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Jun 10

My Journey to Become a Green Investor – Part 4: The Final Decision

What an exciting day to share with you!  Three weeks ago I announced on Frugally Green that I was ready to put my money where my mouth is and embark on a journey to become a green investor, buying into companies that will change our relationship with the environment for the better.  I’ve spent countless hours examining myself and figuring out just what type of investor I was, then pouring over green mutual funds and environmental ETFs to make sure I selected the right candidates for me. Last week was spent in much the same fashion, but this time the end result will be action.

Today, I will purchase my first green investment – $2500 of the iShares S&P Global Clean Energy ETF.  This was not the easiest decision I’ve ever made. $2500 is a lot of money and I wanted to make sure I was giving myself the best chance possible to succeed.  I also wanted to make sure I was investing in something that felt right.  If you remember from Part Two and Three, I had narrowed myself down to a single mutual fund and a single ETF to decide between – The Winslow Green Solutions Mutual Fund (WGSLX) and the iShares S&P Global Clean Energy ETF (ICLN).  In all honesty, I believe that either of these funds would have been a good choice given the right justification, but for my current situation, the iShares ETF was the best option for me.  Let’s compare the two to find out why.

Diversity

Both funds invest in multiple holdings but each one certainly takes a different approach. WGSLX holds 45 stocks in 8 entirely different industries.  This is certainly more broadly diverse than ICLN which holds only 30 stocks across 6 different sectors of clean energy, but look a little closer and you’ll see that some of the larger current holdings of both funds are the same companies, like Vestas and First Solar.

WGSLX will hold up to 50% of it’s assets in foreign companies, while ICLN has no limit.  It simply follows the S&P Clean Energy Index which says that it will follow the 30 best fitting companies throughout the world – and it shows.  Right now almost 75% of ICLN is invested in foreign companies.  Whether you consider this more or less diverse may be up for interpretation and I will leave that for you to decide. All I will say is that Europe has been kicking our butts for ages in the development of green energy and, unfortunately, I don’t see this changing significantly in the foreseeable future.

Also, this investment is only the beginning of my plans for a truly diversified green porfolio.  If your plan to invest green only includes picking up a single fund, by all means, make it as diverse as possible! Once again, we come back to the realization that you must do what works for you.  My journey is only an outline of how to make an informed decision.

Performance History

If you’re the type of person that finds great pleasure in being frightened by horror films, this part is for you.  Both of the funds I selected for final comparison are little infants in terms of market history. WGSLX has been around for only 1 1/2 years and ICLN even less at just a year! This is the nature of the beast that is green investing.  It’s the Wild West of the financial world and we’re settlers on the Oregon Trail (Don’t get wet fording the river or you might come down with dysentery). There is no established, predictable future for us, but I think my opinion on where the green movement is going has been made pretty clear: the growth of sustainable industry is undeniable and good things will come to those who wait…

And wait you must! Both of these brand new funds lost lots of money over the last year.  WGSLX lost 44% of it’s value. ICLN lost 54%!  How’s that for a knot in your stomach? In a struggle to find a real foothold over the last few years, sustainably oriented investments suffered an enormous blow last year as the world-changing recession sent even the bravest of souls running for the most comfortable bonds or, even worse, cash positions.  Now, I can practically see the look on your face  saying, “You want me to buy what? And it lost how much?” And I will kindly respond, “no,” and, “a lot.”

No, I absolutely do not want you to go out and buy any investment because I’m going to do the same.  I identified my risk tolerance and targeted funds that matched it.  I want you to buy what’s right for you.   That may or may not be what I’ve found to be my right decision, and you won’t know until you’ve thoroughly examined your own profile like I did in Part One. I’m like a broken record, aren’t I? I keep repeating it because it’s honestly the most important step in the process.

Now back on track. In terms of performance history, the reason why I’ve chosen ICLN over WGSLX is because it’s performed worse.  That’s right. I’m buying it because it lost more money.  Although past performance is no indicator of furture returns, pretty much all funds were down last year and I am picking the one that I believe is more discounted. See, now it’s got all this room to grow. Remember all that talk above about undeniable growth, yada yada yada? Once again, and removing all emotion from the equation, I believe that rising energy consumption will be one of the biggest challenges humans face going forward (along with water supply, but we’ll discuss that another day) and there will be abundant opportunity for green energy sources to relieve the pressure. I want to be well exposed to that market.

Fund Expenses

I have to admit that this is the factor that swayed me the most on this decision.  The expense ratio of a fund is often overlooked by many of its investors, but can have a shocking outcome on its overall performance.  This is especially true for the long-term investor, like myself.  Even if it seems like just a little bit, the more money a fund takes from you in order to manage it, the less you have available to you to reap the compounding rewards of its growth.  ICLN’s expense ratio is 0.48%. WGSLX is currently capped at 1.25% and is only gaurunteed until 2011.  If you look at what it actually costs to manage the fund, the expense ratio should be a whopping 2.93%.  Is that a steal or a huge potential liability!?! I used an investment growth calculator that Fidelity publishes to see just what the difference in outcome would be if both funds performed the same.  I assumed an annual average return of 8% over a 15 year period (remember – that’s how many years there are until I turn 40 and potentially need this money) and ignored potential inflation and capital gains taxes as they’re not important to this calculation:

Illustration of the performance of the iShares S&P Clean Energy ETF over 15 years with an average annual return of 7.5% after fund expenses

Illustration of the performance of the iShares S&P Clean Energy ETF over 15 years with an average annual return of 7.52% after fund expenses

Illustration of the performance of the Winslow Green Solutions Mutual Fund

Illustration of the performance of the Winslow Green Solutions Fund over 15 years with an average annual return of 6.75% after fund expenses

As you can see, with all other variables the same, ICLN would outperform WGSLX by 9% over 15 years.  That’s $691 of missed potential growth – quite a lot considering my initial investment was only $2500. Are you ready for the real shocker?  Let’s say I decided I didn’t need this money in 15 years and just let it sit, growing for 40 years until I was closer to a more traditional retirement age?

Illustration of the performance of the iShares S&P Clean Energy ETF over 40 years with an average annual return of 7.52% after fund expenses

Illustration of the performance of the iShares S&P Clean Energy ETF over 40 years with an average annual return of 7.52% after fund expenses

Illustration of the performance of the Winslow Green Solutions Mutual Fund over 40 years with an average annual return of 6.75% after fund expenses

Illustration of the performance of the Winslow Green Solutions Mutual Fund over 40 years with an average annual return of 6.75% after fund expenses

Holy crap! I didn’t even expect the difference to be that big. Over a 40 year investment period, with all other variables the same and assuming an average annual return of 8%, this ETF will outperform this mutual fund by a staggering 23% or $10,374!

Of course, there are a million and one things that could happen over 40 years to affect how this model would play out in real life, but the overall lesson here is cut and dry: the more money you invest and the longer you spend investing it, the more growth you will miss out on due to fund expenses.

Implementing my decision

Great.  I have a winner.  The iShares ETF isn’t as diverse as Green Solutions, but I have a plan to deal with that.  It’s better poised to grow, and it has the lowest expenses.  A quick gut-check tells me that it feels right also.  Now all I have to do is buy it.  This will require an online brokerage account.  I already have one with Zecco that I never funded, and after looking at what Tradeking has to offer, I decided to open an account there.  The trading fees are just marginally higher, but they appear to offer better customer support and, most importantly, they offer free automatic dividend reinvesting and you can purchase fractions of shares.  This means I don’t ever have to worry about having some random money sitting in my trading account because a dividend didn’t get reinvested or I didn’t have enough to buy a full share of the fund.  Zecco offers free automatic dividend reinvestment as well, but it appears to be quite a hassle to set it up and they do not currently offer fractional share purchases.  It took me about five minutes to set up an individual and a Roth IRA account at Tradeking and it was confirmed and ready to fund the next day (I set it up on Sunday).  There are many other online brokerages that you can choose from.  I decided to go with a low cost broker because I anticipate wanting to dollar cost average into this fund on either an annual or bi-annual basis and I want to get my money’s worth out of each installment.

Reflecting on the process

As I look back over the past month, I count the hours I’ve spent pouring over the details of this decision and it’s been no simple task.  I put in a lot of time.  I spent several hours a night for a month figuring out what type of investor I am, researching the best mutual funds for my situation, doing the same for index funds and ETFs, and then getting down to the nitty gritty and making a decision on what green investment I would choose.  And that’s all before documenting it on Frugally Green! But, you know what? It wasn’t that hard.  Putting together my plan up front helped me to be very methodical about my decision making.  Once the plan was in place, all I had to do was follow it. Circumstances occasionally came along that forced me to adjust, but with a goal in place from the beginning and an outline of how to get there, properly adapting was no big deal.  All this planning translates to a much bigger picture.  I feel great about my decision. With all this pre-work in place, I can kick my heels up for the next 15 years (at least) and let this money grow.  This is the Chef Ron Popeil “set it and forget it” strategy of investing (remeber those cheesy infomercials?).  Now, there’s no telling what could happen in that span of time that could force me to adapt, but now that I’ve gone through the motions, I know how to approach the task if I ever need to adjust.

I sincerely hope that you’ve found this series to be helpful to your own situation.  If you haven’t already, please go back and read the first three parts to see how I went from a vague idea about becoming a green investor to picking the best strategy for me.  The decisions I made are not recommendations for you, but the process that I underwent is.  Anyone with a little common sense and fortitude can recreate the steps I went through to make an informed investing decision.  My gut tells me you’ve got a little bit of both.  So go forth and prosper!

Are you holding any green investments right now?  What steps did you take to ensure you were making the best decision?  Maybe you don’t currently hold any green investments. Do you intend to? What other advice can you offer to Frugally Green readers to make sure they’re investing in what’s best for them?

Note: This is part four 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

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  1. LKur

    Wow sounds like you spent a lot of time researching and came up with a sound decision! Not sure if you looked into banks or not for investing but even they are beginning to think of the environment, with banks like e3bank (a client of mine) offering a triple-bottom-line… incentivizing people to install eco-friendly features to their homes for better interest rates.

  2. Michael Thomas

    Hey LKur, e3bank looks like a pretty cool concept. I signed up for email updates and started reading through the Offering Circular (sort of like a prospectus I suppose?). I hope they’re able to get the investment they’re seeking to open. I think the idea of offering preferred financing for better performing buildings is pretty innovative and will hopefully become the norm as an incentive to build more efficiently. Thanks for the link.

  3. A Samuel

    So how is the investment doing 6 months on??

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