hypocrite, etc.

http://www.mrmoneymustache.com/forum/ask-a-mustachian/new-and-i-need-help-with-specific-question/
http://www.mrmoneymustache.com/forum/ask-a-mustachian/morality-and-investing/

and by page two of:

http://www.mrmoneymustache.com/forum/welcome-to-the-forum/follow-up-walmart-poll/

I have investigated a little bit about it, and I know about social indices, but in indices like the S&P 500, there are many companies whose practices are, in my opinion, contradictory with many ideas of the "mustachian philosophy". We all know that many of these economic giants are not precisely taking care of the Earth, or helping turn the world into a better place.

Now, I have read things like "when you buy shares in a company, you are not actually giving them money, blablablá". Yeah, I know, but you help rise the value of the stocks, rising then the value of the company in the markets. I know too the "when you own shares in a company you own a part of it and can influence their decisions" answer. That's true, but with index investing you don't actually own a piece of the company, you just give Vanguard (or whoever) your money, and they track the index. But (correct me if I'm wrong), you don't have any power to decide anything. You may say that you are taking money from them and using it to make something better... But what did they do to get that money? What did they do with the money you gave them?

It seems like you've more or less written off the common arguments in favor of just owning the index (at least, that's what I get from "blablabla").  If you're not comfortable with it, it's fine.  Invest in another way-- you just have to go into it with eyes open about the fact that your investments are highly likely to underperform those who chose to simply own the whole market.

Personally, I think making money off of companies that I don't necessarily love, then spending it on companies I do is the height of "screw those guys," but to each his own.
« Last Edit: December 04, 2013, 05:27:12 PM by iamlindoro »

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #4 on: December 04, 2013, 06:40:02 PM »
Personally, I think making money off of companies that I don't necessarily love, then spending it on companies I do is the height of "screw those guys," but to each his own.

I think this is about right. At the end of the day, the success of "unethical" firms will be much more driven by the consumers of their products and services than their cost of funds in the capital markets.

I think it's admirable to look to be responsible in your investing, it's just likely to cost you in either time or money (that could otherwise be spent on your social/charitable goals). Quantifying this tradeoff is probably impossible, so you'll just have to find your own way. I wouldn't let it lead to investment paralysis though.

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #5 on: December 05, 2013, 05:02:03 AM »
Personally, I think making money off of companies that I don't necessarily love, then spending it on companies I do is the height of "screw those guys," but to each his own.

Yes, I think that's about the nearest I can get to finding a solution. But yeah, at the end I guess that those companies benefit from having your money, and helps them grow, even if they pay dividends. On the other hand, I recognize there is a trade-off if you use that money to make more "responsible" things. But who's better off at the end, the company or you? You can't measure those things. I think that my solution at the end will be to buy social indices, even if the benefits I get are lower.

Beckyemerson

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: The ethics behind index funds
« Reply #6 on: December 06, 2013, 08:40:02 AM »
The ethics of the companies I invest in bothers me as well. I too would rather make less or no money investing in a morally good company rather than making tons off a company that has evil practices.

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1037
  • Location: Seattle, WA
Re: The ethics behind index funds
« Reply #7 on: December 06, 2013, 10:15:04 AM »
I've come to the conclusion that this is a problem in the world I cannot influence in this manner. The reason for this is that I am not a pension fund, university endowment, or other institutional investor, so I cannot be nitpicky about my investments in a cost-effective way. Occasionally it becomes possible for us little people to help, such as in the divestment campaign with South Africa. But if I want to see such campaigns get to that level, I have to fight for change in other ways first, and I do believe there are other ways for little people to make a difference.

Think about it this way: how much of your time would it take to research a social index or actively managed fund, transfer your assets to it, and deal with any tax implications? How much of a difference would you make by spending that same amount of time directly championing your cause in another way?

Cyrano

  • Stubble
  • **
  • Posts: 123
Re: The ethics behind index funds
« Reply #8 on: December 06, 2013, 04:29:22 PM »
Is there a reason to distinguish the ethics claim, I should not be long XYZ, from the claim, I am obligated to be short XYZ?

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #9 on: December 06, 2013, 06:52:02 PM »
Is there a reason to distinguish the ethics claim, I should not be long XYZ, from the claim, I am obligated to be short XYZ?

It's an interesting question.

Practically speaking, I think a portfolio that is long "ethical" companies and short "unethical" companies in equal measure will likely go bust at some point. Not only will this inflict personal damage, you'll have to cover your shorts when you get stopped out, rendering the whole exercise pointless.

Doing the ethical thing doesn't always mean trying to punish the unethical. I happen to believe murder and robbery are bad, but I feel no ethical obligation to don a cape and spend nights fighting crime.

Crash87

  • Stubble
  • **
  • Posts: 165
  • Age: 32
  • Location: St. Louis
Re: The ethics behind index funds
« Reply #10 on: December 08, 2013, 09:24:34 AM »
Instead of any investing in any special social funds I would just donate a little more to the charity of your choice. Use part of the allegedly immoral profits to fund a worth cause. Way less complex than building a portfolio with social funds IMO.

juggleandhope

  • 5 O'Clock Shadow
  • *
  • Posts: 20
Re: The ethics behind index funds
« Reply #11 on: December 08, 2013, 11:32:35 AM »
Good questions and I like several of the answers.

Seems like we should think about our ethical decisions.  How seriously should we consider investment ethics versus other ethical decisions?  How can we make good ethical decisions without paralyzing purity or shrugging selfishness? 

For instance I think it's fair to say that capitalism generally continues to rely on exploitation of labor, destruction of ecosystems, violent enforcement of property claims, and began in genocide, slavery, conquest, etc.  So participation in capitalism, whether in "socially responsible" funds or not seems unethical.  If you make gains the government will dedicate part of the resulting taxes to buy more nuclear weapons.  If you spend time on this board thinking about getting more money you're not spending time doing other things that arguably might be better contributions to social justice, etc. 

It seems worthwhile to think about each of these issues but also important to think about how best to think about all these issues. 

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: The ethics behind index funds
« Reply #12 on: December 08, 2013, 01:19:12 PM »
This is an endlessly-debated topic. My position is that consumers of a given society decide who succeeds and fails and what companies are allowed to do to the planet, the poor, et al in order to succeed. Changing your purchasing habits has a chance of effecting real change, however small. Changing your investing habits has no chance of effecting real change. It may make you feel better, but it isn't going to cause change. Conclude what you will. I feel you can do more good by making a ton of money and spending/donating the proceeds wisely.

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #13 on: December 14, 2013, 08:59:29 AM »
Thanks for the answers guys. There's definitely a lot to think about. I don't have any investments. Actually, I just finished my studies and am starting to work in January. That's why I'm thinking about all these things, because I'm going to start earning money.

Doing the ethical thing doesn't always mean trying to punish the unethical. I happen to believe murder and robbery are bad, but I feel no ethical obligation to don a cape and spend nights fighting crime.

The thing is that I think that, by investing in those large companies, you -or whoever- are helping to create that crime that you talk about. That's my point, and that's what I'm worried about.

For instance I think it's fair to say that capitalism generally continues to rely on exploitation of labor, destruction of ecosystems, violent enforcement of property claims, and began in genocide, slavery, conquest, etc.  So participation in capitalism, whether in "socially responsible" funds or not seems unethical.  If you make gains the government will dedicate part of the resulting taxes to buy more nuclear weapons.  If you spend time on this board thinking about getting more money you're not spending time doing other things that arguably might be better contributions to social justice, etc.

I see your point, at it is actually the logical conclusion at the end of the rope I guess. But let's start from the fact that we live in capitalists countries, therefore we have to pay our taxes. I mean, this is something mandatory. But I think that you cannot compare that with investing, because investing is something that you can decide. It is a more active decision, and in this case of index funds, you have no vote in the companies. On the other hand, we can somehow decide in our system by voting. Don't you think so?

This is an endlessly-debated topic. My position is that consumers of a given society decide who succeeds and fails and what companies are allowed to do to the planet, the poor, et al in order to succeed. Changing your purchasing habits has a chance of effecting real change, however small. Changing your investing habits has no chance of effecting real change. It may make you feel better, but it isn't going to cause change. Conclude what you will. I feel you can do more good by making a ton of money and spending/donating the proceeds wisely.

Consumers are definitely very important in the capitalist system. But I think that what really fuels capitalism is investment and the movement of capital. Consumers are the caboose of the train.

I would really like to invest on index funds, but it seems that I can't get over the feeling that I'm actively helping to destroy the Earth by doing so... I guess that there is no way to invest successfully and without much trouble if you have these kind of moral complaints.
« Last Edit: December 14, 2013, 09:08:13 AM by ypsilon »

iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
Re: The ethics behind index funds
« Reply #14 on: December 14, 2013, 01:10:32 PM »
Consumers are definitely very important in the capitalist system. But I think that what really fuels capitalism is investment and the movement of capital. Consumers are the caboose of the train.

Out of curiosity, how do you figure this?  Outside of an IPO and the rare creation of more shares (secondary offerings), stock purchases are transactions between private parties and institutions.  The company makes nothing on those transactions.  Make no mistake, it is the company's revenues from offering goods or services that make them money, NOT sales of stock.   Yes, companies can use shares owned by the company to incentivize employees and make acquisitions, but they live and die on revenues, not stock prices.
« Last Edit: December 14, 2013, 01:12:39 PM by iamlindoro »

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #15 on: December 14, 2013, 07:01:26 PM »
Doing the ethical thing doesn't always mean trying to punish the unethical. I happen to believe murder and robbery are bad, but I feel no ethical obligation to don a cape and spend nights fighting crime.

The thing is that I think that, by investing in those large companies, you -or whoever- are helping to create that crime that you talk about. That's my point, and that's what I'm worried about.

Right, that comment referred to trying to punish companies by shorting them, not avoiding investing in them.

Consumers are definitely very important in the capitalist system. But I think that what really fuels capitalism is investment and the movement of capital. Consumers are the caboose of the train.


I agree with iamlindoro that this is likely not accurate. Imagine that you want to start a cigarette company, but no one wants to buy cigarettes from you. Even if you have unlimited capital at your disposal what good is this endeavor? Corporations exist to produce profits and profits are driven by consumers, not the availability of capital. If a corporation is profitable, it will eventually grow by retaining earnings and investing them, even without the availability of external capital through bond or stock issuance. External investors may speed growth and/or increase profitability but it doesn't create demand for products and services that drive a company.

Also, the notion that capitalism is inherently evil is far from clear. It's a system that, while imperfect, has lifted billions from hunger and poverty in the last few decades, not to mention fueled the development of almost every comfortable feature of modern life from abundant food, to effective healthcare, to the technology that allows us to hash through these issues. This feature on how a t-shirt is made is enlightening:
http://apps.npr.org/tshirt/#/title
Even though the textile industry "exploits" Bangladeshi labor, Bangladesh would almost certainly be worse off without it.

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: The ethics behind index funds
« Reply #16 on: December 15, 2013, 11:58:45 AM »

Consumers are definitely very important in the capitalist system. But I think that what really fuels capitalism is investment and the movement of capital. Consumers are the caboose of the train.

I find it impossible to reconcile this viewpoint with the fact that consumer demand is what ultimately drives investment. Companies generally don't invest capital in projects for which there isn't pre-existing consumer demand (or at least a high likelihood of there being future demand based on product discovery). Demand almost always comes first. Consumers drive the train with capital coming after. It's true companies can sometimes influence consumer demand, but it is self-evidently untrue that investment and movement of capital fuels capitalism, in my opinion.
« Last Edit: December 15, 2013, 12:00:31 PM by kyleaaa »

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: The ethics behind index funds
« Reply #17 on: December 17, 2013, 08:19:24 AM »
Here is a point of view I recently embraced.

If I'm buying Monsanto stocks (I'm assuming here that Monsanto is an unethical company, let's use our imagination for a while), they regularly pay me dividends that I can use to buy those expensive organic seeds from a local farmer and grow my own organic vegetables. What could be more ethical than legally using Monsanto's money to grow organic food ?

And I'm not even mentioning the fact that I have a voting right on the company's decisions. That's very little, until every Monsanto hater does the same.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #18 on: December 17, 2013, 09:37:07 AM »
Here is a point of view I recently embraced.

If I'm buying Monsanto stocks (I'm assuming here that Monsanto is an unethical company, let's use our imagination for a while), they regularly pay me dividends that I can use to buy those expensive organic seeds from a local farmer and grow my own organic vegetables. What could be more ethical than legally using Monsanto's money to grow organic food ?

And I'm not even mentioning the fact that I have a voting right on the company's decisions. That's very little, until every Monsanto hater does the same.

The problem is that it's not "Monsanto's money". As an owner of Monsanto, it's your money, so this isn't exactly a Robin Hood scenario.

This is sort of like being a drug dealer, but donating part of your earnings to DARE. It's better than being a drug dealer and buying gold chains, but I'm not sure it gets you completely off the ethical hook.


k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: The ethics behind index funds
« Reply #19 on: December 17, 2013, 02:56:42 PM »
You may have a point.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #20 on: December 17, 2013, 03:33:26 PM »
You may have a point.

In any event, I agree with the thrust of the idea. Your actions as a consumer are probably more important than your decisions as an investor.

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #21 on: December 18, 2013, 02:51:18 PM »
You are right. My assertion is true from a general point of view: consumers are a driven force in the economy because, if they don't have money, they cannot spend. But if there's no demand for a company's products, that company would go bankrupt. Now, another topic would be the infamous "what if everyone stopped consumming". But that's another story :D

dmn

  • Stubble
  • **
  • Posts: 101
  • Location: Switzerland
Re: The ethics behind index funds
« Reply #22 on: December 21, 2013, 07:06:32 AM »
The drawback of socially responsible index funds is that they usually have high annual expense ratios. For domestic stocks, my own approach is to not buy index funds, but to buy a diversified portfolio of individual stocks, thereby "sampling" an index-like exposure myself.

This allows me to leave out e.g. arms and tobacco companies, and it also comes with lower fees than even conventional index funds, which in Europe still have annual expense ratios between 0.2% and 0.6%. The drawback is reduced diversification, but when a portfolio reaches 20+ companies, it does not make a huge difference any more.

Unfortunately, for individual international stocks, taxes become very complicated, so I may eventually decide to buy index funds for international equity exposure. I am undecided on how to deal with the ethical investment issues for my international portfolio, as I do not want to pay huge expense ratios.

Invest in another way-- you just have to go into it with eyes open about the fact that your investments are highly likely to underperform those who chose to simply own the whole market.
I think a more accurate statement would be that the investments are likely to slightly underperform on a risk-adjusted basis before fees. If he chooses a low-fee investment vehicle, all he loses is some diversification by not owning certain sectors and/or companies. This slightly increases volatility but has the same expected return.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: The ethics behind index funds
« Reply #23 on: December 21, 2013, 02:22:15 PM »
I believe it is much more efficient to make the best investments possible (which means avoiding Socially Responsible Funds) and then using the profits and income generated to directly support the causes in which I believe.

It makes absolutely no difference to the vast majority of public companies whether or not they have any one individual's investment but a significant donation to a non-profit working hard on some issue can be very very effective.

Khan

  • Pencil Stache
  • ****
  • Posts: 616
Re: The ethics behind index funds
« Reply #24 on: December 24, 2013, 01:06:46 AM »
Here's a question: What's unethical?

Is it using chinese labor to manufacture(Foxconn, and everyone they work for like Apple)
Is it using Asian sweatshops, despite the many positive arguments for the practice, and how it raises the quality of life of those citizens working there and their progeny? How South Korea was able to climb from textiles to cars/electronics, and how it exported it's textile industry to Bangladesh when international export allowances for the US changed.
http://en.wikipedia.org/wiki/Sweatshop#Pro-sweatshop_arguments
http://www.npr.org/blogs/money/2013/05/14/184019151/episode-458-bangladeshs-t-shirt-economy
Is it producing something that people kill themselves with, like a cigarette or a sugar laden drink, or a cheeseburger?
Is it producing the meat on any industrialized scale farm?
Is it unethical business practices like monopolization and bullying, while simultaneously increasing the world's food supply?(Monsanto)

I'm not saying that there's not unethical things in the world. I'm asking where's the limit? There's blood on everybody's hands, from Nestle to Coca Cola to the Koch Brothers to Diebold(voting machines) to gun manufacturers, to food producers, to DOW Chemicals and Monsanto. I choose to spend my money on the best harm reduction(from my POV of my dollars) places I can(Target or Costco vs. Walmart, any fast food place instead of Chick-Fil-A), but there's a limit to your control of the world.

And in that control of the world, if you could get a 10% return on your money vs. 8% by investing "ethically"(whatever that definition turns out to be for that social index), over a 40 year period that turns into a return of 4500% vs. 2170%(30 year: 1000% vs 1740%). It does not affect the value of the shares(Monsanto has a daily trading value of 2.5 million shares, at 115$ a share. Let's say you invest $100k into an S&P 500 index fund, .37% of that goes to Monsanto stock(in a roundabout fashion), which is 370$, or ~3 shares... the average trading volume in monsanto shares is 280 million dollars, so no, your money in "buying" those shares is absolutely immaterial.

And if I can insult Coca Cola for the Koch brothers(I made their net worth go up .000000001%, **** those guys) and water rights, and Nestle for baby formula and water rights, and Nike for foreign "sweatshops" or whatever they call them, there's not a single major company that's immune to insult.

(edit)
And then, it's made even worse by companies own interactions, with the law, with eachother, etc. I hate Haliburton. I think DOW Chemicals might be more evil than Monsanto. I can't even tailor my -consumer- actions to affect them. Now that's evil.
« Last Edit: December 24, 2013, 01:13:11 AM by Khanjar »

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #25 on: January 04, 2014, 08:13:08 AM »
Here's a question: What's unethical?

That's a good question and a complex one (how many philosophers have written about ethics and morals?...) For me, unethical is just everything that is unethical to me. I mean, I think that you cannot compare a cheeseburger with a gun. But that's just my point of view... The limit is where you want. You are right when you say that my contribution to Monsanto's wealth would be minimal, but I cannot use that as an excuse, personally, because although it's not a big difference, it's still something. Choosing to buy products from less harmful companies does not make a big difference too, if you see it just from an individual point of view. But, as you see, many people in this forum do it, so is the effort of many individuals sumed up that at the end makes the difference.

jubilantjill

  • 5 O'Clock Shadow
  • *
  • Posts: 33
Re: The ethics behind index funds
« Reply #26 on: January 04, 2014, 04:33:37 PM »
I took a class in college called Capital which was a semester long read/analysis of Marx's Das Capital Vol. 1. My professor  was a self-professed Marxist. I remember asking him one day in class if he invested money in the stock market. He'd just spent months pointing out the evils of capitalism and its oppression of workers and I figured I knew how he'd answer. Boy was I wrong. His reply: "Hell yeah, I'm a capitalist. This is a capitalist economy. If you're not a capitalist you're a worker and I think it's pretty obvious which one it's better to be."
  I guess my point is that I don't think you can decide to exempt yourself from participating in our economy. You're participating whether you invest money to make more money or whether you exchange your labor for money--one of these ways is just much more efficient at making money. Making yourself "suffer" (ie not benefiting from investment returns) isn't going to prove anything. It's kind of like saying "I'll show you Monsanto, I'm going to put my money in my savings account and watch it's value drop with inflation. Take that, Monsanto!"

  It's also worth looking in to how your bank makes money off it's investments. Is it from usury? T-bills? Are you okay with this kind of investing?

I struggle with the ethics of investing as well. Really I just want to live on a back-to-the-land commune in rural South America.

juggleandhope

  • 5 O'Clock Shadow
  • *
  • Posts: 20
Re: The ethics behind index funds
« Reply #27 on: January 04, 2014, 06:41:49 PM »
Jubilantjill - On a back to the land commune in South America there would be other major ethical problems.  Did you see this story of the family in Siberia http://www.smithsonianmag.com/history-archaeology/For-40-Years-This-Russian-Family-Was-Cut-Off-From-Human-Contact-Unaware-of-World-War-II-188843001.html?  In that case the issue was whether or not to take a medical helicopter flight. 

Thanks for the story of the professor.  Did he think you all were sort of dumb or did he just like cartoony ways of talking?  He's mainly a worker if his living mainly comes from earning a wage.  The Marxists I know would describe a capitalist as someone who lives off the invested capital (like Mr. Money Mustache) that we allow them to claim as their own.  Did anything he taught affect your ethical decisions, other than in similar ways to your good point about Monsanto?

Ypsilon - I also have a fetish for unreasonable personal purity.  But if you're really trying to be pure I don't think you can say that capitalism, taxes, etc are "mandated".  You could live in such a way as to not pay most taxes - either through refusal or limiting your income.  You could live in such a way as to not attempt to directly benefit from exploitation of others (in a commune as Jubilantjill mentions).  Everyone draws a line somewhere (often zig-zagged!). 

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #28 on: January 05, 2014, 12:13:22 PM »
You're right about participating of the capitalist economy. Of course I'm participating, as we all do if we live in a capitalist country. But I think that actively giving your money to companies that are unethical to you is way different than having your money in the bank (for example). Because you don't tell the bank how they should manage that money, you just put it there, so it is not your decision to make. On the other hand, investing is an active decision that you take, and you start living off the benefits derived from it, so at the end you are actively increasing the value of those companies, something good for them.

But yes, juggleandhope, as you say, one has to put his limit somewhere, and limits vary.

jubilantjill

  • 5 O'Clock Shadow
  • *
  • Posts: 33
Re: The ethics behind index funds
« Reply #29 on: January 05, 2014, 02:15:10 PM »
 On a back to the land commune in South America there would be other major ethical problems. 
Yeah, the commune comment was made (mostly) tongue in cheek.  But I do like to harbor unrealistic utopia fantasies and, well, fantasize about them!  But really, I don't like people enough to live that closely.

My Marxist professor was incredible-my second favorite teacher of all time (#1 was his wife who taught in the same department). I took a kind of philosophy course from him too called Histories of Knowledges. Also a mind-blowing course. While he didn't elaborate much on his investing I do know he loved to teach and figure he would do it (to some degree) no matter how much money he had. So maybe he had enough passive income to meet his needs. I've no doubt he knows what a capitalist is and wouldn't argue with your definition.

As to whether or not I've allowed my study of Marxism to influence my own ethical decisions- that's a tricky one. I'm as big a hypocrite as anyone else in this country. I suppose I don't shirk paying taxes or social security since ideally that money will get re-distributed to those who need it more. I'm not much of a consumer (like everyone else on this site) at least by American standards, but that's saying very little. I've chosen a career where I can provide meaningful work that benefits others. But Marx didn't really have the patent on any of the underlying ethics of socialism and I probably took that class cause I already agreed with the basic ethics. I've given up figuring out how to be a socialist in a capitalist economy. Strive to emulate the Scandinavians' Social Democracy, I guess? I'd move there if it wasn't for winter.

jubilantjill

  • 5 O'Clock Shadow
  • *
  • Posts: 33
Re: The ethics behind index funds
« Reply #30 on: January 05, 2014, 02:33:30 PM »
You're right about participating of the capitalist economy. Of course I'm participating, as we all do if we live in a capitalist country. But I think that actively giving your money to companies that are unethical to you is way different than having your money in the bank (for example). Because you don't tell the bank how they should manage that money, you just put it there, so it is not your decision to make. On the other hand, investing is an active decision that you take, and you start living off the benefits derived from it, so at the end you are actively increasing the value of those companies, something good for them.



Not disagreeing just adding to the discussion here. What you said about actively choosing made me think about that ethical experiment that's been done a bunch where they ask people to imagine a train track with a runaway train full of people on it.

1) You are standing at the side of a train track. You see a train approaching and, to your horror, realise that it is going to hit and kill five people standing on the track. However, you then realise that you can pull a lever and send the train onto another track, where it will only kill one person. Do you pull the lever?

2) There you are, standing on a bridge over a railway track. You see a train approaching and, to your horror, realise that it is going to hit and kill five people standing on the track. However, you then realise that there is a well-built man on the bridge, and if you push him off he will stop the train and prevent the deaths, but will be killed in the process. Do you push the man off the bridge?

Here's a bunch more. http://en.wikipedia.org/wiki/Trolley_problem


ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #31 on: January 13, 2014, 03:30:55 PM »
Not disagreeing just adding to the discussion here. What you said about actively choosing made me think about that ethical experiment that's been done a bunch where they ask people to imagine a train track with a runaway train full of people on it.

It's a really tough decision, I didn't know that experiment. I think I would pull the lever, because, although I would be guilty of actively killing one man, I would be actively saving 5 with that action too. This is rough, but 5 - 1 = 4. I think that would lessen the amount of suffering.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #32 on: January 13, 2014, 07:03:31 PM »
I mean, I think that you cannot compare a cheeseburger with a gun. But that's just my point of view... The limit is where you want.

Can't you?

According to the UN, meat production is a bigger source of greenhouse gas emissions than all transportation combined. An uncountable number of acres of rainforest have been leveled to graze cattle or grow soybeans to feed cattle. Cattle is a massive source of land and water degradation and you have to feed a cow 8 calories of grain to produce 1 calorie of beef, a horribly wasteful process. That doesn't even begin to get into the very abusive practices prevalent in factory farms (to both animals and workers), the source of beef for a vast majority of cheeseburgers. You may also hold the view that cheeseburgers are an unhealthy contributor to chronic diseases like diabetes and coronary heart disease, but that may be a little more debatable. All in all, I'd suggest cheeseburgers are much more harmful than guns.

You might have to ask questions like:
Is it ethical to eat beef at all?
Is it ethical to eat beef as an occasional indulgence?
Is it ethical to eat beef if you buy carbon offsets?
Is it ethical to eat beef that was sustainably and ethically raised and what do those terms even mean and can they be verified?
Is it ethical to eat at restaurants that serve "unethical" beef or shop at grocery stores that sell "unethical" beef?
etc. etc.

My point isn't exactly to advocate giving up beef, but to suggest that once you start digging into corporate practices, you open a Pandora's box of ethical implications and have to sort through hundreds of shades of ethical grey. This isn't to say it isn't worth trying, but building a diversified portfolio of fully vetted "ethical" companies would be quite a project.

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #33 on: January 18, 2014, 03:42:57 AM »
All in all, I'd suggest cheeseburgers are much more harmful than guns.

I get your point, and was actually waiting for someone to say this. While I think you're right in the sense that if you start digging you may find shit everywhere, the main difference between a burger and a gun is the purpose for which the two things are made. A gun is mainly made for the purpose of killing and/or harming, whether in self-defence or not. A burger is made for the purpose of feeding people.

Now, can you kill a man with a burger? Probably. Maybe, by throwing a burger to a man's face at the underground station, he falls to the rails in the precise moment when the train is coming, therefore killing him with a burger. Or maybe you eat many burgers and end up having health problems that end up killing you. Can you feed someone with a gun? No, but you can hunt an animal to eat it, therefore using the gun with the purpose of feeding someone.

Those two assumptions are right, but, lets be sincere here: a guy in a big city doesn't but a gun to hunt deer. The army doesn't buy weapons to feed its soldiers. And you usually don't throw burgers at people's faces in order to kill them. So, for me, the main purposes of the two objects are very different.
« Last Edit: January 18, 2014, 03:47:35 AM by ypsilon »

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #34 on: January 18, 2014, 09:17:30 PM »

I get your point, and was actually waiting for someone to say this. While I think you're right in the sense that if you start digging you may find shit everywhere, the main difference between a burger and a gun is the purpose for which the two things are made. A gun is mainly made for the purpose of killing and/or harming, whether in self-defence or not. A burger is made for the purpose of feeding people.

Now, can you kill a man with a burger? Probably. Maybe, by throwing a burger to a man's face at the underground station, he falls to the rails in the precise moment when the train is coming, therefore killing him with a burger. Or maybe you eat many burgers and end up having health problems that end up killing you. Can you feed someone with a gun? No, but you can hunt an animal to eat it, therefore using the gun with the purpose of feeding someone.

Those two assumptions are right, but, lets be sincere here: a guy in a big city doesn't but a gun to hunt deer. The army doesn't buy weapons to feed its soldiers. And you usually don't throw burgers at people's faces in order to kill them. So, for me, the main purposes of the two objects are very different.

That's fine, but ignoring negative externalities in your ethics equation seems crazy (or at the very least an incredibly low ethical bar).

You could argue that cigarettes are made for people to relax and get a little nicotine buzz. The purpose of coal production for electricity generation is certainly a noble one, but are you to ignore that it's dirty and polluting? You could even argue that the purpose of F16 fighter jets isn't to kill, but rather to protect a country from invasion and protect the world from dangerous despots.

I'd argue that 99.9%+ of companies don't have destructive intentions. It's the unintended consequences that are of primary interest to the ethical investor, and I'd argue that the unintended consequences of beef are far worse than the intended consequence of personal firearms.

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #35 on: January 27, 2014, 04:26:44 PM »
That's fine, but ignoring negative externalities in your ethics equation seems crazy (or at the very least an incredibly low ethical bar).

Well, ignoring the main purpose of the product that's being created by a company seems to me crazier than that. I'm not saying that externalities are not important, but as you said, if you start digging you find shit everywhere... But, hey, what about a company that has externalities (like -let's suppose- every company) AND makes missiles? For me that's way worse.

And I think it's a little bit naive to think that externalities are "unintended consequences", especially the unintended part. I would say that most of them are more like "well known consequences about which we don't give a fuck because we are going to make more money". Maybe you are thinking about accidents like the sinking of an oil tanker. Now, that would be unintended (or maybe negligence?). What wouldn't be unintended is to drill wherever the fuck we want (destroying, by doing so, other natural resources of incalculable value, and God knows what else) in order to get oil. That's what I'm talking about, and those are the kind of companies to which I wouldn't like to give my money.

iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
Re: The ethics behind index funds
« Reply #36 on: January 27, 2014, 04:38:50 PM »
You asked for opinions, most people here differ from your take on it, and that's fine-- go invest in a vehicle you are happy with.  Since you keep coming back to argue about it, what's the real goal here?  Are you hoping to change people's minds and have them stop investing in total market index funds?  If so, don't be disingenuous, say it outright.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: The ethics behind index funds
« Reply #37 on: January 30, 2014, 01:06:29 PM »
That's fine, but ignoring negative externalities in your ethics equation seems crazy (or at the very least an incredibly low ethical bar).

Well, ignoring the main purpose of the product that's being created by a company seems to me crazier than that. I'm not saying that externalities are not important, but as you said, if you start digging you find shit everywhere... But, hey, what about a company that has externalities (like -let's suppose- every company) AND makes missiles? For me that's way worse.

And I think it's a little bit naive to think that externalities are "unintended consequences", especially the unintended part. I would say that most of them are more like "well known consequences about which we don't give a fuck because we are going to make more money". Maybe you are thinking about accidents like the sinking of an oil tanker. Now, that would be unintended (or maybe negligence?). What wouldn't be unintended is to drill wherever the fuck we want (destroying, by doing so, other natural resources of incalculable value, and God knows what else) in order to get oil. That's what I'm talking about, and those are the kind of companies to which I wouldn't like to give my money.

I'm not sure if we're really disagreeing.

If "unintended consequences" are really "known consequences", that just underscores my point that externalities should be considered as much as "main purposes".

My argument is simply that an investor should consider all effects of corporate actions (both positive and negative) when making an "ethical" investment decision. You're free to make your own decisions about how to consider things like "main purposes", intended and unintended consequences, primary or secondary externalities, etc. Just watch out for confirming your own biases. You may think guns are bad and factory farmed burgers are good, but someone who uses guns to hunt venison in a sustainable way may justifiably feel the exact opposite way you do.
« Last Edit: January 30, 2014, 01:51:22 PM by KingCoin »

ypsilon

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: The ethics behind index funds
« Reply #38 on: February 01, 2014, 04:41:43 AM »
You asked for opinions, most people here differ from your take on it, and that's fine-- go invest in a vehicle you are happy with.  Since you keep coming back to argue about it, what's the real goal here?  Are you hoping to change people's minds and have them stop investing in total market index funds?  If so, don't be disingenuous, say it outright.

Of course I'm not trying to change other people's minds, we are just discussing the matter. More than trying to convince anyone, I'm trying to convince myself. I don't have any problem with any of you guys investing, I just want to have a constructive discussion, as I said in my first post. That's the goal. But of course everyone is free of not coming back here to answer anymore.

I'm not sure if we're really disagreeing.

If "unintended consequences" are really "known consequences", that just underscores my point that externalities should be considered as much as "main purposes".

My argument is simply that an investor should consider all effects of corporate actions (both positive and negative) when making an "ethical" investment decision. You're free to make your own decisions about how to consider things like "main purposes", intended and unintended consequences, primary or secondary externalities, etc. Just watch out for confirming your own biases. You may think guns are bad and factory farmed burgers are good, but someone who uses guns to hunt venison in a sustainable way may justifiably feel the exact opposite way you do.

Yes, I guess that at the end everything is very personal. I'm just surprised that people don't think about this kind of issues more often.

Khan

  • Pencil Stache
  • ****
  • Posts: 616
Re: The ethics behind index funds
« Reply #39 on: February 01, 2014, 12:18:17 PM »
Yes, I guess that at the end everything is very personal. I'm just surprised that people don't think about this kind of issues more often.

No. We have thought about it, and we've decided that choosing where to invest our money is not how we make the change we want to in this world. If you would like to follow your own investing strategy, despite all of our voiced concerns, then go ahead and be our guest.

China will still build coal plants. Green Peace and worse organizations will still oppose nuclear power, to the benefit of traditional fossil fuels. Dow Chemical will still make chemicals that would make you piss your pants in fear of the biological effects. Monsanto will still breed mosquito-corn that provides more food per square acre. McDonalds will still pay it's workers shit.


The Guru

  • Stubble
  • **
  • Posts: 214
  • Age: 63
  • Location: Great Lakes
Re: The ethics behind index funds
« Reply #41 on: February 04, 2014, 07:57:15 AM »
As a believer in SRIyself, i have to stick up w/ypsilon on this. Compare it to bicycling: none of us will ever go outside in the morning, take a lungfull of cleaner-than-it-was yesterday air and congratulate ourselves for bike commuting the day before. Yet there is a strong current of environmental awareness in MMM's posts on the matter, even granting that the Mustachian's primary motivation in biking is saving money.

Either biking or SRI can most effectively bring about improvement by influencing others' behavior. I'd venture that most businesses don't give a rat's ass about the environment. or worker's compensation - EXCEPT as it impacts their corporate image. Corporations don't like bad press, if only because it can, theoretically, sour publlic opinion and cause them to take their business elsewhere. Too, I think that many consumers buy products that they percieve as environmentally or worker-friendly,  if only because its easier than actually taking action  themselves (eg buying a "more fuel efficient" SUV rather than using public transit or riding a bike.). So-public opinion and public presssure- say, from SR mutual fund companies, I think can potentially be a motivator for business to " do the right thing", even if for the wrong reason. Even the above-mentioned article concedes as much.

 All of this is not to say that there isn't some good being done in the industry. While many funds like the MMA Praxis series appear just to pay lip service to the concept of SRI, some others, like Calvert Investments and Walden Asset Management, have effected change at companies they've invested in. For example, Calvert helped persuade Region's Financial to drop one their payday loan products and was able to get Church & Dwight to disclose more information about their animal testing procedures.

If it leaves me w/ somewhat less return than I might get from, say, an index fund, I'm OK w/ that. I'm sure we all make decisions that take away money that could otherwise be freed up to invest. In the end, that's the individual choice to invest via SR pinciples, ride a bike, drive a Prius. Or not.