Over the past few years I have been very blessed by an income that greatly exceeds my expenses. While I am still not out of the woods with regard to debt—my student loan still exceeds $60,000—the economy has been in a state where it is more efficient to invest my excess than to pay down the debt. I currently have four investment vehicles, and I’d like to take some time to explain each one and consider not only the financial pros and cons, but also the ethical impact of my decisions.
Vanguard Index Funds
Taking the excellent advice of several voices in the FIRE subculture (Financial Independence / Retire Early), I have put the majority of my dollars over the past two years into Vanguard’s Total Stock Market index fund (VTSMX to begin with, then upgrading to VTSAX when I met the minimum requirements). I’ve maxed out my IRAs and put a commensurate amount in a taxable brokerage account with Vanguard.
The short version of why I regard this as good advice is because Vanguard has among the lowest management fees in the mutual fund business. They don’t bother with expensive management trying to make clever investments and time the market; they just buy a little bit of everything and let the market itself do its thing. This lets them keep the fees low and the investments efficient. The strategy also automatically diversifies the portfolio. Sure, I only have one stock ticker, but that account holds shares in every company in the entire U.S. market, so if any individual stock or sector takes a nosedive, the rest shore up the overall value. It’s obviously still vulnerable to a market-wide downturn, but historically the markets have always recovered from crashes and recessions.
So that covers the personal financial responsibility side, but what about ethical concerns? There’s enough economic Socialist in me (though I certainly don’t describe myself as such generally) to automatically distrust “Corporate America.” I see our economic culture as one that prizes profit over compassion, and that gives me pause. VTSAX doesn’t discriminate based on where a company’s activities fall on any ethical scale. Honestly, I’m not sure it would make much sense for them to try, and it would certainly increase the fees if they did. So if I oppose individual companies, does it make me a hypocrite to allow my money to be invested with them, even indirectly? Investment through an index fund, unlike buying the stocks themselves, does not entitle me to a voice in the operation of any of the companies the fund owns. Does that make me more complicit in unethical activity they might carry out, or less? I don’t have answers to these questions, but they’re something I should certainly think about.
TD Ameritrade—A Traditional Brokerage
When I first began investing, even before returning to school, I followed the most obvious path: I chose a major brokerage firm and bought some stocks that I thought might perform well. By and large I was completely wrong. I still don’t understand how Corning (GLW) can make the glass for every single smartphone on the planet and yet still fail to increase their value. That seemed like a no-brainer investment at the time, but it’s still at the same price now that it was in 2008. At least it pays good dividends, though. I think my annual return from picking my own stocks is somewhere around 2%, and that’s mostly because I did pick companies that pay dividends.
I also put a good deal of thought into buying stocks that, as far as I know, reflect my own values. Some people might criticize me for supporting the military sector by buying Lockheed Martin (LMT), but I’m genuinely enthusiastic about what they’re doing in aerospace and energy systems. Also, I actually do support military technology, not because I welcome more efficient ways of killing people, but because I would prefer our soldiers to be as safe and effective as possible. Lockheed has, without a doubt, produced some horrendously destructive weapons, but they also pair those weapons with some of the most advanced and precise sensors available, which can limit unintentional loss of life when properly employed. As a general rule, I oppose war, and indeed I would be happier if the U.S. were to take a step back from its aggressive foreign policy, but if we’re going to fight, I want us to win, and I want us to win fast. So I don’t view investment in a company that produces military equipment to be unethical or immoral.
That is just my viewpoint, though. We all have to make our own decisions and draw our own lines.
In the interest of diversification, I wanted to spread my investments across a couple more sectors. Agriculture is an obvious place to buy—no matter what happens, we’re always going to need food. I considered a few high-tech companies in that industry, but it’s rife with questionable science and hostile practices. I don’t believe there is any health risk to genetically engineered crops (Genetically Modified Organisms, GMOs), as some people do. I am concerned about how such crops affect the ecosystem, though. Furthermore, there are plenty of stories in the news about patent holders suing farmers for unauthorized use of GMO seeds. For the most part, I find their tactics reprehensible and find my opinions almost unfailingly in favor of the farmers.
So in agri-business I settled on Deere & Co (DE). Their hands are not lily-white, either, of course (even discounting all the motor oil). One of my personal ethical bugbears is the Digital Millenium Copyright Act, which criminalizes any act of circumventing copy protection. Deere has used the DMCA to prevent farmers from performing their own maintenance on tractors with computerized control systems. I haven’t yet heard of them suing anybody for circumventing the software’s encryption, but just the fact that they attempt to maintain a monopoly on servicing equipment sold to a market segment who are famously part of a do-it-yourself culture is shameful. Still, it’s a relatively minor quibble, and as far as I know they haven’t truly ruined anyone’s business with the policy, so that’s where I put my money.
I also invested a bit in solar power production with Sunrun (RUN), which satisfies my interest in environmental matters, although I still have some concerns around conflict minerals in panel production. I’ve never seen anything pointing to a specific pipeline of conflict minerals into U.S. power production, but it would necessarily be a difficult thing to trace. Although Sunrun doesn’t appear to go to any great lengths to investigate their own supply chain, they at least seem to be proactive in their legal compliance efforts, and that’s probably the best that could be expected.
I have a few other individual stocks in that portfolio, but I think I’ve sufficiently made my point: When I am looking to invest with a specific company, it’s important to me that I am not supporting activities that I couldn’t ethically engage in myself.
Robinhood—Easy, Low cost investing and cryptocurrency
My Robinhood portfolio is really more of an experiment than anything. They claim no commissions and offer an easy-to-use smartphone app. I plunked down a few dollars on some of the “Dividend Aristocrats,” honestly without much thought to ethical matters. I couldn’t even tell you what some of the companies I invested in do. That’s bad behavior on my part, really. It’s also quite inefficient compared to my index funds. I’m up almost 14% per year since I started buying VTSAX, but my Robinhood account is a paltry 4% per year. I’d have done better if I’d sent that money to my student loan.
The considerations for investing at Robinhood are exactly the same as with any brokerage, so let me turn my attention to the cryptocurrency side of things. RH lets me invest in Bitcoin (BTC) or Etherium (ETH), two “magical” digital currencies that aren’t tied to any government and supposedly offer secure, private transactions. Unfortunately, an uncomfortably large percentage of the people you can do business with in cryptocurrencies may be criminals. On the other hand, if you’ve purchased BTC from Robinhood, you don’t actually have access to the currency itself. I guess you just have to trust that they really hold it in your stead? I suppose it’s like buying a commodity—nobody’s going to actually send you 10,000 bushels of soybeans.
Anyway, you’re not actually buying into any particular business interest when you “invest” in cryptocurrency like this. There are still some ethical concerns, though. There’s an estimate that Bitcoin mining consumes about a third of a percent of the electricity being produced world wide, and it breaks down to more than a megawatt-hour per transaction. That’s enough juice to power my apartment for about seven months (I’m pretty conscientious about my power consumption).
Although the most popular tool for mining cryptocurrency is a high-end GPU (which is its own issue—crypto miners have distorted the market for graphics cards over the past couple of years, making it difficult to get hold of the latest hardware), some unscrupulous folks are using hacked web pages to do the mining. Is that a reason not to buy in? I don’t really think so, but you might.
As I mentioned before, a great deal of black market activity uses Bitcoin as the currency of choice for its anonymity. I have no idea what percentage of Bitcoin transactions are used for illegal purposes, but it’s certainly something to take into consideration.
I mostly treat my crypto investment like a game. It takes about the same amount of time and bookkeeping as my Rail Gun shop did in EVE Online, but at the end of the day, I get real profits instead of virtual ones. Theoretically, anyway. I haven’t actually tried to withdraw anything from Robinhood yet!
Lending Club—Peer-to-Peer Lending
I saved my Lending Club experience for last because this is where moral considerations have actually led me to make a change. The concept behind Lending Club is that individual investors—you and me—can buy shares in consumer loans. Joe wants to add a deck to his house, so he goes to Lending Club and applies for a loan. A large number of investors each put up $25, and when enough shares have been purchased, Joe gets his loan and builds his deck. The payments he makes are split between the investors. Lending Club makes 2-year and 5-year loans at rates usually ranging from 5-25%. Obviously, the best returns (along with the highest risk) are at the top end of that range. I put $2000 into Lending Club ten years ago, and it’s grown modestly since then.
As I’ve been reading the blogs and listening to Dave Ramsey, though, I am becoming increasingly uncomfortable with participating in this business. A 25% interest rate? Come on! And the people who are qualifying at that rate are quite likely the ones who can least afford to carry a loan of any kind.
Peer-to-peer lending feels like a great idea—take the banks out of the equation so that more people have access to credit! But I feel like what I’m actually doing is supporting one of those payday loan places. I just can’t do it any more, so I’m pulling my money out of there as my notes are paid off.
Of course, I’m making myself sound nobler than I actually am. Even at those ridiculous interest rates, I haven’t seen my Lending Club returns crack 7%. Right now my overall return is only 5.25%, so it makes financial sense to pull out of there, too. Even if I were pulling down 17-20%, though, I hope my decision would be the same. I don’t want to live at someone else’s expense if I can help it.
We Americans tend to keep our money and our morals separate. Even the best of us tend to think that as long as we drop a healthy share in the offering plate, we’re free to do as we like with the rest. It’s an unhealthy way of living, and it’s bad for the world. If you’re in a position to be able to invest, take some time to consider the ethical implications of your investments. Even if you can’t afford to buy into the market, maybe consider whether the companies that sell the products you buy day to day measure up to your personal standards. Maybe its impossible to buy only from perfectly ethical vendors, but I believe that even small efforts can add up to big changes.
Stop and think.