While speaking to my father about his investments, he let me know that he had invested in a fund that gave churches low-interest loans in the denomination that I was raised.
Our conversation got me thinking about faith-based investing and whether I wanted to shift some of my investment portfolio in that direction. This led to questioning the concept and whether it is a good idea.
What is Faith-Based Investing?
Faith-based investing is an investing strategy that focuses not only on how much money a business makes but also on how that business makes its money.
It doesn’t mean that a business has to be based on a single religion, but how they conduct business is in line with the investor’s religious values.
Along with socially responsible investing, faith-based investing has become more popular over the last ten years as people have begun to evaluate companies’ business practices. It appears that these types of investment strategies only stands to grow over time.
Investing By Values
There are many different faith traditions across the globe, and we will not attempt to suggest an investing strategy for each one. The following examples can give you an idea of how faith-based investing might look for some of the largest religions in the United States.
Catholic values investors tend to invest in companies that support human rights, environmentally friendly, and fair employment practices. They tend to avoid companies that support abortion, stem cell research based on embryonic stem-cells, and weapons (especially weapons of mass destruction).
The United States Conference of Catholic Bishops (USCCB) has released a set of socially responsible investing guidelines if you want to do further research on investing in line with Catholic beliefs.
Protestants have a similar core set of beliefs, but the different protestant denominations have differing opinions on a few activities that could affect a faith-based portfolio on protestant beliefs.
Most would steer you away from companies that support abortion, gambling, pornography, high-interest lending, and various other activities, not in keeping with Christian teaching.
Your best bet is to spend time with the guidelines of a particular denomination if you want to stick closely to what their investing guidance would be. Most Christian mutual funds are going to be in line with any of the protestant denominations since they tend to err on being more conservative.
A primary focus of investing based on Judaism is diversification. Diversification is referenced frequently in the Talmud. Socially responsible investing is also closely associated with Judaism-based investing.
As with protestants, there are many different sects of Judaism. You will want to check with your rabbi or larger Jewish organization to determine what values are most important for your faith-based investment strategy.
Islamic-based investors tend to avoid any companies that make money in gambling, alcohol, or pornography. These would be classified as sin-stocks under the Islamic faith.
Avoiding companies that earn a significant amount of their money from interest or carrying a heavy debt burden can also be a factor for faith-based Islamic investors. Finally, any company working with pork products is not permissible in an Islamic faith-based investing strategy.
This still gives you a broad base of companies that will do business in compliance with Sharia.
If you want to go the complete opposite direction from faith-based investing, you could consider investing in sin stocks. These are companies that make their money in legal areas that many people consider unethical.
Sin stocks typically include:
Because these industries are considered immoral, they also have a higher risk when it comes to government policies regulating how they make money.
Does it Work?
You can absolutely make money with faith-based investing and not feel bad about what your money is invested in.
Faith-based investments have the same pitfalls and potential as any investments. Make sure that the companies you are investing in have strong financials and growth potential, and you will do fine buying individual stocks.
If you are looking at mutual funds and ETFs that are faith-based, you can feel confident that they will do well compared to the market, especially over long periods.
John C. Adams from the University of Texas at Arlington and Parvez Ahmed from the University of North Florida published a study in the Journal of Investing that shows over long periods faith-based funds do just as well as their secular counterparts.
Tips for Investing in Faith-Based Funds
Faith-based funds are an excellent way to invest using your beliefs. Use these tips to help you.
Check the History
Faith-based funds are just mutual funds that invest in companies inside of a belief structure. They should have a long history of getting their members solid investment returns.
If you see a faith-based fund with a poor history of returns, keep moving on to other options.
Use a Screener
Manually searching through mutual funds is painful. With so many people interested in socially responsible investing, the major brokerages now allow you to screen for funds in this investing niche.
Setting your filters correctly will save you a ton of time as you evaluate these investments.
Watch for Fees
With any mutual funds you need to watch for the fees the fund charges, this is especially true with niche investing products.
As faith-based investing has become more mainstream, the number of funds has expanded, and there are many low fee options available. Don’t get stuck with a high fees fund that hurts your long-term investing returns.
Accept the Limitations
When you eliminate entire sections of the market, you are going to limit your options. There are many faith-based funds available, but not nearly as many as those that solely focus on profits.
If you are going to make this strategy work for you, you have to be willing to not focus on the grass on the other side of the fence.
Don’t Worry About Scandals
From time to time, religious institutions will have a scandal. These scandals have little impact on the funds that focus on the values of that institution.
Fund performance is about the management of that fund, not when external people violate and sully the name of the beliefs that the fund is using to find their investments.
Final Thoughts on Faith-Based Investing
I am a fan of faith-based investing. It seems like an excellent way to get a solid return on your investment while supporting businesses that align with your belief system.
That doesn’t mean I am going to invest in any business that matches my beliefs. For me, faith-based strategies could be used for buying individual stocks
For example, I don’t believe enormous amounts of debt are a wise way to live life or run a business. Therefore, using a company’s debt burden to decide whether their stock is worth purchasing could be an excellent way to utilize my personal beliefs in an investing strategy.
No matter what faith tradition you belong to, there will be useful elements to add to your investing strategy. You could always go entirely passive and buy total stock market funds and ignore all the research to find faith aligning companies.