Frugally Green

Hello again!  Last week I mentioned that I was on my way to becoming a “green investor” – purchasing investments that align with the ideals of environmental sustainability.  I had originally planned for this to be a two-part series that culminated in a decision today, but after all the reading and research I’ve done since last week, I’ve decided for your and my own benefit, that this will now be a four-part series offering a more comprehensive overview of my research and decision making process. I hope this will give you a better understanding of the “big picture” as I make my debut into green investing…and I need more time to make my best informed decision! Last week in part one I talked about my current financial situation and how it would affect my investment strategy.  I also touched on my initial thoughts about investing and set up some ground rules that I would attempt to abide by when making my decision on which investment vehicle to purchase.  This week I’m digging into the numbers a little bit and researching mutual funds.

A mutual fund is an investment vehicle aimed at allowing you to purchase bits of many different companies without the large, fee-laiden financial burden of buying them all by yourself.  It accomplishes this by pooling many investors’ money together to buy all of these stocks and then packaging them together in a nice little bundle for you with only one transaction fee to you rather than the many that would come with buying an array of individual stocks yourself.  Think of it like going out to dinner with your friends who all order separate dishes and then share with each other, taking a bit of each plate to create a nice, well rounded meal.

The good

There are a number of flattering characteristics to be mentioned about mutual funds:

• They’re actively managed – You can feel good going to bed at night knowing that a professional (or a whole team of them) are crunching numbers and evaluating companies, keeping a watchful eye over your hard earned money.  Every day they go to work trying to find a way to outperform their target market by rebalancing and managing the portfolio of stocks you own. Their job is to make you more money.

• They’re diversified – All mutual funds are diversified to a different extent, but you can almost always rest assured that your money is morespread out than if you were to buy only a few stocks.  Buying a share of a mutual fund usually means buying shares of a multitude of different companies. Depending on the fund, it could be a pool of companies completely unrelated to one another or it could be one comprised of companies in a specific industry, market capitalization, or both.  Whichever way you choose, you won’t end up with all of your eggs in one basket.

• They can invest defensively – If all hell breaks loose and the financial markets collapse (we’ve seen it happen!), most funds hold a clause in their prospectus (something you should read before you purchase any fund) that allows them to abandon all hope, sell off their holdings and invest in whatever they deem to be the safest vehicle to ride out a financial storm, saving you from complete fiscal decimation.

The bad

Of course, this wouldn’t be a fair article if I didn’t balance the attractive characteristics of mutual funds with it’s less than appealing ones (hmm, these sound familiar):

• They’re actively managed – That team of hard working professionals trying to make you money have to feed their families too.  And how do they do it?  They charge you for their hard work!  Good ol’ fashioned capitalism at it’s best.  If you want the impressive returns that come with a well managed fund, you’re going to pay for it in fees. Is it worth it?  That’s for you to decide.

• They’re diversified – Sure, we all know the more spread out your money is, the less likely it is to go away.  But if you’re an expert stock picker, you’re lowering your overall returns by buying a ton of different stocks if you know which ones are going to grow the most and the fastest. This certainly isn’t me, and I have a hunch if you’re reading this introductory article, this isn’t you either.  But it’s still something to consider.

• They can invest defensively – Nothing quite like buying high and selling low, right? Most times, if you have a long investment horizon, you’d end up in a much better position by riding out the storm, taking your lumps, and getting in on the growth following a walloping bear market.  But these guys are professionals, right? They get paid to know when to get out and get back in.  At least that’s what we hope!

The ugly

It had to come, didn’t it?  Here’s the real dirt on mutual funds – most of them don’t ever end up beating their target indexes, at least not in the long run. Markets, in and of themselves, are extremely efficient, and when you’re paying someone to try to beat them, the odds of succeeding are stacked well against you. But, there will always be a few managers out there that  beat the odds, and as long as they do, there will be people willing to give them their money in exchange for some of that mojo.

Getting green

Now, you might say that all that nonsense above is slanted against mutual funds.  If you did, you’d be right (I can’t get anything past you)!  I’ll admit that in most circumstances, my general opinion is that an actively managed mutual fund is not the best bet, err..investment… for the average investor. But we’re trying to get green here so this is not a normal circumstance and we are not average investors.  From the research that I have conducted, there currently seems to be a lot more options for sustainably minded mutual funds than their competitive, new (relatively speaking) counterpart – index funds (more on these in part three).

If you remember, in part one I laid out a selection of mutual funds and a set of criteria on how I would judge them.  I decided that all of these funds embody the spirit of the green movement and have a fair potential for long term growth, so the most important things I looked at were expense ratio and diversification. Most of these funds differed in one way or another in this aspect. After putting them all through the ringer, one fund came out as a decisive winner for me – the Winslow Green Solutions Fund – it’s diversified across a field of green, innovating industries, has a low (relatively speaking) expense ratio of 1.25% (though it should be mentioned that it is currently capped and could rise in 2011), and gets plenty of exposure to foreign markets where a lot of “green solutions” are being spearheaded, namely Europe.

The conclusion

So, that wasn’t so hard.  All it took was an hour or two a night for a week to get acquainted with mutual funds and dig into the basics of the ones that interested me.  Now that you know how to do it, I bet you can come to a conclusion much faster than me on what the right fund is for you.  Just don’t forget to put the time in up-front to analyze your current situation. Forgo that step and you’d be failing to be frugally green.

Note: This is part two of a four part series on entering the world of green investments.  The four parts are as follows:

1. Part One: The Analyzation Stage
   
2. Part Two: Researching Mutual Funds
3. Part Three: Researching Green ETFs
4. Part Four: The Final Decision

Wouldn’t you like to make money while you sleep? Aid in the creation of great ideas and products that could make the world a better place and earn lasting income from it without taking on the massive burden of creating them all by yourself?  I know I would, and that’s why I have made the decision to begin pursuing passive income. There are infinite ways to go about doing this, but today, I want to talk about a fairly common method, yet one that I am not yet entirely familiar with.

Today I begin my journey to become a green investor.  As a 24-year-old recent graduate, I started contributing to my 401k the first month that I was eligible at my new construction job.  It took me a couple hours to set up the account at Vanguard,  select a fund and how much to contribute to it, but after that, my investing plan was basically on autopilot.  This, on the other hand, feels like a whole new world.  It’s scary and it’s exciting and only time will tell what the future holds for me and my money, but I intend to do the front-end work to make sure the odds are stacked in my favor and it would delight me to be able to share my journey with you.  Hopefully you’ll get something out of it that you can apply to your own life.  Maybe you’ll even have some advice for me as I venture down this winding road.  Let’s start off by going over what I know about myself as an investor already.

Analyzing my current situation

I’m 24-years-old, contribute 18% of my current salary to my 401k (15% + 3% employer match), I want to “retire” (stop working because I have to) by the age of 40 (a lofty goal, I know), I have roughly 37% of my current annual salary in liquid savings, and no outstanding debt.  That’s Tyler in a financial nutshell. Now lets look at what each of those pieces of the puzzle mean.

• 24-years-old – When I wake up in the morning and notice that my muscles ache and, curiously, I have a little more hair on my body and less on my head, I feel like an old man. But in the world of investing,  I’m still a young buck, relatively speaking.  I have a long investment horizon and can handle large swings of the market.
• 18% contribution to 401k – By most financial planning standards, that’s pretty good, especially if I don’t plan on big pimpin’ in retirement. Anyone who knows me knows that is likely not my plan.
• Target retirement age of 40 – Whew, that’s a scary goal to put down in writing. But not that scary, because what I really mean by “retire” is that I want to be able to feel comfortable to pursue less, shall we say, lucrative income vehicles that are either completely fun, rewarding, or both and not feel like I have to keep earning MORE in order to die with some money in the bank.  If I find work that is just right for me in every aspect, I have no qualms with working till the day I die.  So this leaves me with some flexibility in how I structure my future investments.
• 37% of current salary in savings, no debt – I currently have 37% of my salary in liquid savings and I have calculated that my monthly living expenses work out to just under 50% of my income.  This means that if everything that could go wrong went wrong, I could continue my current lifestyle for about 9 months.  Knowing that I have a several opportunities to cut my expenses and adapt to such a hardship, I’ll play this one liberally and say that I could survive for a full year on just what is sitting in the bank earning minimal interest before having to do something to start the income machine again.  Plenty of time for someone with a sharp mind and knack for spotting opportunity to get things back in order.  Hmm, guess I better keep saving.

Looking at my current situation, I would estimate that I’m in a good position to take some calculated risks.  Look at the metrics above that I used to evaluate my current situation and decide for yourself where you stand.  Everyone is different and your situation likely has some unique characteristics that are worth analyzing.  One thing to keep in mind, no matter what financial situation you’re in, is that psychology plays a big part in how you should structure your investment strategy. Knowing your personal risk tolerance is an important part of the equation.  You could have all the money in the world, but if losing 50% of it (and we’ve all seen it’s possible) makes your stomach turn in knots and you have to reach for something sturdy to maintain your balance, then volatile investments might not be your cup of tea even though you can certainly, financially speaking, manage a great loss.  You probably have a gut feeling about how risk averse you are, but here’s a quiz I found over on moneycentral.com that you can take to reaffirm your opinion if you’re just not sure.  Moneycentral seems to agree with my gut instinct that I am fairly risk tolerant but probably shouldn’t lay my emergency fund down at the roulette table (black jack has much better odds).

Putting some green in my portfolio

Now that I have taken a good, solid look at my financial situation. It’s time to start looking for some opportunities to grow my portfolio.  This is where I will be doing some research to decide what the best route for me will be.  I know that I want to target stock in companies that put environmental sustainability at the forefront of their business, but beyond that, I haven’t come to a solid conclusion about how I’ll do it.  I could invest in individual stocks, but I don’t feel confident enough for that yet.  There might be a few green bonds out there that could interest me, but I feel that in my current situation, bonds are a tad to safe for me.  So right now I am leaning towards mutual funds or index funds as they increase my exposure to the overall market with the limited amount of money I have earmarked to begin green investing ($2,500).  But this isn’t set in stone, and next week I will write about the research that I did into each option and why I selected what I did. For now, here are a couple of mutual funds that I have briefly looked into already:

• Winslow Green Solutions or Growth Funds – These are 2 different funds aimed at investing in specifically companies that provide environmental solutions.  Each takes a slightly different approach in the selection of companies.
• Calvert Large Cap Growth Fund – The Calvert Fund is a fund that seeks to invest in large U.S. companies that are doing their part to reduce their footprint on the environment.
• Guinness Atkinson Alternative Energy Fund – This is a fund that invests in domestic and foreign companies that derive at least 50% of their income from alternative energy.
• New Alternatives Fund – This is another  fund that invests in companies that provide environmental solutions. The New Alternatives Fund, unlike most other green funds, has been around since 1982.
• Domini Social Investments – Domini created the Domini-400 Social Index that many funds now attempt to track.  They recently switched from an index to a mutual fund.

You might notice that everything I have looked at so far has been a mutual fund. That is because 1) I don’t feel very comfortable yet picking individual stocks and 2) I’ve yet to find a passively managed index fund that meets my (yet to be fully developed) opinion of what constitutes a truly “green” fund. What I’ve found in the way of index funds so far has actually felt a bit more “green washed.”

This is just the beginning though.  When I make a selection and post again,  I will explore these funds further in depth and hopefully I will have some more options to discuss. Maybe you can recommend something to me that I might be leaving out?

Strategies for decision making

Whenever I make an important decision, I like to set up a list of critera that I base my decision on.  After I have all of the facts in front of me, I throw them out and go with what my gut instinct tells me to.  Sometimes the criteria fully supports my decision and sometimes it needs some “creative inerpretation” to really make sense. Try it sometime.  Actually, try it often.  You won’t always make the best decision, but you will learn to trust yourself, and that is just as important.  Plus, you’ll notice that as you learn from your mistakes, your gut will gradually get smarter.

Here is a list of criteria (in no particular order) that I will be looking at as I attempt to decide where my money will go:

• Self-defined “green factor” – How green do I really feel this fund is?
• Expense ratio – how much do I have to pay you to buy all these stocks for me?
• Diversification – Does this fund invest in a wide variety of businesses or is tied mostly to one type of industry?
• Potential for long-term growth – Do I feel like this fund is poised to grow long term? How patient can I be waiting for it to really shine?

So, before I make a decision, do you hold any green investments? If so, what are they? If no, why not? What are the absolute facts that you must know before you make a financial investment?  What’s your risk tolerance?

Note: This is part one of a four part series on entering the world of green investments.  The four parts are as follows:

1. Part One: The Analyzation Stage
   
2. Part Two: Researching Mutual Funds
3. Part Three: Researching Green ETFs
4. Part Four: The Final Decision

Such a strong opinion, I know, but once you’re done reading this article, hopefully you’ll see where I’m coming from.  The more I learn about the bottled water industry, the more dismayed I am that a market still exists for it.  I guess that says a lot about the power of advertising.

So why the contempt for such a seemingly insignificant product? People need water, right? And the best tasting water comes from a bottle, no?  Let me start off with…

A brief history of plumbing

Somewhere around 3,000 years ago, the people of the Near East (now more popularly categorized into the larger category of the Middle East) realized that trading goods would get them farther in life than forever hanging out next to the rivers that sustained them.  Though, in order to trade their wares, they had to move away from these oases…but they still needed their water.  After what was probably a lot of head scratching and beard stroking, they devised a plan to dig a ditch, later known as an aqueduct, that would carry the water to a more prominent trading location.  Several hundred years later, the Romans, flexing their mental (and just as often physical) muscles, took this concept to a whole new level, conquering lands far and wide across Europe, The Middle East, and Northern Africa and carrying water across hundreds of miles of plains and valleys  with aqueducts built of stone and, later, concrete in order to support the growth of their empire and sustain the trading hubs that kept them growing. Life was good, and getting better. However, there was one big, ugly problem. As cities grew and grew, water-borne illness began to claim more and more lives. Unfortunately, this was not fully understood until more than 2,000 years later when Louis Pasteur and a handful of other scientists brought widespread acceptance to Germ Theory.  Less than 100 years later, there wasn’t a developed nation in the world that didn’t protect their municipal water and even begin using it  to convey human waste away from buildings where further treatment would render it harmless.  Throw in a bit of invention here, a touch of innovation there and…Voila! Modern plumbing and water sanitation.

As you can see, billions of lives were sacrificed and thousands of years of thought were spent creating a system that allows you to walk into your kitchen and drink a glass of water while being more than reasonably sure that you will not die or even become sick.  Drinking bottled water is like slapping each and every one of those people in the face. Sure, that’s complete hyperbole, but you get my point.

The cost of bottled water to you

As much contempt as I have for the bottled water industry, I am also amazed by their ability to get people to pay for something that they can obtain more conveniently for virtually free. That is, as far as I can tell, utter brilliance used for evil rather than good. Do you think you should pay more for water than you do for gasoline? Here’s an exerpt from an article that puts it in perspective:

Take, for instance, Pepsi’s Aquafina or Coca-Cola’s Dasani bottled water. Both are sold in 20 ounce sizes and can be purchased from vending machines alongside soft drinks — and at the same price. Assuming you can find a $1 machine, that works out to 5 cents an ounce. These two brands are essentially filtered tap water, bottled close to their distribution point. Most municipal water costs less than one cent per gallon.

Now consider another widely-sold liquid: gasoline. It has to be pumped out of the ground in the form of crude oil, shipped to a refinery (often halfway across the world), and shipped again to your local filling station.

In the U.S., the average price per gallon is hovering around $3. There are 128 ounces in a gallon, which puts the current price of gasoline at fraction over 2 cents an ounce. (Editor’s note: The station down the street from me is currently advertising regular unleaded at $2.37 per gallon, putting it at a fraction under 2 cents an ounce)

And that’s why there’s no shortage of companies which want to get into the business. In terms of price versus production cost, bottled water puts Big Oil to shame. (Full article here)

Environmental and Social Impact

Of course, this post wouldn’t be complete without an overview of the impacts that the bottled water industry has on our environment and society at large.  The production of it, the bottles that contain it, the thousands of miles it has to be transported to get to your store, the distance you have to travel to purchase it – every step of the process requires precious energy to support the system.  Compare that to the single plant that treats your municipal water and the few pumps that conveniently deliver it directly to your home and the energy disparity becomes pretty obvious. Also, take into consideration that when you finish that bottle of water, it has to go somewhere.  Hopefully, if you’re reading this blog, it at least makes it into your recycling container.  While certainly the best option and kudos to you for making the effort to recycle, even recycling comes at an energy cost that can’t compare to the energy saved by simply drinking from you tap. One more issue that should not be taken lightly is the fact that the rise in popularity of bottled water detracts from the improvement of our municipal water systems.  While I’m far from a Doom’s Day theorist and water is safer than it ever has been, attention to the continued safety of our public water is just as important as it has ever been.  If a worst case scenario were to occur and public drinking water were to become unsafe to drink, you can be sure that most of us would no longer be able to afford its bottled counterpart.  The protection of our public water is important to your health, no matter how little of it you currently drink.

But my tap water tastes awful!

I can hear you right now saying to yourself, “Ok, I get it. Bottled water is exorbitantly expensive and you think I’m irresponsible for drinking it, but my tap water tastes horrible and I can’t stand it.”  Well, hold on there. You’re putting words in my mouth. I didn’t say you’re irresponsible and I don’t think it, either.  Taste is a valid concern.  I know because half the time I take a plain salad to work for lunch, I end up staring at it for five minutes before putting it back in the refrigerator and going to a restaurant down the street.  Luckily for us water snobs, there are a number of companies that have gone to a lot of work to develop products that will make it taste a lot better to be frugally green (see what I did there?). Brita and Pur are practically household names these days, but there are other companies, as well, offering competitive products worth looking into.  Check out these websites to find reviews, tips, and side-by-side comparisons to help you choose the best filtration system for you:

• consumersearch.com/water-filters
• waterfiltercomparisons.com
• waterfilterreviews.net

There are plenty of options out there to fit nearly every need from basic pitchers to faucet mounted devices to full household systems at any price range, including frugal, like you and me! Personally, my household doesn’t require a lot of filtered drinking water, so I use the standard, old Brita pitcher unit that I keep in the fridge. The sticker on the side says that I should change the filter every 2 months, but we’re going on about 6 months (maybe more, who’s counting?), and the water still tastes great.  Since I’m not currently concerned with all the possibly “terrible things” that could be in my drinking water, I will keep using this filter until the water running through it gives me bitter-beer-face (remember those old Keystone Light commercials from the 90s?).  For water on the go, consider picking up a couple of aluminum  bottles like these.  I still use those plastic Nalgene bottles.  But, once the media finally convinces me that they’ll give me cancer, I’ll probably switch to aluminum (This concern exists for disposable plastic water bottles as well, so just one more reason to stop buying them).

Considering all options, ditching the bottled water for a filtration system is a pretty darn cheap and easy way to save money, help the environment, and give your fellow man a hand.  Who knew it could be so simple? I know, of course you did.  You’re so smart!

Do you use any sort of water filtration system?  Do you recommend one? Maybe you’re tougher than the rest of us and just drink from the tap? Can you think of any time a bottle of water from the vending machine is a better option than the alternative (like visiting a 3rd world or developing nation)?

Editor’s note: I would like to make it clear that I do not promote or endorse any of the products in this article.  All links are for imformational purposes only. When I decide to promote a specific product that I feel strongly about, I will make it very clear that I am doing so!

Want what you have. Isn’t this the easiest way to kill two birds with one stone? If you want what you have, you consume less.  If you consume less, you save more.  You also lower your impact on Earth.  Is this not the highest realization of both frugality and sustainability?

This is a fairly simple line of logic.  So why is it so hard to practice? Why do we seem to be pre-programmed to desire more and more? Is it simply centuries of social conditioning or is there more to it? The consumerist society that we have become today is certainly a product of social conditioning, but wanting more than you have is an intrinsic value to human beings.  If we didn’t strive for more, we wouldn’t have what we have now. No high-speed transportation. No internet. No modern medicine. The reason I write this blog is because I desire to educate myself and become a better writer.  I also hope to eventually monetize Frugally Green and earn some extra income from it. Increasing your income goes hand in hand with being frugal and wanting more can impel you to better yourself.  Desire drives innovation and propels civilization forward. What’s so bad about that? Nothing, necessarily.

But where’s the line?

So we’ve determined that a desire for more is actually a good thing, but where is the line? How do we know where positive, character-building want stops and greed begins? This line is unique to each and every person and finding it is actually not that difficult. All you have to do is ask yourself, “Am I happy?” I say, as long as the answer is yes, you’re still on the right track. If your desire for more is driving you to become a better person and not hampering your ability to be happy NOW, then you’ve little to worry about. However, if you find that your desire has turned to greed and your focus lies solely on obtaining the things you don’t have to find the happiness you think you deserve, you’re going to find yourself in the throws of a vicious cycle. Each achievement you make will be dwarfed by your desire to make the leap to the next rung of the ladder. Happiness will become a myth, unable to be attained through this line of self-destructive thought.

What Path are You On? How Can You Improve?

It probably goes without saying that no case is completely black or white.  You’ll likely never be able to look at yourself and say, without a doubt, you are one type of person or the other. This concept exists for each person on a spectrum and you’ll never make it to either extreme.  As long as you are leaning towards the healthy, sustainable side, you’ll be ok.

If you take a good, hard look at yourself and decide that you’re not happy and want to change the “way you want,” start looking at individual decisions you make. Look at the “things” you’ve bought in the last week, month, or year and categorize each one. Ask yourself, “Did I buy this to support a goal that will make me a better person?,” or, “Is this something that will truly bring me joy?” Tally up your answers. Examining your past purchases will give you an idea of what direction you’re currently headed and asking yourself these questions as you go forward will help you put your spending in perspective and avoid the pitfalls of making placeholder purchases – things you buy to keep you “happy” when you can’t afford what you truly desire.

As the old adage goes, “If it can be measured, it can be improved.”  It won’t be easy, and you won’t achieve 100% success. Learn from your failures and then put them behind you.  Focus on each little success. Success begets success and you may find that the more you focus on it, the more it comes to you.  Don’t get caught up with finding perfection, just make sure you’re headed the right direction. Fail forward, so they say.

There’s a great post about this over at The Motley Fool that can be found here. There’s a great point in there about shifting your wants from “having” to “doing.” They also make some points that I thought related well to my post last week.

This is one of the deeper topics of frugality and sustainability and one that I would like to revisit from time to time.  It touches on becoming frugally green in a fundamental sense; a building block, so to speak.

What was your reaction to this post?  What do you do to keep yourself focused on fundamental issues like these? How do you deal with the inevitable failures that come with this pursuit and how do you celebrate your successes without undoing them?