We know, from the study of well-known economists and accomplished investors that we are a fickle bunch. Prone to biases and emotional tendencies, we know better about what we should do than we actually put into practice. In other words, into every portfolio a little mad money, a term originally coined by Ben Graham, must fall. You can, as he aptly described in the Intelligent Investor protect your personal finances first. Then focus on your a future when you will no longer be working. And lastly, satisfy that which is in every investor the thrill of risk.
That risk Mr. Graham points out should only be fueled with your money once. Lose it and learn but never refinance the account. Do it right and profit and you will be taking care of something that is fundamentally human. But there may be another way to do what is needed and in the process, do what is right.
In a previous article here at Target2025.com, we looked at the effect a focus on impact investing could have around the world. A new ratings system of helping investors who feel as though the investments they currently might own may not be in alignment with their values is now available to help. The Global Impact Investing Ratings System (GIIRS) can now offer the average investor the opportunity get a clearer picture of what good their investments are doing; not just how good they feel about investing in them.
Mutual funds that are considered socially responsible use their investor’s money to micro-finance local businesses in emerging countries. Small loans, designed to give those less than creditworthy entrepreneurs the opportunity to conduct their business with small, low interest loans has suggested by doing so they are raising the economic well-being of the country. One such mutual fund, The PaxWorld Women’s Equity Mutual Fund focuses on just such a “one small loan at a time” approach to their investment strategy. But critics wonder if the problems (risk) is greater than the benefit.
Among those criticism: these businesses rarely make money – at least enough to create an income. While everyone agrees that if you are going to lend to a poor entrepreneur, lending to women is far more likely to honor the terms of the agreement, the end result of her efforts may create a quasi-laborer in the process. In other words, the markets they are trying to gain access to for their products may be the same markets that do the actual lending. Mutual funds would have the same problem without their own “boots on the ground” presence.
Another criticism falls on the sensationalism of successes rather than the comparisons to the failures. Milford Bateman, the author of Why Doesn’t Microfinance Work? thinks the whole concept is illusory. Lending money is only one part of the overall requirement for any business to succeed. In developing nations, the need for insurance and an affordable money exchange is also needed.
Few of these new owner/operators have the understanding that simple business pressures can exert on a household. Failure in some cultures results in increased suicides, often to protect the family of the business owner from retribution. Worse is the blurry line between what is considered outreach and what financial folks refer to as the business’ overall sustainability.
But investors have an option in their own backyards. Just don’t expect much in the way of returns. Slow Money describes itself as redefining what an investor is and they have the “dirt” on their hands to prove it. Looking at local farming practices as way to give investors an opportunity to micro-finance in the US. The concept is broken down into soil, seeds and water. the soil are the millions of acres of farmland that might be lost without financial help, the sustainability of small organic operations would never thrive and the future generations that could benefit from what they refer to as “nurture venture capital”. The concept of seeds the entrepreneur and the water would be provided by the investor.
As I mentioned, the risk is there but it unfolds so slowly as to provide something of a safety net if your investment fails. The socially responsible part is obvious to anyone worried about the food chain. But Slow Food knew that it needed to be easy to invest even if the up front knowledge was that your return would be smaller than you normally would have wanted.
To address the charitable needs of investors and those who want some return, albeit small, they have developed financial tools that are specific to many of the areas in the country, possibly even your backyard. (To see Slow Money’s financial tools, click here.) As I said earlier, if you broke your account down in the wayMr. Graham suggested, a socially responsible part of your portfolio, funded by your mad money might be just the thing to make you feel better, to channel some of your current rage away from the traditional markets, and in the process give you the same experience as a venture capitalist might have: risk and reward.