Green Investing on a Budget: Set Yourself Up

Let's be honest - 90% of investors fall below the $1M net worth requirement for many of the hedge type assets available to institutional types. In fact, as more and more high net worth individuals turn to alternative assets to complete their portfolios, most of us are stuck with either 1.) 401(k)'s run by someone else with broad, if not comical, options, or 2.) amounts too low to qualify for much in the way of diversification (see here for why diversification is important).

In light of this fact, it makes sense to review the way a $10,000 do-it-yourself-er can invest green and be diversified. It's definitely possible to have a responsible, diversified portfolio with $10,000. To do it, we considered the following things as paramount:

1.) Liquidity is a must. $10,000, even in a self directed IRA, should be almost entirely liquid. Typically, investors with only $10,000 in investable assets are in the accrual phase of investing, and may need to draw for big item purchases like a real estate or schooling. It makes sense to be liquid and stay liquid where possible.

2.) Avoid fees where possible. Avoiding fees is impossible - everyone charges you for everything you want to do in this country, especially when they think you won't notice. It is absolutely imperative to look at the fees for what you're investing. Can't get through the legalese? Email me - I'll do it for free. Fees, while the necessary bane of investing, can be limited by doing research and being prepared. The first and most important fees to understand are the trading fees. There is a great, competitive field for online discount brokerages now, and fees can be reasonable. Still, do some reading and find what's right for you - I use optionsXpress personally and love them, but read this and this when considering some of the bigger (and smaller) online firms. My advice: stay away from the Fidelity's and Merrill Lynch's of the world. If you already have a broker you like (or you have no choice about), read every prospectus when determining how much you're paying for someone to manage your investment.

3.) Unless you watch the markets daily, avoid turnover and emotional selling. This is a really basic rule, and easily the most difficult to follow. As a portfolio manager, it doesn't get easier. I bought AAPL stock on November 19, 2007 for $164.92 after fees. By December 31, 2007, it closed at $198.08, a solid 20.1% gain. As a long holder, I kept holding and watched my shares hit a low of $119.15 of February 26, 2008 close. That's a rollercoaster of up 20.1% to down -27.8% in a matter of 3 months - a 47.9% swing! The point? This will happen, and probably to you. Stock timing is like playing roulette. The best advice is don't try to time the market. Even Mark Twain said, "Buy good quality common stocks and hold 'em until they go up. If they don't go up, don't buy 'em." Green investments will go up and down, there will be good news and bad news, and the talking heads will blast it and praise it. Don't listen to sensationalism. Besides, if you've seen it on the news, you're already too late.

What about turnover? Well, that's just simple math - if you invest $10,000, a $15 trade fee represents 0.15% per trade. If you have a portfolio of 10 assets and you traded quarterly? - you're looking at being down 1.50% per quarter just in trade fees, or down 6% per year. That adds up quick, and digs deep into your returns. So keep the trades to a minimum in smaller accounts, or you'll end up on the losing end of trading fees!

4.) Be S.U.R.E. when you invest. At the risk of being cliche and using a ridiculous acronym, it helps remember. Whenever you sit down to make an investment decision, be:

Self aware, understanding your investment situation - don't go for the home run if you can't afford the strikeout.

Understand the costs involved.

Research your investment. It's not enough to just know what you own, if you want to be responsible, know who you own.

Execute and forget it. Assuming you're in it for the long hold, be in it for the long hold. Set yourself timelines if you have to (ie, no portfolio review for 1 year).

In the long term, especially using and index/ETF approach, there are very few total losers. In fact, even in the mutual fund world it's easy to look like a winner over the long term. If you're able invest, forget about it, and go on living, it's a good way to stay Zen.

Tomorrow's post: our suggestions of what to buy.