The Tale of Two Investors
Consider two investors:
* Investor One is a faith-based investor who decides to screen his portfolio according to his hot-button issues (i.e. screen out abortion, pornography, embryonic stem cell research, companies actively involved in the homosexual movement) and screen in companies that are in line with his faith. (positive screens to include companies developing life curing diseases, helping mankind, and standing on Christian-Judeo principles).
* Investor Two is a maximum-profit investor who decides that the highest return on his money is his goal. He choose not screen his investment portfolio.
If both follow the same asset-allocation process and use a similar investment-selection process, will both investors have similar returns on their investments? You can make arguments on both sides that they will or will not achieve similar returns. Many people assume that the maximum profit investor will always outperform the faith-based investor because he is not using any screens or filters to eliminate potential investment choices. I have seen compelling arguments presented on both sides of the coin. There are studies showing screening hurts performance, but there are also studies showing that screening does not affect your returns.
Whom do you believe?
Now if the maximum-profit investor outperforms the faith-based investor, many assume that it was because of the screening process used by the faith-based investor. My argument is that the underperformance could be from the asset allocation or the investment selection process. Do not automatically assume that the screening parameters used by the faith-based investor cause underperformance.
I have seen many faith-based investors far exceed maximum-profit investors because they used a solid asset-allocation and investment-selection process. I have also seen many faith-based investors suffer lower returns because of a weak asset-allocation and investment-selection process. The faith-based investor and the maximum-profit investor stand an equal chance of achieving competitive financial returns if they follow a solid, disciplined process. There is no reason to use lower expected returns as an excuse not to invest according to your faith. If you develop a solid approach, you can achieve both solid returns and keep your values in check.
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