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.
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.
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!
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.
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.
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: