The Joy of Hedging 

How the dismal science applies to your life.
March 22 2000 3:00 AM

The Joy of Hedging 

The case for investing against your heart and with your head. 

77000_77689_000310_investing1b

What do you think about when you're choosing your investments? Your financial future, of course, but what about broader social issues? Do you have an aversion to military contractors or tobacco companies? Do you favor firms that are ecologically trendy or give a lot to charity? If so, several dozen mutual funds are vying for your business. The Bridgeway Fund Social Responsibility Portfolio, the Delaware Social Awareness Fund, and others like them invest according to criteria that range from animal rights issues to racial diversity in the corporate boardroom.

Advertisement

But if you're really an ardent opponent of, say, military spending, you might be better off skipping the social responsibility funds and investing in a large defense contractor such as Lockheed Martin. That way you'll always have something to be happy about. If military spending is cut, you can tell yourself it's good for the country. And if military spending is increased, you can tell yourself it's good for your portfolio. That's called hedging, and it's a basic principle of finance.

For the same reason, passionate anti-smoking crusaders might do well to invest in Philip Morris, while the small-is-beautiful crowd should take a second look at Microsoft. Social responsibility funds, by contrast, should have a special appeal for those who believe that environmentalism or high-level affirmative action has gone too far. These funds will do well relative to the market precisely if those policies go even further.

Now, this advice is hardly ironclad. If you're so wrapped up in politics that an increase in military spending would leave you too depressed to enjoy being rich, an investment in Lockheed Martin serves no purpose. You might as well invest in something you believe in. Presumably that's why sports fans bet on the home team. Betting on the visitors has all the advantages of hedging—no matter who wins, there's something to celebrate. But if a hometown loss takes all the joy out of collecting a bet, then you might as well put your money where your heart is.

Investing in accordance with your social philosophy is like betting on the home team; investing counter to your social philosophy is like buying insurance against pain and suffering. Either strategy is defensible. But—Slate readers excepted—few investors are likely to be so passionate about politics that financial good fortune would fail to compensate for a political defeat. So, my guess is that a majority of investors would do well to bet against their ideological home teams.

If everyone follows my investment advice, your socialist neighbors will choose companies devoted to the single-minded pursuit of profit, while your capitalist neighbors choose funds such as Bridgeway that balance profits against other goals. In the long run, that means the socialists will get rich faster than the capitalists. Whether that means that in the long run the socialists and capitalists will trade ideologies remains to be seen.

There's one other alleged selling point for the social responsibility funds. While many of their selection criteria are politically controversial, there's one big exception: charitable giving. Surely charity transcends ideology. So isn't that a reason why everyone should look favorably on companies that give generously and on mutual funds that favor such companies?

77000_77690_000310_investing2

A ctually, it's a reason why everyone should avoid such companies and such funds. As a stockholder who cares about charity, why would you ever want the board of directors giving your money away instead of allowing your stock to appreciate so you can give it away yourself? This has nothing to do with the question of whether you want to give a lot or a little. It has to do only with whether you'd rather choose the recipient yourself or delegate that decision to a board of directors that is unlikely to share your exact values.

That seems pretty straightforward, but the tax code introduces a complication. When the corporation gives a dollar of your money to charity, it (and hence ultimately you) reaps the benefit of a tax deduction at the corporate rate. If instead you give a dollar to charity, you reap the benefit of a tax deduction at your personal rate. So, if you're in a high tax bracket, you'll want to do your own giving, but if you're in a low tax bracket, you might want a corporation to do your giving for you. In other words, rich people—but not necessarily poor people—should avoid corporations that give to charity and hence avoid the social responsibility funds that favor such corporations.

There's one other reason you might support corporate giving: It forces other stockholders to give. But this is relevant only if you believe the other stockholders would not have given on their own. The investor who wants to give $100 to the American Cancer Society, and who sees the board of directors giving $20 on his behalf, reduces his private contribution to $80. So corporate giving does not increase the total of all donations except when the corporation gives to causes that the stockholders had not planned to support.

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.

Jurisprudence

Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Weigel
Sept. 16 2014 7:03 PM Kansas Secretary of State Loses Battle to Protect Senator From Tough Race
  Business
Moneybox
Sept. 16 2014 4:16 PM The iPhone 6 Marks a Fresh Chance for Wireless Carriers to Kill Your Unlimited Data
  Life
The Eye
Sept. 16 2014 12:20 PM These Outdoor Cat Shelters Have More Style Than the Average Home
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
  Arts
Brow Beat
Sept. 16 2014 8:43 PM This 17-Minute Tribute to David Fincher Is the Perfect Preparation for Gone Girl
  Technology
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Medical Examiner
Sept. 16 2014 11:46 PM The Scariest Campfire Story More horrifying than bears, snakes, or hook-handed killers.
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.