Sharing lessons with our grandchildren on ethical investments
By Leland B. Hevner
As a teacher of personal investing for over a decade, I have heard many stories from former students. One that I found particularly inspiring came from a grandmother.
After attending a personal investing class I taught at a local college and reading my newsletter on ethical investing, this retiree told me how she used what she had learned to give a unique gift to her 13-year-old grandson.
For several years she had given the boy a sum of money on his birthday. This particular year she gave him a gift of 100 shares of a “green” investment. Drawing on information from my newsletter, she selected an Exchange Traded Fund (ETF) for this purpose having the symbol PBD-a diversified clean energy investment. This ETF gift also gave her the vehicle to provide the gift of education. Using information found at Finance.Yahoo.com, she…
• explained to her grandson the concept of “green” technology and the various types of alternative energies produced by the companies owned by his ETF, including solar, wind and biofuels;
• discussed how green technologies benefit the environment;
• taught the boy how to use a financial Web site to track the progress of his ETF and how to access daily news headlines related to the entire green industry;
• made him aware of the career possibilities in the “green” industry, an idea that could affect his education path decisions.
I found it gratifying that this wonderful woman gave much more than money to her grandson. She used the gift of a green investment and her time to expand his knowledge in an area that will be a large part of his future. At last report he was checking his ETF on the computer every day and had developed a significant interest in “green” careers and ethical investing in general!
Leland Hevner, author of The Perfect Portfolio: A Revolutionary Approach to Personal Investing, is president of NAOI, the National Association of Online Investors [www.naoi.org].
NAOI is offering GRAND readers a special discount on personal investing courses. For information, click here.
In his book The Perfect Portfolio [www.perfectportfoliobook.com] Leland Hevner writes about the investing class he teaches: “I see a cross-section of the U.S. public. Most are older and probably retired…. I know that these students are not day traders and few, if any, are experienced personal investors…. The overwhelming majority of people who attend my classes have off-loaded their portfolios, some of which are quite substantial, to advisors and brokers because they have no confidence in their own ability to make investing decisions. But as they have watched their portfolios stagnate or erode while being charged significant fees, these individuals have reached a breaking point….I tell them that this new approach will require that they forget most of what they have learned about investing to this point….
“The financial services industry is not meeting the needs of people who are seeking to learn how to take more personal control of their portfolios. As a result, the investing public wants, needs, and demands change.”
Bonus Tips: 6 Steps for Adding Ethical Investments to Your Portfolio
“Greening” your portfolio without losing your shirt
By Leland B. Hevner, president of the National Association of Online Investors [www.naoi.org] and author of The Perfect Portfolio [www.perfectportfoliobook.com]
In the college classes I teach on personal investing I have recently had a lot of student interest in adding what has been termed “ethical” or “green” investments to their portfolio. I sense a growing concern about the environment and a desire by average investors to support companies that are contributing to cleaning it up.
In past years so-called green companies have been rather exotic investments that attracted little interest among the investing community and did not fare particularly well in a portfolio. As an ethical investor you essentially had to suffer for your beliefs. Fortunately this has changed. Now investing in green technologies can not only make you feel good, it can earn you substantial returns.
But, as with all investments you need to know what you are doing. There are a lot of bogus investment schemes for green technology in the market and there is no shortage of mutual funds that claim to be “green” but use the term very loosely and often inaccurately.
Here are six steps for ethical investing that will give you the satisfaction of promoting the health of the planet as well as the health of your portfolio.
1. Understand what green technologies are and the forces that move related investments
Green technologies have two main goals. The first is to provide products or services that reduce pollution and contribute to cleansing the earth’s atmosphere. The second goal is to reduce our economy’s dependence on oil and hence our dependence on foreign countries. To meet these goals, companies exist that develop, manufacture and maintain products in the areas of wind power, solar power, geothermal power, advanced battery technology and others. These are “green” companies.
The price of investments in the green sector responds to two main factors:
• The price of oil. When oil prices are high, green technologies thrive. When the price of oil is low, consumers will not bear the higher prices of energy from green technologies. Since oil is a limited resource and worldwide demand is growing at a rate that can only result in higher oil prices, the long-term outlook for green technologies is good.
• Government mandates and spending. As you probably know, the current administration is placing an emphasis on clean energy, and a significant amount of stimulus and grant money is flowing into clean energy development. This is another factor that bodes well for investing in green companies.
So the future looks bright for ethical/green investing. Now you need to know how to take advantage of this opportunity.
2. Use ETFs
Many people who have the desire to invest in green companies are stymied when faced with the daunting number of choices. This problem immediately goes away if you simply purchase an Exchange Traded Fund (ETF) that holds a broad range of companies in the field. An ETF is an investment that owns a bundle of stocks just like a mutual fund but can be traded just like a stock-a feature that is important, as you will learn below.
Examples of ETFs that track an index of green companies are provided below. Shown are the trading symbol, name of the ETF and 2009 year-to-date returns as of October 29.
• QCLN: NASDAQ Clean Energy + 22%
• PBW: PowerShares WilderHill Clean Energy + 12%
• PBD: PowerShares Global Clean Energy + 22%
With one easy purchase you can own a basket of green companies, and you can see they have fared well in 2009. Green ETFs dramatically simplify the process of including ethical investments in your portfolio.
3. Find, evaluate and select the “best” green ETF
Next, you should identify at least three green ETFs for comparison purposes before deciding on one to buy. Then create a worksheet for collecting data using these headings: Performance (year-to-date and one-year), Risk (in the form of standard deviation-the lower, the better), Average Daily Volume (beware of extremely low volume-look for at least 50,000 share traded daily) and Management Fees (the lower, the better). Any number of sites will give you the data you need. An example is www.morningstar.com. Complete your worksheet and select the ETF showing the “best” data. But you are still not ready to buy.
4. Use a price chart to buy
For the ETF you have selected access a 6-month price chart on the Web. Again, many sites will give you this, including the Morningstar site referenced above. Simply “eyeball” the price line on the chart and see if the price trend is up or down. You only want to buy the ETF if it is currently experiencing a price up-trend. Never buy if it is moving down. If the price is falling, continue to check back until you see the price in an upward trend.
5. Use a trailing stop to sell
When you buy the ETF, you must also protect yourself from the risk of owning it. Clean energy investments can be volatile. The simplest way to do this is to place a trailing stop on your order at the time of purchase. This is very easy to do using an online broker. Here’s how it works: Let’s say that you purchase 100 shares of PBD for $15 per share. At the same time you can place a trailing stop order at a specified drop amount to limit your risk. You enter a trailing stop that says you want out if the price drops by $3. Now, if PBD immediately drops to $12, your position is sold. But if PBD goes up, the trailing stop price goes up with it, maintaining the $3 drop specification. So if PBD goes to $20, your trailing stop automatically follows it up to $17. But if from $20, PBD goes down to $18, your trailing stop stays at $17. The beauty of a trailing stop is that it goes up but never goes down! In effect it limits losses but allows profits run. You are now protected from unacceptable losses, and your buy decision just became a lot easier.
6. Determine your green allocation
As a final step you must determine the allocation of your investment money to your green investment. Remember that even though your downside risk is protected by a trailing stop, this is still a volatile investment, so don’t commit too much of your money to it. Your allocation will depend on your risk tolerance, your outlook for general market conditions including the price of oil, your view of government actions related to clean energy spending and finally the strength of the price uptrend you viewed on the chart in Step 4.
In my book The Perfect Portfolio I show how to design an efficient portfolio using one ETF for each of the following markets as building blocks: Stocks, Bonds, Energy, Gold, Agriculture Commodities, Real Estate and Emerging Markets.
In honor of Ethical Investing Week I can confidently recommend another for your consideration-a “green/ethical” building block. The 6 steps listed above show you how to create, monitor and trade it to both maximize your return and limit your risk and, in doing so, contribute to the health of our planet.