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The Moral Dangers of Investing in Mutual Funds

NOTE: This piece is rather controversial and I’m writing it both because I’m concerned by this hidden danger and because I’m open to having these ideas challenged.


Investing money into a mutual fund, whether through a 401K, a life insurance policy or directly with a stock broker is possibly the most morally dangerous act most people in our modern world will ever engage in. Second perhaps only to the act of withdrawing money from those kinds of investments and “blessing” our families with it.

The reason is simple. If you thoughtlessly gave a friend $50,000 to start a business, and that business brought in a substantial profit, but years later you discover your friend was selling drugs to school children which: destroyed families, ruined live, and even caused several deaths, how much of those results would be your responsibility? Honestly answer that question before continuing to read.

This question first confronted me a number of years ago when my would-be broker showed me a list of Mutual Funds which all had a company named Altria as their their top money maker by far. When I asked who that was and why I had never heard of them my broker reluctantly told me this was Philip Morris the tobacco giant, re-branded to cut down on objections from mutual fund investors. Their strategy, at least in my case, backfired.

Investing money is a powerfully creative act. It brings things into existence that otherwise could not exist and it makes the investor the source of that business’s life. Businesses are, at their most basic level, simply an extension of the life and wishes of its investors. In a capitalist economy, where those with capital own the stock of the company, those with capital are ultimately responsible for all the actions of those companies, even more than the entrepreneurs and executives who are really the investor’s surrogates.

So when you invest in a fund that spreads its money to hundreds of companies and then you receive a profit in return, how can you possibly know how each of those dollars were made? Yet, in a very real sense you made possible every action that was done to make those dollars. That’s why you get a return. But that money doesn’t come back clean. Along with it comes all of the responsibility for the actions taken to make that money. Those actions whether positive or negative are also added to your account, your moral account. Ignorance is, of course, no excuse any more than ignorance is an excuse in the example above. In fact deliberate ignorance in the face of funding evil is yet another form of sinful negligence.

Now if you’ve investigated the practices of how profit is made in all the companies you invest in and you hold executives in those companies accountable to a high ethical standard, you can be confident and at peace when you get a return on your investment. I’m very pro investing. It’s an essential part of stewarding resources. But mutual funds make this nearly impossible. A company that receives a large percentage of its funding from mutual funds gets the message that “no one is looking” and “as long as you keep giving us a return the capital will keep coming.”

There was a day, back when stock markets were young, that a typical family might look for 2-5 companies they really believed in and invest in those entities for life. They would go to stock holder meetings, read quarterly reports, ask penetrating questions and follow relevant news stories. No longer. Today investing is a “don’t try this at home” game for professionals who vie with one another to give totally passive investors greater and greater returns.

A man like Bernard Madoff, for example, is our own creation. This former chairman of Nasdaq began a Ponzi scheme in the early 90’s that gave thousands of investors surprising returns month after month for almost two decades without anyone, including countless professionals, actually following a single dollar to its real source. And we learned exactly the wrong lesson from this scandal. Instead of discovering the moral and financial dangers of completely passive investing, we made a monster out of Madoff. But as New York Times writer and author of the new book Wizard of Lies, Diana B. Henriques says about Madoff, after many in-person interviews, “He’s not inhumanely monstrous, he monstrously human.”

Let’s face it, Main Street created Wall Street. We are in this together. Wall Street is a reflection of the collective, boundless greed of an entire society willing to continue to reward anyone who can provide a higher return. Nothing has changed. The only way out of this cycle is for investing families to demand a moral accounting for every dollar they receive back from their investments. And the only way that becomes possible is through deep faith and reverent fear in a God who holds the true accounting ledger – the total hidden and public impact of every activity in every part of our lives.