A principled portfolio
Susan Loucks looks for investments that mirror the values by which she lives her life

By Linda Tucci, Globe Correspondent  | 
December 17, 2006

Henry David Thoreau might have recognized a kindred spirit in Susan Loucks. Or at least commended her determination to "live deliberately." 

Loucks, who is paid $48,000 as a program manager for a Boston nonprofit organization, lives on $15,000 a year. The Wellesley College graduate and practicing Quaker, 35, doesn't own a car, gets by without a home computer, and spends about $200 a year on clothing. "I shop at Goodwill."

Frugal for herself, Loucks is generous to others, giving away about 10 percent of her annual pretax income to charity. This is done in part by "taxing" herself: For every dollar she spends on entertainment or eating out, she gives another to charity.

Loucks wishes to be equally principled about investing, and, indeed, most of the approximately $40,000 she has saved is funneled into several mutual funds that she believes reflect her social values. They include three Pax World Funds, a Parnassus Mutual Fund, and the Vanguard FTSE Social Index. "But for all I know, all these funds might be investing in the same companies," she said.

She applied for a Globe Money Makeover to get advice on how to create a do-it-yourself, socially responsible investment portfolio that is balanced "without becoming a person who does this 40 hours a week."

Socially screened mutual funds are the fastest-growing segment of the $2.29 trillion socially responsible investing industry, increasing to more than 200 socially screened funds in 2005 from 55 in 1995, according to the Washington -based trade association, Social Investment Forum. Assets in socially screened mutual funds accounted for $179 billion last year, an 18.5 percent increase from 2003.

Socially screened funds put money in businesses that reflect certain values and keep money away from companies that do not. For example, they might invest, as the Parnassus Fund has stated it does, in companies "that respect the environment, treat their employees as partners, encourage diversity in the workplace, insist on ethical business dealings, or support the communities where they operate." At the same time, the fund shuns companies that "manufacture alcohol or tobacco products, are involved with gambling, manufacture weapons, or generate electricity from nuclear power."

The Globe matched Loucks with Sharon Rich, founder of Womoney, a fee-only Belmont financial planning firm for women and their families. She co wrote a book, "The Challenges of Wealth," with Amy Domini, who developed the Domini 400 Social IndexSM.

Any good investment portfolio is diversified, comprising US and foreign funds, large, mid-cap and small companies, and a mix of value and growth stocks, Rich said. Aside from there not being "enough good money managers out there -- period," socially responsible funds are new, and there is "no one socially screened fund that does it all."

"Most of the socially screened funds do not have consistent returns that put them in the top quarter of their class over a long period of time. But just being diversified has benefits," Rich said. So having a foreign fund, for example, even if it is not doing great, is better than not having a foreign fund.

For core holdings, Rich liked Loucks' investment in the Vanguard FTSE Social Index Fund, a large growth fund that has low fees and takes a passive management approach mirroring an index rather than picking stocks. "A passive approach historically does better than active management," she said.

For diversification, Rich moved about $25,000 of Loucks' savings into three additional funds. "The Neuberger Berman SRI Fund is a fund I like because it is more even-keeled and it has some foreign exposure," she said.

Rich also thought Loucks could make a "little room" for Ariel Funds, which describes itself as turtle investors, knowing that this holding would be a long-term buy and hold. Rich also suggested Loucks diversify with Domini's new European fund, even though "it doesn't have a long track record."

"Some of the funds you just have to be patient with because they are either hot or cold," Rich said.

Loucks, however, may be able to stomach riskier investments. Rich, who leaves no question unasked, ferreted out that Loucks has a considerable family trust that, given her modest ways, makes her financially independent.

So far, Loucks has refused to tap it or even acknowledge it, saying that she feels awkward spending money she didn't earn. "My Dad manages that," she said, adding that she tells him, " 'Don't even show me the papers on it.' "

But Rich said Loucks can't ignore the money. "Now I am going to challenge you on that," Rich said "It is your money. Get the information."

Rich said Loucks might consider making her charitable donations through the trust using a donor-advised account rather than her earnings. That would save effort and allow automatic annual, as opposed to monthly, disbursements.

"Fidelity Charitable Giving, Vanguard, Calvert Funds, or Combined Jewish Philanthropies have good programs," Rich said.

Rich also gave Loucks a list of financial assignments, reminding the young philanthropist that she "can't take care of other people if you're not taking care of yourself."

Loucks, who owns a 320-square-foot Somerville condominium, needs additional condo insurance to cover her personal property.

Because of her charitable giving and homeowner status, she probably could claim more exemptions on her income tax. She also should switch the beneficiaries on her retirement accounts and life insurance, leaving the tax-fee life insurance to her sister and the taxable retirement accounts to charity.

"The nonprofits don't pay income tax," Rich said. "More money goes to everybody."

Rich also insisted that Loucks increase her clothing budget to $550 in case she needs a "good pair of shoes and a winter coat."

But Loucks' ascetic lifestyle hasn't stopped her from enjoying life. She goes Lindy Hop dancing several nights a week. She enjoys shape-note singing, a centuries-old communal style of singing for people who didn't read music. "Really high-energy, loud, old hymn tunes," she said. "It's a good time."

In the end, Loucks found the investing advice invaluable. "It was a real gift."

What is socially responsible investing? The concept is laudable: Invest in businesses that reflect your values, pressure them when they slip, and boycott them when they don't. Socially responsible investors often screen for businesses that make money from tobacco, gambling, or weapons; or that have poor records on human rights, corporate governance, or the environment. Putting your money where your morals are, however, proves more difficult in practice. A company with a decent track record on one front, say global warming, might fall short on another- discrimination against minorities, for instance.