Caring About the World Makes You a Better Investor

by | Sep 10, 2018

Socially conscious and impact investors don’t behave like traditional investors. In my experience, they tend to hold steady during market fluctuations and stay invested over the long-term. They care as much about clean air and water as they do about how their investments are performing. They are resilient investors, more able to weather the storms inherent to the market.

Behavioral finance shows that people do not act rationally when it comes to their money. Instead they tend to react: to market plunges, to rising markets, to what their friends say, or the news says. This can lead to poor decision-making and can be measured using the “return gap.” This is the difference between what an investment fund returns vs. what the individual investor makes in that same fund.

In 2017, with Derek Horstmeyer of George Mason University, we attempted to measure that difference in behavior for ethical investors. The results were remarkable. Investing with the intent of making the world a better place improves investor returns by as much as 1.23%. Socially responsible and impact funds tend to perform similarly to their traditional peers* but impact investors see more of that return for themselves.**

Top Study Findings:

 

  • Investor behavior lessens returns over time in all types of funds
  • This behavior may include trying to time the market, overreacting to market fears or jumping in during market excitement
  • Investing with the intention of making a positive impact in the world improves investor behavior and dampens reactivity to market ups and downs
  • Due to this better behavior, being an “Impact Investor” can improve returns by up to 1.23% annually.

Comparing the return gaps for investors in various fund types over a 10 year period highlights that investors in mutual funds that particularly target “value” and “growth” stocks suffer the greatest gaps in return. On average investors in these funds are losing 2.16 and 1.93 percentage points respectively annually due to investor behavior. For example, for each 10% the value funds returned, the average investor made 7.84%.

Contrary to this, investors in S&P 500 index funds and those in impact/sustainable funds—or funds with an ethical bent—have the lowest return gaps (0.77 and 0.93 percentage point, respectively).

Investing for Impact Lessens the Investor Return Ga

*06/12/2012 Fulton, Kahn and Sharples  Sustainable Investing: Establishing Long-Term Value and Performance

**Study compared the Return Gap on 864 mutual funds with stated SRI or impact focus to the Morningstar data set on traditional funds. Research Provided by Derek Horstmeyer Assistant Professor, George Mason University, dhorstme@gmu.edu