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by guest contributor Jennifer Gorton from Forex Traders
The recent BP oil disaster in the Gulf of Mexico has focused the world’s attention on our dependence on fossil fuels and the extremes that companies and nations will go to extract that resource from our planet. The inevitable costs may seem distant, but the environmental damage is blaringly obvious to anyone tuned into local news channels. We cannot change the practices of an oil giant like BP, but we can follow prudent conservation techniques at home, and more importantly, we can invest our savings in companies that share our desire to both protect Mother Earth and act socially responsible in the process.
Investing in the Green Revolution is like any other investment regimen. It starts with preparation. Read as much as you can about the topic and discern the market issues that will impact value. You will soon discover that there are quite a few companies devoted to various green sectors including renewable energy, energy efficiency, the smart grid, energy storage, green building, the recycling industry, water, organic foods, and healthy lifestyles. It's not as easy as it looks to invest in renewable energy, energy storage, and the smart grid. Although many companies have matured past the startup stage, they still resemble micro-cap companies with volatile stock patterns and liquidity issues. The risk profiles of these companies are such that you must follow the trends, the companies, and market sentiment about them before investing. Other green sectors, such as water and healthy living are more mature and can easily be used to diversify a portfolio.
When it comes to green investing, where do you start after your preparation phase? You must assess your tolerance for risk as a next step. This assessment has much to do with your personality. If you are not a risk taker at heart, then you may want to avoid individual stocks, and consider instead a combination of mutual funds and exchange traded funds (ETFs) dedicated to green investments. This is an excellent way to start green investing that can also get you acquainted with leading firms in the industry and help diversify your risks at the same time.
Here are the suggested “Next Steps” toward successful green investing:
- You must decide whether to choose your own green investments or hire a financial adviser to assist you. Stay away from brokerage houses or one of the larger firms since you would likely get an inexperienced trainee. Try to find someone who is local and who is experienced, trustworthy, qualified and comes highly recommended when it comes to green investing.
- You must now decide on an appropriate allocation percentage of your portfolio that you wish to devote to green investing. Will it be 10 percent, 20 percent, or 30 percent? Spreading your risk among more than one form of sustainable investment is prudent, especially when starting out. Bear in mind that any investment, green or otherwise, involves risk.
- Start out with well-established firms that have demonstrated a long history of commitment to green consciousness. These companies have developed revenue streams, market capitalizations over $1 billion and are profitable.
- As you investigate smaller firms, be aware that these companies are high risk and that their value propositions may not win in the fast changing times ahead in this space. Look for companies with a unique advantage and sufficient investment capital to convert their strategies to material revenue. Share prices will be volatile, lending themselves to strategies like Forex scalping or swing trading, but your goal is to find companies that you can “buy-and-hold” for a few years at a time, not consciously trade for short-term gain. However, you may need to heed currency fluctuations in the market, since many of these companies are global in nature.
- Choose your entry/exit points carefully. Some renewable energy stocks are heavily dependent on the price of oil in the market. Follow trends and use technical indicators to guide your purchase/selling timing.
- Design your portfolio with diversification in mind. If you choose five companies, make sure they do not overlap too much. Opportunities abound in clean technology in several sectors, for example, wind, solar, batteries, and water purification, where some overlapping interests should not be a problem.
The challenge of green investing is a two-sided coin. You must increase your portfolio’s value while avoiding harm to people and the environment. Ideally, socially responsible investing can help make the world a better place. Companies that outperform with regard to the environment, generally outperform on a financial basis, too. Strong environmental performance equates to better management overall, which translates into strong earnings and shareholder value. As with any significant financial investment, however, always do your research before you commit your hard earned capital to any one sustainable investment strategy.
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