What is impact investing and do you consider it a worthy pursuit?

Dear Dave,

A friend recently mentioned something called impact investing to me. What exactly is this? How do impact investment funds perform, and what do you think about them?

Carson

Dear Carson,

Impact investing generally aims to benefit society, while providing a profit for the investor, by investing in companies, funds and organizations that are aligned with causes, certain values or issues. Think of it as a middle ground between traditional investing and charitable giving, where you can match your investing with your own particular beliefs. It really isn’t all that different from investing in traditional mutual funds, except for the goal of the funds.

Since their inception, impact investments have averaged returns of a little less than 6%. That’s well below the average return of the S&P 500. Impact investing can do some good, but the truth is it’s hard to measure exactly how much good it’s doing. If you’re going to invest in impact investing funds, you need to make sure you understand exactly how your money is going to help the businesses you invest in, if they’re actually doing what they say they’re doing, and whether or not they’re really making a difference for the better.

As with all investments, it pays to do a lot of research and find an advisor with the heart of a teacher. And never invest in anything if you don’t completely understand how it works. Remember, it’s your money that’s in the mix. Don’t feel like the odd man out if you’re the only one not joining in on an investment craze your friends are diving into.

Personally, I recommend investing in good, growth stock mutual funds and real estate paid for with cash. And hey, if you want to make a difference in the world and still invest the old fashioned way, create room in your budget for charitable giving or saving with the goal of making donations to organizations and causes you care about.

I hope this helps, Carson!

—Dave