Having experienced a decade of the Dow with close to zero returns, we now appear to be stuck in a secular bear market with no relief in sight. Many investors and wealth advisors over the past few years have been gradually increasing their exposure to tactical plays in the alternative investment arena in order to hedge investment risks. On top of that, geo-political and environmental risks have come full circle to the forefront of the news including our significant oil dependency from the Middle East, the BP oil disaster, the Fukushima Daiichi nuclear meltdown and failing U.S. infrastructures with Americans spending more than 4.2 billion hours a year stuck in traffic and costing motorists $67 billion a year in operating costs. Many companies and Americans are making more of a conscious effort today to keep their energy bills down and to operate more efficiently while taking actions to protect our planet for future generations. As a new tactical play, could now be a good time to go green with your portfolio sector allocations?
First you should know what sustainable investing means. Green investing is actually a form of socially responsible investing – as it follows ethical guidelines. Sustainable means incorporating environmental and social factors in investment decisions. Sustainable (eco or green investing) has three specific sectors. First would be the buildings and efficiency sector which focuses on green building materials, and design. Second would be the eco living sector with focus on sustainable products for healthy living from organic foods to healthy pharmaceuticals. Third is the alternative (non conventional) energy sector which would include renewable energy creation and storage from natural resources including wind (turbines), water (hydroelectricity), sun (solar), plants (biofuels), natural gas and geothermal energy conversion to electricity.
Second it’s important to understand where the sector currently stands. Most of our consumption (and waste) in this sector obviously comes from electricity production and then transportation. Right now we are only consuming a total of 8% in renewable energy of all U.S. energy consumption, which is actually a fair amount of usage. Still, as long as there is consistent competition for low natural gas and oil prices and no strong investment or incentive by the government to convince utilities to enter more power purchase agreements with eco- resources, it could take a long time for our renewable energy usage needle to tick upward in our country. While public and private sector research and funding over the past decade to sustainable technology and energy has not gained significant momentum (though we do see more hybrid cars on the road and more eco-friendly buildings), there could be a significant increase to this sector over the next decade as the economy improves. Perhaps by 2021 it will be cool to be green. There could be some gradual profits and benefits to invest in the eco-sector over time, or a great buy if you can pinpoint a company today that may become an industry leader in their eco-niche.
Third entails knowing how to get in the game. It could be difficult for the investor at home to understand all these sustainable resources likewise very challenging to pick the best corporations to invest in. Rather than joining Greenpeace, fueling up your DeLorean with leftover veggies and buying a green company stock, consider to diversify a small percentage of your portfolio to an investment vehicle that is designed to track an eco-index or sub-sector. Just over the past year, the American Stock Exchange has expanded to offer a large family of indices to ‘track the growing environmental and clean energy sector’ known as the ‘green economy’. Their broadest index is the Green Economy Global Benchmark Index (Nasdaq OMX) which covers various eco-friendly sectors with exposure to over 360 companies. They state that this bench mark is “is designed to act as an indicator of performance of stocks in areas such as energy efficiency, renewable energy generation, pollution mitigation and advanced materials, providing a global benchmark for institutional and retail investors.” While these are unmanaged indexes which cannot be invested into directly, there are other more ‘pure play’ sustainable investment vehicles out there that may focus on specific areas like the R&D, manufacturing or storage of emerging clean-energy technologies, but may also incur more risk.
While it may be righteous to vote morally with your dollars for sectors and companies that are sustainable as well as adhere to high standards of good corporate citizenship, tracking how those investments perform over time and understanding the inherent risks and volatility should be of utmost concern. While investing in commodities and gold may be headline news today, keeping some money you already own in gold may be a good inflation hedge. Taking some of your profits off the table and investing a small percentage of your money in the green economy may be a smart idea to consider for the long term. From a high level, asset allocation may not be ‘dead’ but adding in additional tactical alternative investment sectors may help to hedge your portfolio overtime while utilizing investments that have low (or no) correlation to the market.