A Beginner’s Guide to Green Investing

I find there are two ways to green your business, or your life in general: internally and externally. Effecting internal change like using solar panels, recycling, or re-scrapping that memo from Jackson down the hall that reminds you to use a cover on your TPS report. Internally, you have all the control, and all the expense. It is the micro way to effect change - and it works when everyone does little things with you.

The external way to be green is one very few people know or feel comfortable with: investing green. For the hardcore DIYers, this may mean individual stocks. In my opinion, buying an individual stock is like playing roulette - you almost always lose, and it's totally addicting. As I have enough vices, I avoid stock picking in general, but if you're into it, here's a good place to start. Spreading your risk amongst a combination of ETFs (exchange traded funds) and mutual funds is a perfect way to promote green and sustainable business, and even (maybe) make some green yourself.

So the questions is: where to start? Well, shameless self promotion has never come so easy - you can start at my blog, Smugly Green, for some basic information. But here are some steps you can take to invest greener or more responsibly:

1) If you don't do it yourself, get a financial adviser. Preferably NOT at one of the large firms. While most of the large firms like Merril Lynch and Goldman Sachs have green investments on their platform, I find you have less control and the cost is often higher. Find someone local, someone you can trust, and always understand that there is a conflict of interest when someone is paid on commission. If you're a DIYer, I recommend online brokerages like AmeriTrade, optionsXpress, or eTrade - they tend to be cheaper than any brokerage house, and if you're comfortable managing your portfolio, they're definitely worth it.

2) Allocate a percentage of your overall portfolio to green. This is a personal choice - it is always good to have your risk spread among many different industries, many different countries, and many different asset types. Green is just a part of the puzzle. For me, it's the whole puzzle, but I'm willing to take that risk. How much makes sense to you? 20%? 10%? 5%? When you make the decision, understand that green has to be a long term investment, at least 5 year horizon, and probably longer. Green can also be risky and volatile, like any stock. There are socially responsible income vehicles I will talk about that you can use to allay your risk, but better to understand the worst up front.

3) Start investing with the old guard of green. There are some green funds that have been around for a long time, it makes sense to start with them. They have long, proven track records, and more importantly, have shown a long term dedication to green investing. Many funds are popping up on an almost weekly basis now as money floods green sectors, but avoid trying to make a quick buck. Wall Street can be an insidious place, best stay above the fray. Here are some of the old stalwarts:

• New Alternatives Fund [NALFX]
• Winslow Green Growth [WGGFX]
• Domini Social Equity [DSEFX] - SRI investment

4) Consider investing in the new green do gooders. There are some new green/SRI investments worth looking at by respectable companies. These track records are short, but I own some of them, and they are worth looking at:

• Guiness Atkinson Alternative Energy Fund [GAAEX]
• Winslow Green Solutions Fund [WGSLX]
• Calvert Global Alternative Energy Fund [CGAEX]

If you don't want to pay for active management in mutual fund wrappers, ETFs are an excellent way to "own the index" - basically expose yourself to green industry in general, for better or for worse:

• PowerShares WilderHill Clean Energy (PBW)
• PowerShares WilderHill Progressive Energy (PUW)
• PowerShares Cleantech (PZD)
• Claymore S&P Global Water (CGW)
• Market Vectors Alternative Energy (GEX)
• NASDAQ Clean Edge (QCLN)

And for the very new, but very interesting funds and ETFs, check these out:

• ELEMENTS Grains (GRU)
• ELEMENTS Global Warming (GWO)
• ELEMENTS Solar Energy (TAN)
• SAM Sustainable Climate Fund [SMCNX]
• SAM Sustainable Water Fund [SMWNX]

5) Add income to the portfolio. Green income is hard, if not almost impossible, to come by yet. There are ways in the future it will be more viable (green real estate investments, green corporate bonds, etc.), but for now, it's a tough buy. Instead, there are some excellent socially responsible investments that provide yields that you can feel better about:

• Pax World High Yield [PAXHX]
• Domini Social Bond Fund [DSBFX]

6) Construct your portfolio. This is the tricky part. I recommend mixing four or five of the investments above that don't overlap very much. For instance, investing in Water, Green Energy, Socially Responsible, Income, and Cleantech will avoid a lot of unnecessary overlapping.

7) If you own a business, think about bonusing green stock or investing company assets in green. Every little bit of green investing sends the message to Wall Street: be sustainable.

Disclosure: Though I may own and use this asset in my portfolios, it may not be the correct fund for your individual situation, so these posts are by no means a recommendation that you purchase a particular asset or fund. Please read the prospectus in full before choosing to invest, and if necessary, consult a financial professional (understanding that your financial professionals also have conflicts of interest in many cases when making suggestions).

Comments

[David Lentz]

How about the First Trust ISE Global Wind Energy Index Fund (FAN)? It is too new to commit funds to (IMHO), but looks promising and is worth watching.

It has a nice international flavor that reduces single country/currency exposure, providing reasonable diversification within the field of wind power, which has valuations not quite as far into nosebleed territory as solar.

Disclosure: I don't own any, but am watching it as a possible future purchase.

[MattMoscardi]

David,
I definitely agree - solar, while not entirely overpriced in my opinion, has been quickly inflated due to demand for green energy exposure. FAN is DEFINITELY worth watching, and even worth considering as a buy on the early boat. For my money, I'm patient for the most part - wind will be far more volatile in the short run I think. But I agree it's worth the watch (especially as it's already down 5% since it opened, buying opportunities could abound!).

[lefty]

Green is good--but not for the investor, yet. In todays market, I invest only in necessitys. Food, energy, and beleive it or not, financials.

[h2oworks]

Wow! What a great introduction to investing for the future. Thank you.

[Ron Robins]

Good post. I want to add that that what is green and what is not is open to much debate. However, if everyone applies their own values to their investments I believe that in the wash the best will shine through.

Also while the problem of climate change remains, investing in green companies will continue to rage.

Incidentally, I have a site that might interest you. It covers the latest global green and socially responsible investing news and research. It's at investingforthesoul.co.../

Best wishes, Ron Robins