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: