One of the great joys of investing in the stock market is that you can choose to support companies you believe in with your investment dollars. If you’re a supporter of green companies and causes, there’s never been a better time or opportunity to consider investing in them. For years, environmentally oriented companies were on the fringes of the investment world, but now it seems as if every company wants to go green. Electric vehicle maker Tesla, for example, shot up over 700% in 2020 alone as investors got behind the green wave that is sweeping over the auto industry.
However, not all “green” companies are winners, and many are quite volatile. Take a look at these steps to consider before you put any of your hard-earned money into this up-and-coming sector.
Last updated: April 8, 2021
Decide Why You Want To Go Green
Most investors decide to green their portfolio for environmental or social justice reasons. And while those are noble causes in their own right, they don’t always translate to successful investments. Before you decide to commit a portion of your hard-earned money to the green sector, ask yourself why you are making this choice. Do you want to avoid investing in fossil fuel companies? Are you looking to profit from gains in hot stocks in the up-and-coming clean technology field? Whatever your reasons are, remember that the ultimate goal of investing is still to profit. Once you decide the types of investments you want to own, you’ll still have to do your homework regarding which are winning stocks in your chosen field.
Choose Your Asset Allocation
Once you’ve decided to go green, you’ll have to determine your level of commitment. Is this going to be your entire investment philosophy? Are you going to dedicate 100% of your portfolio to green investments? Or are you just planning on using green investments as a diversification tool, occupying, say, 5% to 10% of your portfolio? These determinations will be important as you construct your portfolio and attempt to match it to your overall investment objectives and risk tolerance.
When Do You Want To Go Green?
If you’re going to “green” your portfolio, you’ll need to choose a time frame. Do you plan to completely overhaul your entire portfolio immediately and set out on your new course? Or do you prefer to wait until market conditions are right, slowly shifting your allocation to new investments as opportunities present themselves?
Typically, experts will suggest that you slowly average your way into a position rather than making drastic changes all at once. One strategy is to compile a list of investments you’re interested in and pick them up when they sell off, or buy little bits at a time until you work your way up to a full position.
How Much ESG Criteria Do You Mean To Employ?
ESG is the buzzy acronym that dominates the conversation about going green. ESG stands for environmental, social and governance, and it relates to the three primary pillars of green investing.
Environmental investors avoid companies that damage the environment, such as fossil fuel companies, and support companies that protect the environment, such as waste disposal firms. Social investors favor companies that adhere to worker-friendly labor and safety standards and hire diverse workforces. Governance refers to how companies pay their executives and observe fair and equitable management policies.
As a green investor, you can try to incorporate all of these pillars into your investments, or only focus on the areas that are most important to you.
How Are You Looking To Diversify?
Diversification within the green investing world is just as important as it is in general investing. If you put all your eggs into one basket, you are taking on undue risk when it comes to the daily fluctuations in your portfolio. However, diversification comes in many forms. One way to start is to diversify your investments across the ESG pillars.
For example, you may want to own some clean energy companies along with those that promote fair working conditions, with some well-run governing boards tossed in as well. Or, you may view diversification from a total portfolio perspective, with a small, concentrated position in a few green stocks to balance out the remainder of a more traditional portfolio.
Develop an Investment Timeline
When you begin your investment strategy, one of the things you’ll have to decide is what your investment timeline is. Just as with traditional investments, you’ll need to choose if you’re chasing short-term profits or a long-term, buy-and-hold portfolio. This will direct you to the type of investments that you should be using in your portfolio. For example, if you just want quick profits, you might invest in hot sectors of the green industry when they sell off by 40% or 50%. But if you believe in the long-term viability of electric vehicles, for instance, you might think twice before flipping out of your Tesla stock and decide to hold it forever.
Investing in green businesses is a relatively new concept, but there are already a host of exchange-traded funds dedicated to the space. This creates a lot of opportunity for investors, as it removes the need to research hundreds of individual stocks. Just make sure to review the investment objectives of any ETF you are interested in to make sure they match your own. For example, if you’re looking for non-nuclear investments and buy a utility ETF, you’ll have to do the legwork to make sure the ETF doesn’t invest in nuclear properties.
Look Outside of the Country
The U.S. is by no means the world leader when it comes to green energy.
Although the incoming Biden administration has pushed for clean energy jobs and an expanding green infrastructure, many companies around the world are already ahead of the game when it comes to things like wind, solar and hydrothermal energy. Europe as a whole, for example, generated more power from renewable energy sources than coal for the first time ever in 2020. This makes overseas a great place to start if you’re looking for countries that are on the cutting edge of green investments while the U.S. starts to play catch up.
Talk To a Professional
Investing in a green portfolio is something of a newer concept in the history of the stock markets. Getting an opinion from a seasoned professional is always a good idea, and this is particularly true when it comes to risking your hard-earned dollars in a new(ish) field of investment.
Do some research to find out which brokers in your area may have expertise in green investing — including your own, if you already have one — and give them a call. At the very least, you can get an additional perspective on what’s up and coming in the green investment world and bounce your own portfolio ideas off someone new.
Lastly, if you really want to go green with your portfolio, live what you invest in. Rather than jumping in a fuel-burning car to drive across town to meet with your broker, set up a Zoom call or even an old-fashioned phone call to discuss your investment needs. This way, you’ll be able to get both a green portfolio and you’ll be contributing to a greener world. Who knows, depending on how you live your life, you might already be using products that end up in your portfolio.
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