Investments, Investors and My Retirement
Lately, I have been worrying about retirement. Mind you, I might not have to worry about retiring, if I should die before I become too old or infirm to make a living. Alternatively, I might have to worry about retirement all too soon, especially if I never find a career that will allow me to sleep at night with a clear conscience. Retirement worries me because I could potentially have no source of income. While I am no big fan of having a lot of money, it would be nice to be able to eat regularly.
All three of the financial planning books I have read so far have told me that saving money for my retirement is important, and that I should start saving my money when I am young. The idea seems to be that if I invest my savings now, the magic of compound interest will take over, making me so rich that I will be able to eat regularly and perhaps even have a safe place to sleep. The more money I save and invest now, the longer compound interest will have to work its wonders and the more regularly I will be able to eat when I am old and retired.
This plan is tempting, but it bothers me. Beyond the basic (and for me incredibly important) question of whether it's even possible to earn money without making others suffer, there is the issue of investing my money. I can deal with the idea working to make enough money to meet my expenses. I can even deal with the idea of saving money I have made for future expenses. Unfortunately, I am not comfortable with the idea of putting my money into investments to make more money without me doing any additional work. I think there is something seriously wrong with that idea. In fact, I suspect that investments are to blame for a lot of the problems our economic systems cause, including environmental degradation, crippling debt and rampant consumerism. Such accusations might sound slanderous, but I think the relationships are distressingly clear.
The Problem: Abstraction
The problem stems from the abstract way we treat investment. As far as I can tell, we are supposed to look at investment in terms of black boxes. Each investment is a black box with two displays. The first display is labelled RISK, and the second EXPECTED RETURN. The higher the RISK display, the more probability we have of losing the money we invested. The higher the EXPECTED RETURN display, the more money we are likely to make. We put money into one end of the black box, wait a while, and collect the money that comes out the other end. Sometimes we get a lot more money out of the box than we put in. Sometimes we get only a little more money out of the box than we put in. Sometimes we get much less money than we put in, and sometimes we lose all of the money we put in. It all depends on the RISK, the EXPECTED RETURN, the timing of our investment and some random events that are hopefully correlated with the RISK and EXPECTED RETURN.
Some kinds of investments, such as GICs, Canada Savings Bonds and our savings account, have a very low RISK. That means we are less likely to lose the money we invest. Unfortunately, investments with low RISK generally have low EXPECTED RETURN, so some people invest in black boxes with higher RISK values. Mutual funds have medium RISK and medium EXPECTED RETURN, and stocks and lottery tickets often have high RISK and high EXPECTED RETURN. Black boxes with high RISK and low EXPECTED RETURN also exist, but we are not supposed to invest in those.
As an investor preparing for my old age, I am supposed to play the following game: I should invest my money in black boxes so that I have a good chance of getting more money out of the black boxes than I put in. Then I want to take all the new money I have made and re-invest it with all my old money, again choosing black boxes wisely so that I get more money out of the black boxes than I put in. I would like to make a lot of money each time I invest, but I don't want to lose all my money, so I put money into black boxes with higher EXPECTED RETURN displays, but which have RISK displays I can live with.
I can take this even farther: if I have a sense of adventure and lots of time on my hands, I can try to peek inside the black boxes to see whether the RISK and EXPECTED RETURN displays are really indicative of the random events that will determine how much money I make. I can also change investments frequently, jumping from black box to black box when I predict that good random events will occur, so that I will make lots of money.
Consequences
Although many people (and all three of those financial planning books) seem to treat investments in this way, I think the abstraction is lousy. Investments are not black boxes. When we make an investment, we are funding some organization, be it banks (GICs), countries (Canada Savings Bonds), provincial and federal governments (lottery tickets), or private companies (mutual funds and stocks). In general, the amount of money we get back depends on how much profit our organization made using the money we invested. Even many lotteries operate on this principle: the more people who buy Lotto 6/49 tickets before a jackpot is claimed, the higher the jackpot becomes. If the organization loses money, then we usually lose part (or all) of our investment.
Profits don't come from nowhere. In order to make profits, organizations have to do something -- and the things that they do affect our world. I might make a lot of profit by investing in Coca-Cola stock. But Coca-Cola had to make its profits somehow, and the way the Coca-Cola company makes its money is by selling carbonated, nutrient-free sugar-water to people all over the world. If I don't like that idea, I shouldn't be investing in Coca-Cola stock. That's fine, except that as an investor I am not supposed to be looking at Coca-Cola stock as the means by which the Coca-Cola company gets funding to sell sugar-water to people. I am supposed to be looking at Coca-Cola stock as a black box with two displays labelled RISK and EXPECTED RETURN.
It is true that I don't have to look at investments in terms of black boxes. I could look at investments in terms of investments: as places I put my money that have concrete effects upon the world in which I live. Unfortunately, I am not encouraged to see investments in this way. Unfortunately, I don't think many people do see investments in this way. That has enormous reprecussions.
When people make investments, their job is to maximize the return they get for the money they put in. That puts a lot of pressure on the organizations these investments are funding, because if people discover that their investments are not going to yield a high return, they can withdraw their money and put it elsewhere. That is fine from the perspective of investors, because they are taking their money from low-return investments and putting them into (hopefully) higher-return investments. That is not fine from the perspective of the organizations that have investment money taken away. Without that investment money, those organizations may well make less profit, or may start losing money. In order to keep their investment money, organizations have to look as attractive to investors as possible by making as much profit as possible.
That's where the trouble starts. Operations that generate higher profits will look better for investors, and since investors are concerned only with RISK and EXPECTED RETURN, organizations that cut ethical corners can win big. If organizations can cut costs by dumping their waste into the air and water, they can increase their profit and attract more investors. If organizations can improve sales by encouraging overconsumption of needless goods (and in the process putting their customers into debt), they can increase their profit and attract more investors. If organizations can cut payroll costs by laying off thousands of workers, they can increase their profit and attract more investors. None of these profit increases are beneficial, even to the investors -- for investors are people too. Investors breathe air and drink water. Investors are affected by our consumer culture. Investors often have day jobs. But so long as the investments don't directly affect the investors being attracted, nobody seems to care.
It gets worse. If several organizations are competing for the same investment money, then the one that makes the most profit is more likely to get that investment money. If every organization is ethical save one, then the unethical company can win big, because it will take steps the other companies will refuse to take, thus increasing its profits and attracting more investment.
The High Road
This is a bit of an oversimplification. Some organizations take the high road, and tell potential investors that they are ethical, hoping that this will be a non-monetary consideration investors will take into account when making their investments. Some organizations are so blatantly unethical that they turn investors away. However, as a general rule I think it is safe to say that many investment-funded organizations (especially companies on the stock markets) will take every ethical shortcut they can get away with, because they won't survive in the marketplace if they don't. Even if the people running the organization want to act ethically, I would argue that they often can't, because their job is to maximize the return to their investors, and by behaving ethically they will jeopardize return on investment. At the very least, organizations have lots of pressure to disregard ethical standards.
My credit union tries to remedy this situation by offering "Ethical Funds," a form of mutual fund. Basically, "Ethical Funds" are regular mutual funds with additional constraints. The companies that participate in the mutual fund must meet some ethical guidelines, such as environmental friendliness and fair wages. While I do think these funds are better than regular old mutual funds, I don't think they solve the fundamental problem of abstraction. Companies that participate in "Ethical Funds" are still supposed to maximize their investments, which means they are still going to take as many ethical shortcuts as they can get away with. It's just that these companies can get away with fewer shortcuts. Moreover, investors are still supposed to look at these funds abstractly: they are still out to get the best rate of return that they can.
I don't think investments have to be evil. I bet the original motivation for investing money was to give organizations capital so they could go about their business. That's not necessarily evil. I am making an investment when I volunteer my time fixing bicycles at Recycle Cycles; I am making the investment to promote cycling in my community. Similarly, a neighbourhood can invest in a hospital, a school, a well or anything else that would be too expensive for any individual to buy, but which benefits the entire community. It even makes sense to invest in certain businesses, I think: good things like fuel cells and worldwide communication systems may never have happened without investment.
I see two differences between the above investments and investments the financial planning books want me to make. Firstly, people make these investments because of what the organization is doing, and not so much to maximize profit. Secondly, many of these investments are local: people live with the consequences -- good and bad -- of the investments they make. These distinguishing points are important. Not maximizing profit is important because often wasteful unnecessary ventures are more profitable than useful ones: pushing expensive sugar-water on people doesn't benefit them as much as supporting organic gardening and well-digging, hawking sugar-water is a lot more profitable than helping people thrive. Local investments are important because then people are less tolerant of ethical shortcuts. It is a lot easier to allow your investments to profit from sweatshop labour and groundwater contamination when the sweatshops and contaminated groundwater are far away on other continents. Such problems are far less palatable when you must deal with them in your own community. Granted, in some sense the groundwater on distant continents is part of every community on Earth, but if investors looked at their investments from that perspective, our world might be a better place.
Personally, I have trouble ignoring the potential consequences of my investments. These pesky ethical concerns prevent me from getting a high-paying job, and they might well jeopardize my retirement plans. Unfortunately, avoiding investment might be impossible if I want to prepare for retirement, because of inflation. I don't know very much about inflation. I don't know why we need it or what good it does. Apparently it devalues money: $5000 will be worth a lot less fifty years from now than it does today, which means that even saving a lot of money now that I am young won't mean much without the magic of compound interest keeping the value of my savings high.
Options
One option I am considering is to take the least evil investments I can. If I invest in my country by buying Canada Savings Bonds, maybe my savings will be worth something when I retire. Unfortunately, I think that Canada Savings Bonds are one of the lower-return investments, and the payoff may not even match inflation. If I found other kinds of investments that I could endorse with a clear conscience, then maybe I would have enough money to eat once in a while.
Another option is to try an earn lots and lots of money, then save it and hope that it doesn't devalue too much. This, however, brings back the debate of how to earn money without hurting others, which I have not yet resolved.
I see two other options. One is to forget about saving for my retirement, and hope that the government will take care of me. I don't like that option because it is not very sustainable: I don't want to live a self-sufficient life only to depend on handouts when I am old. Also, the chances that government pension plans will have the funds to support me when I am old are slim.
The final option is not to retire, and either work until I die or die when I can no longer work. This might well be a better alternative to investing in highly-profitable organizations I despise, but I don't find this choice terribly palatable. For one thing, I don't think I have the willpower to stick with this plan. Secondly, not retiring doesn't seem like a very satisfying way to prove that you can live a fulfilling life without conforming to the insanity of our economic system. On the other hand, maybe that's the whole point: no matter what I do, I am not going to win this game.