Frugally Green

Protecting the earth isn’t always easy.  Neither is saving money.  In fact, sometimes it can be downright hard work.  Becoming frugally green requires a shift in lifestyle design that a lot of people just aren’t comfortable with.  Living consciously is an important virtue, but it isn’t easy. So what can you do if you’re just not up to the challenge?

Here are 8 steps you can take to make sure you avoid the hassle of living an environmentally and financially conscious lifestyle.  You won’t make the world a better place, you probably won’t save any money, and you certainly won’t grow as a conscious individual, but everyone around you living similarly mediocre and unconscious lives will likely be very impressed.

Always buy cheap

Never mind that each piece came from a different corner of the world, was produced in a highly toxic facility and that you’ll have to buy another one when it breaks in a month because it was so poorly constructed by underpaid third-world slaves in a sweatshop at 3 AM on Christmas.  Your friends will be impressed that you’re so thrifty.  You always find the best deals!

Always buy “green”

This option is easy to spot because they made the box twice as big to fit all the reasons why it saves the world on it.  Rather than figure out how to improve the product, they hired a new marketing team to “accentuate” all the “green” details that weren’t so important before.  Don’t even look at the price or comparison shop, just eat it up because the best way to lead a sustainable life is to surround yourself with things that tell everyone else that you care.

Talk a big game

The more you know about the green culture, the more you can tell other people about it.  Keep up appearances by trading tricks and tips with all your friends.  Don’t bother actually implementing them.  That takes time and effort.  Besides, the more people you tell about all the great stuff you know, the less you actually have to do.  As long as they’re all doing it, it won’t make much difference if you do. But, what if they’re all like you?

Ridicule your friends

Don’t give up.  They’re only one more insulting comment away from seeing everything your way!  The only way to influence people to live like you do is to shove your lifestyle down their throats.  Get in arguments.  Shout louder when they offer different perspectives.  They won’t get it until you’ve uncovered every last undesirable characteristic they possess.  Careful with this tip, though. They won’t have to dig too deep to retaliate.

Produce more energy, don’t conserve it

The more renewable energy you create, the less you need to worry about conserving it.  If you’ve got the money, buy a few more to power the sauna and the 72” plasma TV in your theater room.  There’s no need to reduce consumption when the electricity you generate makes you feel so good about yourself.  If you don’t read your electricity bill, you won’t even notice that it hasn’t changed.  This is another friend impresser.  Throw parties once a year to show off the windmill in your back yard.  Make sure there’s a great view of it from the hot tub.

Donate but never volunteer

It’s long been known that the more money you throw at a problem, the easier and faster it is to fix.  Take this to heart and send a few dollars out to worthy foundations here or there, but only if you get your name on a plaque or something.  Remember, though, don’t ever give them any identifying information you don’t have to.  Someday they might actually ask if you’d like to help and you don’t have time for that.  Besides, what do they need your time for when they have your money?  Plenty of others are sure to help, right?  Showing up might open you up to other changes you need to make in your life.  You’re busy and don’t have time for this either.

Never challenge yourself to do more

Find a nice comfortable spot and stay there.  This is the easiest way to get through life.  And life is tough, so don’t add to it!  Besides, you already do more than most people.  Isn’t that good enough?  When someone presents a great idea to you that sounds like work, politely brush it off while highlighting the other things you do.  This is the best way to diffuse the request, as most people are very understanding.  They won’t question your decision.

Don’t take risks

If you never take a risk, nothing will ever go wrong.  You can feel good about yourself knowing that you’ve successfully navigated your way through life without ever causing a commotion.  All those world changing ideas you have?  They can’t be that original.  Someone else will probably do them so don’t worry about it.  Besides, what if you did give them a shot and they didn’t work out quite like you’d planned?  People might think you’re a failure.  Best to just fly under the radar.

The final word

There are plenty more ways to lead an average life, and quite honestly, there’s nothing wrong with average.  But if you’ve found yourself here, then I’m going to guess that you’re probably someone that is looking for more.  Looking back, I wrote this piece quite sarcastically.  It might offend some, but I’m hoping it will inspire more.

There are no two ways around it.  Living a meaningful and conscious life is hard work.  Most people will opt for the easier route as their lives are hard enough as is, but if you’ve read this far, I believe you probably are, or at least have an urge to be one of the few that opts to break free from the sea of mediocrity.  Congratulations. You have a long, often frustrating road ahead of you,  but you know it’s worth it.  Anyone can do it, most wont.  Which one are you?

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I need your help. My dear old computer, age 6, has begun acting up.  Truth be told, it started acting up about a year ago and I have been quietly coaxing it back into good behavior with encouraging phrases like “You can do it!” and “Don’t give up now!” as well as a lot of fiddling around with it’s innards.  In fact, I’m writing this post on it now, but will probably have to restart several times in order to finish.  It’s frustrating!

All this anguish has really ignited the “I want a new one” fire inside me.  I almost bought a brand new iMac at work the other day, getting all the way to the order confirmation page before slapping myself across the face and remembering that I should probably put some thought and planning into such a decision before getting all trigger-happy.  Buying a new computer can be a real financial burden and drain on the environment.  Maybe I just need to follow some of my own advice?

That’s when I remembered that I no longer have to make decisions like this on my own.  Since starting Frugally Green, I have gotten some really thought provoking feedback from the amazing people that have found their way here. So today, I pose my question to you, friends: What do you think is the best frugally green solution to my dilemma?

Here’s what I’ve considered already:

Repair my existing PC

Right off the bat, this seems like the least expensive and most environmentally friendly option.  I’ve exhausted my own repair knowledge, so I’d have to take it to a professional and likely be without a machine for awhile (though I could use my work laptop if I had to).  I’m hesitant to go this route, though, because a lot of the software I run is quite sluggish on this computer.  I’m afraid that if I repair it, I’ll just end up needing to buy a new one anyway before long.

Buy a cheap new PC

This is another option – just bite the bullet and pick up something new that I know won’t give me any trouble and, if it does, I’ll be all over that warranty. My old machine will be dropped off at Free Geek, allowing me all sorts of warm, fuzzy feelings when they Frankenstein it into something useful again that someone less fortunate can get some value out of.  It will also better ensure that very few, if any, bits and pieces end up in a land fill.

In this case, I’d probably make the new machine a fairly barebones system and add hardware to it as I saw necessary.  This would require little cash up front and allow me to add things that I think are important as I go. To be honest, though, I’ve recently had my eye on some Apple products, which leads me to my third option:

Buy a new (or gently used) iMac

This would bestow upon me the ultimate consumerist happiness.  I’m no drooling Mac fanatic, but I did use them throughout college and enjoyed the operating system as well as a lot of the software (except iTunes! I hate iTunes!).  I don’t think I’ve mentioned it here before, but in my spare time, I’m a home recording enthusiast.  The software I use and am very happy with is Mac only.  This wasn’t a problem before as my roommate had a Mac that I used for recording, but now he’s moving out.

I feel like buying one of these would allow me the most versatile use, but would also be the most expensive option. I’m keeping an open mind because I know that sometimes you have to spend upfront to save down the road and used Macs seem to hold their value better than PCs.  At the same time, I’m afraid I’m being influenced by aesthetics. Apple makes pretty computers and I don’t want to spend extra money just to look at something attractive (I get my fill of that from Jessie for a much better bargain).  A computer is a tool to me, not an accessory.

So I’d like your help!  I’ve thought this through myself, but I want to know how you would approach the situation. What criteria would you use to make sure you got the most for your money, everything you wanted, and were being environmentally conscious about a major electronic purchase?  I really value your opinion and want to know what you think.

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The Giving Tree is an illustrated children’s story, written by Shel Silverstein that chronicles the relationship between a boy and a tree.  In the beginning, they’re playmates – the boy climbs the tree, swings on its branches and eats apples in its shade.  They both enjoy each other’s company very much.  But the boy grows a little bit older and starts to come around less often.  This saddens the tree.  When he eventually returns he’s grown up a bit and no longer wants to play.  Instead, he wants money to “buy things and have fun.”  The tree doesn’t have money, but she is happy to let the boy harvest her apples to sell in the city.  So he does, and disappears again.

When the boy returns years later, the tree is excited and anxious to play, but the boy is a grown man now and hasn’t the time or desire to.  He wants a house so that he can find a wife and have children and raise them.  The tree cannot give the boy a house so, instead, she offers him her branches.  He cuts them and disappears.  Again the tree is sad.  When the boy returns, he is middle aged, sad, and wanting a boat that he can sail away. The tree, with no boat to give, allows him to cut down her trunk to make one.  The boy does and sails away.

When he returns once again as a very old man, the tree tells the boy she’s nothing left to give him.  The old man now says he has no need for anything else.  He’s too tired to do anything but sit.  The tree offers him a seat on her stump.  He takes it, and the two become friends again.  And the tree is happy.

I have to admit that The Giving Tree is my favorite children’s book.  I like it so much that, at one time, I considered having it’s cover illustration tattooed on my arm.  If that’s not the ultimate testament to my enjoyment, then I don’t know what is.  Maybe if I put it on my forehead?

This story silently speaks volumes about the unconditional love that can exist in a one-sided relationship while warning those that take advantage of such a relationship of the harm they inadvertently do to those who provide for them.  Looking at this story through our green goggles, it’s only fitting that the two characters happen to be a human and a tree.

Think back to the different life stages that you’ve been through. What were some of the things that you really appreciated and what did you take for granted? Can you say that you truly appreciated anything when you were just a child?  Probably not, but then again, you were too young to really take advantage of a relationship.  What about when you were a teenager?  A young adult?  Maybe you’re middle aged or even elderly now.  What has changed throughout your life regarding what and who you truly appreciate and what and who you might have taken advantage of?  As we age and aspire to new and bigger challenges, we shift our attention from one priority to the next, even though the resources and relationships that support us might not change at all.

I don’t say this to make anyone feel bad.  We’ve all been guilty at some point in our lives of taking from one relationship to give to another.  What’s really important is that we’re able to recognize when we’re doing this and make an effort to rebalance our focus.  Life is tough and we’ll never get it perfect, but just by trying we’ll allow ourselves to build stronger, balanced relationships.

From a frugally green perspective, try to think about some of the ambitions that you’ve had, or some that you have now, and consider the potential impacts that you have on various natural resources and systems as you pursue them.  Then, use that knowledge to focus on finding new, creative ways to lessen that impact.  The idea here isn’t to feel guilty or stop pursuing your goals, it’s to be aware of how they affect other people and things and then to take action on their behalf.

A personal example I can give is simply writing this blog.  Since I started Frugally Green in April, 2009 I’ve spent considerably more time sitting in front of the computer reading, writing, researching, and designing than I ever would have without this website as motivation.  As a result, my computer is using up a lot more electricity than it was before.

Realizing this, I wanted to adopt a small change in my life that I could use to offset it.  The solution I came up with?  Drive my truck less on the weekends.  Weekends are errand and chore days for me.  I go around town picking up things I put off during the week, visit friends, and run out to the farmer’s markets that Jessie sells cupcakes at.  When I realized that most of the places I go don’t require me to carry much  and that I have a perfectly functional bike, the solution was obvious.

Now, when I run to the hardware store or out to the farmer’s market, I just hop on the ol’ two wheeler and pedal off.  I still have to use the truck to pick up large items now and again, but I have significantly cut my weekend driving down – more than enough to offset the extra computer use (and it doesn’t hurt that I now spend a good chunk of my weekends huddled over a keyboard thinking of witty parentheticals to make you chuckle).

The relationships that we create with people, places and things can sometimes lead to unsustainable practices.  Lots of times, we don’t even notice because we’ve become so consumed by our pursuits.  Remember that, like the Giving Tree, the earth will provide to us all that we are willing to take from it, without making much of a fuss.  If we ignore that for too long, like the boy in our story did, we could come to the end of the line with little left to be harvested by those that will follow us.

“In every deliberation, we must consider the impact on the seventh generation.”

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As I’ve come to realize, there are lots of ways to support my planet while spending very little from my own wallet.  In fact, here at Frugally Green, I usually write about the ways an average person can save money or even make it while incorporating small changes into their lifestyle. The changes themselves may be small, but putting them together can really make a difference.  But what do we do when we feel like we’ve already done all the little things we can to save the planet and save some money?  What if we feel like all the “low hanging fruit” has been picked?

The simple answer is probably that we actually just need to look a little bit harder to find more opportunities.  I know that, although I’ve changed my life dramatically over the last few years, there are still plenty of simple changes I can make that just aren’t on my radar.  However, none of this should distract you from making big changes if that’s what you desire to do.

Sometimes, the big changes we want to make cost a lot of money, like installing solar panels, wind turbines, and heat pumps at our homes, upgrading to high efficiency appliances, or buying a hybrid or electric vehicle.  I’ve written about ways to save big on buying an efficient car and appliances and renewable energy, but the truth is, even if you maximize your savings, supporting new technology is expensive, and you’re going to pay more up front to do so.  This may not seem frugal, but I think it’s important to remember that frugality is all about seeing the long-term savings of a purchase.  You’ll pay a premium to outfit your home with solar panels, but the money you save on electricity, when done right, will more than pay for them through their life cycle.  This is a tenet of frugality – realizing when paying more now will save more later.

But for adults with so many other financial commitments in their life, it’s hard to find the money to make the best purchases they can.  This is why it is so important to get your financial house in order.  When you pay off your debt, spend less than you earn, and save for the long term, it becomes substantially easier to find the money you need to make these kinds of long-term purchases.  It’s like a snowball rolling down a hill – the more it rolls, the bigger it gets.

When I decided to really change how I handled my money, there were a few basic things I did that yielded the biggest immediate gains for me:

• I paid off my debt – Luckily, I didn’t have much at all, but getting rid of it was a huge relief that allowed me focus on more important things, like…

• Tracking my spending – This was easy to do by setting up an account at Mint.  Once a week or so I would go look at where my money went.  Sometimes I felt really good about the things I’d bought, and sometimes I felt awful.  After a few months of just seeing what I spent my money on I…

• Set up a budget - I picked out the major items that I regularly spent the most of my discretionary money on and slowly started to budget a little bit less for them each month until I felt like I had gotten lean enough.  Once I had a good idea of what I was spending my money on and a plan for keeping myself within a few limits, I was able to…

• Pay myself first – This is a very recent development that I am still trying to perfect.  Now that I know where my money goes each month, I’ve decided to automatically start saving a part of each paycheck that I receive.  Before, I would just save whatever was left over at the end of each month but now I am able to declare that I will save “xxx” dollars every month and know that it will be available.

Will following this exact plan work for you?  It might or it might not.  You may notice that I didn’t ever have much debt.  I understand that this is a much bigger problem for many people, but I cannot write effectively on it because I have not experienced it and trying to tell you how to fix a problem when I have no understanding of what it’s like or how it feels to be in that situation would not be helpful to you.  If you’re looking to improve your finances and have a lot of debt, start here with JD over at Get Rich Slowly.  His story is an inspiration, and if you like what you read, he has years of archives for you to comb through. Trent over at The Simple Dollar has a similar story.

Whether you follow the same path I did or create one for yourself, I think you’ll find that when you take the time to really look at your finances and make a plan that you can live by, you will be a lot more connected to how you are spending your life’s resources.  This can lead to very gratifying feelings of security and self awareness.

So to bring the focus back to being frugally green, I’m excited to say that my next big step in connecting my own personal finance with sustainability will be to start a new savings goal for green ventures.  I can’t say yet how much I’ll save or even what it will specifically be for, but I want to get started now rather than later.  So much about success directly relates to simply starting something. I will begin by adding another sub-account to my ING savings where I am saving towards other financial goals:

What can I say?  I like to give my accounts silly nicknames.  It makes saving more fun for me.  If this is something that interests you, you can read all about how to open multiple accounts at ING. Once you’ve got that figured out, you can watch Ramit Sethi’s video on how to automate your finances.

Big changes take big commitments to make, but as you can see, the “big” financial change I am trying to make is a result of lots of smaller ones.  It’s the constant daily focus on small, but important tasks that lead to the big, life-affirming changes.  It’s rare that someone with any amount of success wakes up one morning and wonders how they got to where they are.  They know exactly how they arrived because they spent years, focused every day, on getting there.

I’m curious to know more about the financial state of my readers.  I don’t need to know how much money you have, but I would love to know more about how you approach your finances.  What kind of goals do you have for your money and what has driven you to make them happen?  Please feel free to discuss in the comments or, if you consider this information personal, but would still like to share with me, you can send me an email.  I’ll never share your personal information without your permission.

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 7.52% after fund expenses

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 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

Welcome back! The last week has gone by so fast researching more green investment options.  Since this is such an organic process, I have made another change to my plan.  After searching tirelessly for traditional index funds that would meet my criteria, I have decided to abandon these (for now) and change course just ever-so-slightly.  This week I’ll offer  some clarity about the pros and cons of achieving your sustainable investing goals through a passively managed ETF (Exchange Traded Fund).

What is it and why should I care?

An ETF is similar to and behaves like an index fund in that it is (usually) passively managed, allowing for a low expense ratio and tracks a chosen market index. The main difference between the two is that an ETF is traded on a stock exchange and can be purchased through a broker at any time of day that the market is open.  Index and mutual funds require a separate account with the investment companies that provide them and can only be traded at the end of the day.  So, if you have an online account with one of the many brokers out there like Zecco, Etrade, or TradeKing, you can simply log on and start trading. For a more in-depth explanation of the differences between an ETF and an index fund, take a peak at this article I found over at Investopedia.

The good

Let’s compare some of the basic advantages to an ETF over a traditional mutual fund:

They’re passively managed – A sentient being rarely gets involved with the day to day management of an ETF.  A fund is set up to track a specific index and does not attempt to beat it.  That means that Sally, the trusty ETF computer, can handle all the day to day tasks of making sure the fund stays on track while we humans hang out by the pool knowing that our money is in good, binary hands.  And this lack of active management keeps the fees down!  Humans require paychecks, but Sally will work for free with minimal maintenance.  If you remember from last week, the mutual funds I was researching all had expense ratios of 1.25% or greater.  The green ETFs that I’ll tell you about below are all under 0.75%.  You may think 0.5% is too little a difference to worry about.  I did at first, too, but for the long term investor, 0.5% could equal some astronomical losses in potential gains. Compound interest is a force to be reckoned with.

They’re tax efficient – Since the way that shares are traded in an ETF are different from a traditional fund, there’s much less turnover, meaning that the fund manager does not have to buy and sell large amounts of holdings in order to let new investors in or old investors out. When a fund sells shares, it is required to pay a capital gains tax to the government.  Obviously, the more often your fund is able to avoid this scenario, the better the overall performance will be and the more money you’ll keep in your pocket.

There’s no minimum purchase – One of the great barriers to entry into a mutual or index fund for younger, less-endowed (financially!) folks like me is the minimum amount required just to open an account.  Oftentimes, the minimum is at least $1000 and can be as staggeringly high as $50,000! When you buy into an ETF, you can purchase just one, single share of it if you like. Now, I wouldn’t recommend this strategy seeing as the per trade fee from your broker would decimate your future earnings if you bought one share at a time, but having the option to get in for less up front can really help out the beginning investor who sees that account minimum as a giant hurdle.

The bad

On the otherhand, you’d be wise to consider the possible downsides to investing in an exchange traded fund:

They’re passively managed – Looks like this going to be another one of those double edged swords!  If the stock market takes a turn for the absolute worst, an actively managed fund will abandon ship and shelter your money in temporary defensive investments.  Most ETFs will do this as well, but when it comes to abandoning ship, Jane, the mutual fund manager who is paying attention to the market every day will probably be better prepared than Joe, the guy who has to turn off Sally the ETF computer and figure out what to do with his pot of money.

They’re easy to trade – If you’re like me and trying to set yourself up for a smooth, long-term investment, having the option to simply log on to your brokerage account and move money around may prove devastating to this plan if you do so.  You’ll incur brokerage fees at each trade that could quickly wipe out the savings you thought you were getting from the low expense ratio!  Let me repeat myself:

You’ll pay a brokerage fee for each trade – This is one area where traditional index and mutual funds can beat the pants off of an ETF.  Unless your fund has a front-end fee ( a percentage removed from every deposit you make) most traditional mutual and index funds will allow you to add to your investment for no additional cost.  Dollar cost averaging is a very useful investment tool that you will pay more to utilize for an ETF than for a traditional fund.  If you’re going to dollar cost average into your ETF, I suggest finding the cheapest broker around and making sure that each trade you make is big enough to be worth the cost.

The ugly

I can’t really say that there is anything terribly ugly about ETFs, but here’s the dirt that seems to be getting kicked around lately – over the last several years ETFs have experienced, overall, greater “tracking error.”  This means that the funds have not matched the return of the index that they track as well as they “should have.”  This could mean that they don’t perform as well, but it could also mean that they accidentally beat the return of the index! One explanation for this is that the ETF has gained a great deal of popularity lately.  New funds are sprouting up all over the place to track new indexes that are appearing.  New indexes and, subsequently, new funds are not perfect and are difficult to get right. This is definitely something to consider when deciding to enter the world of green investing. Most of the options out there are relatively new.  While the explosion in popularity of socially responsible investing is exciting, all of these new funds to choose from could make for a bit of a bumpy road as the industry grows and matures.  Personally, I am happy to know that I’ll be getting in near the beginning, exposed to all the potential growth.  This likely won’t come without some rocky patches, but I’m willing to ride them out because I’m in this for the long-haul.

Getting green

So on that note, I’d like to introduce you to the ETFs that I decided to research this week.  There are six of them – all are based on clean energy indexes, three focused domestically and three focused globally.

Domestic ETFs

Powershares Clean Energy (PBW) – PBW tracks the WilderHill Clean Energy Index (54 stocks of all market capitalizations, but mostly small) and has an expense ratio of 0.67%.

Powershares Progressive Energy (PUW) -Similar to the Clean Energy Portfolio but focuses on transitional energy – companies working to improve the cleanliness and efficiency of existing energy sources. The Progressive Energy ETF also covers all market caps and carries a slightly higher expense ratio of 0.73%.

Nasdaq Clean Edge US Liquid Series (QCLN) -This is another domestic fund that focuses on emerging clean energy solutions like solar power, biofuels, and advanced battery technology. QCLN uses a weighting methodology to give larger companies more weight in the portfolio but maintain a balance of all market caps.

Global ETFs

iShares S&P Global Clean Energy (ICLN) – ICLN is a global fund that tracks the S&P clean energy index of 30 holdings across a fairly diversified field of clean energy companies.  It also has the lowest expense ratio of all that I picked at 0.48%.  Attractive.

Powershares Global Clean Energy (PBD) – This fund holds 80 different companies across a broad array of clean and alternative energy markets. While it has exposure to all market capitalizations, it is weighted heavily towards mid caps. PBD seems well diversified comparively speaking, but it boasts a pretty high expense ratio as well, 0.75%.

Van Eck Global Alternative Energy (GRN) – With an expense ratio of 0.62%, GRN tracks the Ardour Global Index with 30 holdings practically split between large and mid cap stocks.  It should also be mentioned that Van Eck offers an Agribusiness ETF with the stock ticker symbol “MOO.”  That’s funny.

The Conclusion

As you might remember, back in Part One I laid out the criteria that I would use to guide my selection.  After evaluating these ETFs based on those principles, my profile as an investor, and taking into account the reltive “newness” of all these funds, I feel my personal winner is the iShares S&P Global Clean Energy Fund.  It has the lowest expense ratio of the funds I selected and the index that it tracks was created by Standard & Poors who’ve been around the block.  I think they’re the best qualified to manage a successful index. Two of the larger companies in this index also have major operations in Oregon.  Living in Portland, supporting them with my investment dollars feel good.

I feel good about this.  I could analyze every option to death, but I feel I’ve done a fair amount of research on funds that fit my profile and I now have two funds remaining to compare side by side and select.  Only one week remains until a final decision is made and I am on my way to bettering the world and my portfolio with a green investment.

Maybe you’ve found yourself interested in green ETFs.  I hope you have.  I would highly encourage you to take a deeper look at the funds that I outlined above,  but don’t stop there!  Those ETFs that I picked were hand selected for my own situation and there are many options out there to fit your particular needs.  If you haven’t yet, please go back and read Part One to make sure that you fully understand your own situation before selecting an investment vehicle.  Create your own investor profile and go from there.

Happy hunting!

Note: This is part three 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

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