For most people, the best way to build a green or fossil-free portfolio will be to use mutual funds or an investment advisor. The exceptions are those who like to do things for themselves, and understand the significant advantage that saving just a fraction of a percent in annual fees can make to the long term performance of a portfolio.
This article can be found in the July/August 2014 digital edition of Renewable Energy World. You can preview the issue at this link.
For these exceptions, the right choice may be to build a portfolio from scratch, using individual stocks. While managing your own portfolio could easily become a full time job, there are ways to build and maintain a stock portfolio with a time commitment measured in hours, not days.
One way is to piggy-back on the work of the professionals by starting with mutual fund holdings. Garvin Jabusch, Co-Founder and CIO of Green Alpha Advisors in Boulder, Colorado and the co-manager of a fossil-free mutual fund thinks this is the way to go for busy professionals. "If I were a doctor or a lawyer, I'd probably use this strategy," he said.
The Stock Lists
The Securities and Exchange Commission (SEC) requires that mutual funds disclose their portfolios quarterly, but many often disclose their holdings more frequently on their websites. Start by selecting a few green mutual funds, ideally the ones you would consider investing in if you were to build a mutual fund portfolio rather than a stock portfolio. An investor who wanted to build a fossil fuel free portfolio might use mutual funds that describe themselves that way, such Green Century Equity (GCEQX), Portfolio 21 (PORTX), and Jabusch's Shelton Green Alpha (NEXTX). The links connect to each fund’s list of holdings on Morningstar.
The table to the right is a list of all the stocks in these three funds top ten holdings, organized by sector. The sector designations (Technology, Healthcare, etc.) are the categorizations given by Morningstar. It also includes each company's dividend yield and beta. Beta is a widely used measure of a stock's market risk.
The choice to use three funds and ten holdings from each is fairly arbitrary. The list simply needs to include enough stocks from as many different industries as possible to build the portfolio described below. In addition to these and the holdings of other green mutual funds, a variety of other publications such as gofossilfree.org's Extracting Fossil Fuels from Your Portfolio [pdf] also include useful stock lists.
One criticism of green mutual funds is that they tend to be heavy on technology and healthcare stocks, as is clearly the case in this table. The next step is to correct for this bias.
Balancing The Portfolio
A "Balanced Portfolio" usually refers to a portfolio containing a balance of different security types, usually equities (stocks) and fixed income (bonds.) According to conventional financial theory, the right balance depends on an investor's financial resources and risk tolerance. There are any number of online calculators and questionnaires available that will take this sort of personal data and produce portfolio allocations to match.
This article is mostly about the stock or equity portion of the portfolio. For the fixed income portion of the portfolio, the best choice is to reduce debt. Any debt (mortgage, car loan, credit card) an investor owes is a bank's or someone else's fixed income security. By paying down that debt, the investor can effectively buy it back that security, while saving the overhead costs built into the loan. Investors without any debt can bear more risk and invest more in equities because they have no need for extra income to meet the required periodic payments.
Similarly, taking measures such as increasing the energy efficiency of your home or paying up-front to install solar (as opposed to leasing a system) will offer financial returns similar to fixed income securities. While the attractiveness of installing solar varies widely from state to state depending on the level of incentives and sun available, energy efficiency investments usually have incredibly attractive returns. A good indicator that a home solar system is an attractive investment is if a solar company like SolarCity is willing to lease it to you. If SolarCity can make money leasing you a system, you'll probably do well making the investment yourself.
Investors using tax-advantaged accounts such as IRAs will be limited to more conventional financial investments. Simple options include a bank CDs from a relatively green bank such as Capital Pacific Bancorp (CPBO) or Toronto-Dominion Bank (TD). TD Bank also happens to be included in the stock list to the right. A number of solar-lease like investments are listed here.
Many investors will find that the 1.25 percent interest from a 7-year CD may be a safe, but not particularly attractive, investment. One option is to use a portfolio of high-income equities.
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