Investing is not inherently unethical. If you’re directly buying a tobacco company’s bonds, then yeah, you’re helping evil to prosper, but consider the following scenarios. (Remember that money is just a number—what it represents is that you’ve done work for other people, and in exchange other people are willing to do a certain amount of work for you. Compared to barter, money provides a magical layer of indirection as it sloshes around the economy—you may make widgets for FooCorp, and the money you earn allows you to buy gizmos from BarInc, even if nobody from BarInc has ever heard of a widget.)
You have money, but right now you’re not interested in buying anything with it. Person X doesn’t have money, but would like to have a car right now instead of waiting for a year to accumulate enough cash, or would like to live in a house right now instead of waiting for 30 years to accumulate enough cash while living in a tiny apartment. If you loan Person X money, they get to buy that car or house right now (yay for them!). In exchange for not being able to access your money for a period of time, and for taking on the risk that you might not be paid back, Person X agrees to pay you back extra money. (The original pile of cash that changes hands is called the “principal”, while the extra pile of cash is called the “interest”.) This is super awesome for you—you’ve earned extra money by doing financial work, instead of the usual physical work or mental work at your day job.
There are many other reasons why someone might want to borrow money (i.e. giving you an opportunity to lend to them). A company might want to expand its operations, but needs a temporary infusion of cash to do so. Once expanded, they predict that they’ll make more money than before, so after paying you back their position will have improved. Or perhaps a country needs to buy a bunch of tanks in order to fight Nazis, or zombies, or zombie Nazis.
There are ways to do this wrong (see the epic housing crash), but that doesn’t mean that all lending is wrong.
The machinery of lending powers apparently simple things like savings accounts—the bank isn’t paying you money to be nice. It’s because they’re turning around and loaning your money out. By offering interest on savings accounts, they can get a bigger pile of cash to loan out. They’re pocketing some (or most) of the interest, but in exchange you have the ability to withdraw money at any time (instead of in 2 years or 30 years or whenever someone pays their loan back), and you’re insulated from the risk that someone might not pay back their loan. (Once upon a time, we hadn’t figured out how to make this work, and the economy imploded. You may have heard of it: the Great Depression. That particular failure mode is no longer possible due to the wonders of FDIC insurance, although we keep trying to discover new ones.)
“Certificates of deposit”, or CDs, which are usually FDIC-insured, are similar to savings accounts. You give up the ability to withdraw money at any time—instead your money is locked up for a fixed period that you choose (e.g. 6 months, 1 year, 2 years, etc.). In exchange, you get a higher interest rate.
More volatile investments (e.g. stocks) have higher risks (i.e. the potential that you could LOSE MONEY) but hopefully higher returns.
I started off by keeping money in a savings account—this seemed pretty cool until I realized that my bank was paying me 0.25% which is basically worthless. Then I switched to ING DIRECT, an online bank (FDIC-insured just like a physical bank—I made real sure to verify that part) offering higher interest rates on both savings accounts and CDs. Several years ago they offered some of the highest rates around—nowadays that doesn’t seem to be the case, but I’ve stuck with them for convenience. I had a bunch of 12-month CDs, set up to expire once a month, so I could benefit from their higher interest rates, yet get money out fairly rapidly if I wanted to.
As I accumulated more and more money, I began to lose my fear of the stock market (acquired due to my parents suffering through the 2000-era tech crash as I was in college). This was also due to the fact that I had invested my 401k (which is a special money bucket, if you’re unfamiliar with the US system) in three mutual funds (helpfully chosen by my father when I knew nothing). I started investing in mutual funds of my own choice through Fidelity online—no more than 5 at a time. I dropped some that I became convinced were dogs (i.e. likely to perform badly in the long run—and my suspicions have been justified) and added others. Eventually I switched to putting all of my money, outside of my 401k/IRA and about 6 months of emergency living expenses in an ING DIRECT saving account, in a single mutual fund. In order to avoid a $75 transaction fee for buying this particular fund through Fidelity, I actually mail checks directly to the mutual fund firm. (I can now observe my account balance online, although I haven’t bothered to set up the stuff that lets me buy/sell shares online.) Then the economy exploded (yes—I moved into mutual funds nearly at the peak). As it fell, I shoveled more money into the furnace. At the bottom, I had lost an incredible amount of money. And then as it came back strongly, I made back my losses and more, because I had bought more shares during the free-fall. Overall, from October 2007 when I bought my first mutual fund, to today, I’ve made an annual percentage yield of 12.68%. That sounds pretty awesome (and it is), but remember that at some points that number had the same magnitude and was NEGATIVE.
I’m just an amateur investor (the whole point of buying mutual funds is to get professionals to do the work for you—or the market as a whole, if you like the idea of index funds, which I personally don’t really understand), but my recommendation is to go to Google Finance or whatever, get a graph of an index (e.g. the S&P 500) or a fund, expand it to 10 years, and consider how you’d feel having bought and sold at various points. Don’t just focus on what would have happened if you bought at the bottom and sold at the top (or kept to the current day) - consider the reverse. I moved my money into my preferred mutual fund when I saw that it outperformed the market for long periods of time, and was relatively immune to losses in value (e.g. during the tech bubble burst, it was largely flat as the indices fell). I liked that behavior, and I still do (even though it fell and rose with everything else during the Great Recession). You should find a fund or funds whose behavior you like. (Past performance is not a guarantee of future results, but it is important data.)
Investing is not inherently unethical. If you’re directly buying a tobacco company’s bonds, then yeah, you’re helping evil to prosper, but consider the following scenarios. (Remember that money is just a number—what it represents is that you’ve done work for other people, and in exchange other people are willing to do a certain amount of work for you. Compared to barter, money provides a magical layer of indirection as it sloshes around the economy—you may make widgets for FooCorp, and the money you earn allows you to buy gizmos from BarInc, even if nobody from BarInc has ever heard of a widget.)
You have money, but right now you’re not interested in buying anything with it. Person X doesn’t have money, but would like to have a car right now instead of waiting for a year to accumulate enough cash, or would like to live in a house right now instead of waiting for 30 years to accumulate enough cash while living in a tiny apartment. If you loan Person X money, they get to buy that car or house right now (yay for them!). In exchange for not being able to access your money for a period of time, and for taking on the risk that you might not be paid back, Person X agrees to pay you back extra money. (The original pile of cash that changes hands is called the “principal”, while the extra pile of cash is called the “interest”.) This is super awesome for you—you’ve earned extra money by doing financial work, instead of the usual physical work or mental work at your day job.
There are many other reasons why someone might want to borrow money (i.e. giving you an opportunity to lend to them). A company might want to expand its operations, but needs a temporary infusion of cash to do so. Once expanded, they predict that they’ll make more money than before, so after paying you back their position will have improved. Or perhaps a country needs to buy a bunch of tanks in order to fight Nazis, or zombies, or zombie Nazis.
There are ways to do this wrong (see the epic housing crash), but that doesn’t mean that all lending is wrong.
The machinery of lending powers apparently simple things like savings accounts—the bank isn’t paying you money to be nice. It’s because they’re turning around and loaning your money out. By offering interest on savings accounts, they can get a bigger pile of cash to loan out. They’re pocketing some (or most) of the interest, but in exchange you have the ability to withdraw money at any time (instead of in 2 years or 30 years or whenever someone pays their loan back), and you’re insulated from the risk that someone might not pay back their loan. (Once upon a time, we hadn’t figured out how to make this work, and the economy imploded. You may have heard of it: the Great Depression. That particular failure mode is no longer possible due to the wonders of FDIC insurance, although we keep trying to discover new ones.)
“Certificates of deposit”, or CDs, which are usually FDIC-insured, are similar to savings accounts. You give up the ability to withdraw money at any time—instead your money is locked up for a fixed period that you choose (e.g. 6 months, 1 year, 2 years, etc.). In exchange, you get a higher interest rate.
More volatile investments (e.g. stocks) have higher risks (i.e. the potential that you could LOSE MONEY) but hopefully higher returns.
I started off by keeping money in a savings account—this seemed pretty cool until I realized that my bank was paying me 0.25% which is basically worthless. Then I switched to ING DIRECT, an online bank (FDIC-insured just like a physical bank—I made real sure to verify that part) offering higher interest rates on both savings accounts and CDs. Several years ago they offered some of the highest rates around—nowadays that doesn’t seem to be the case, but I’ve stuck with them for convenience. I had a bunch of 12-month CDs, set up to expire once a month, so I could benefit from their higher interest rates, yet get money out fairly rapidly if I wanted to.
As I accumulated more and more money, I began to lose my fear of the stock market (acquired due to my parents suffering through the 2000-era tech crash as I was in college). This was also due to the fact that I had invested my 401k (which is a special money bucket, if you’re unfamiliar with the US system) in three mutual funds (helpfully chosen by my father when I knew nothing). I started investing in mutual funds of my own choice through Fidelity online—no more than 5 at a time. I dropped some that I became convinced were dogs (i.e. likely to perform badly in the long run—and my suspicions have been justified) and added others. Eventually I switched to putting all of my money, outside of my 401k/IRA and about 6 months of emergency living expenses in an ING DIRECT saving account, in a single mutual fund. In order to avoid a $75 transaction fee for buying this particular fund through Fidelity, I actually mail checks directly to the mutual fund firm. (I can now observe my account balance online, although I haven’t bothered to set up the stuff that lets me buy/sell shares online.) Then the economy exploded (yes—I moved into mutual funds nearly at the peak). As it fell, I shoveled more money into the furnace. At the bottom, I had lost an incredible amount of money. And then as it came back strongly, I made back my losses and more, because I had bought more shares during the free-fall. Overall, from October 2007 when I bought my first mutual fund, to today, I’ve made an annual percentage yield of 12.68%. That sounds pretty awesome (and it is), but remember that at some points that number had the same magnitude and was NEGATIVE.
I’m just an amateur investor (the whole point of buying mutual funds is to get professionals to do the work for you—or the market as a whole, if you like the idea of index funds, which I personally don’t really understand), but my recommendation is to go to Google Finance or whatever, get a graph of an index (e.g. the S&P 500) or a fund, expand it to 10 years, and consider how you’d feel having bought and sold at various points. Don’t just focus on what would have happened if you bought at the bottom and sold at the top (or kept to the current day) - consider the reverse. I moved my money into my preferred mutual fund when I saw that it outperformed the market for long periods of time, and was relatively immune to losses in value (e.g. during the tech bubble burst, it was largely flat as the indices fell). I liked that behavior, and I still do (even though it fell and rose with everything else during the Great Recession). You should find a fund or funds whose behavior you like. (Past performance is not a guarantee of future results, but it is important data.)
ds