Green Is Dead: Long Live the Green

After a long hiatus, Smug is back. Not so much back (Smug never left), but making a more conscientious effort to reprioritize posting. And no time like the present as the market quietly falls into oblivion.

Some very quick personal updates:

• Smug Investments launched at just the wrong time, stalled, and de-launched temporarily. Funding is dry for hedge fund start ups, green or not, even with no leverage. Despite that, the model is still running and trading - we lost roughly 16% in 2008, which ain't so bad considering it's a.) all publicly traded, and b.) the S&P lost 40%. More on the Smug model to come in future posts.
• I've started working at a non-profit, Ceres, in their Investment division. I manage their Clean Tech Investment Programs, facilitating some of the largest institutions in the world to invest in clean tech and sustainable vehicles. Smug is not dead - Smug is Smugger. For more information on my non-profit work, see www.incr.com (the Investor Network on Climate Risk) or www.ceres.org.

On to bigger and better things.

So many of you (if there are any of you left) are in the unenviable position of losing money in the current market. Green is definitely not an exception - the NEX index lost nearly 60% last year, a measure of global green investments developed by Robert Wilder (WilderHill leased the index to make the PowerShares Global Clean Energy ETF - ticker PBD). No happy campers in that boat. The headlines are getting worse and worse, as well - things like "Green Is Stalling", "Green Is Dead", "Why Everything Sucks", and "Could Things Be Worse for Climate Change?". Oddly, the ominous seems to downplay the positive things coming out of the new Obama administration - longer subsidies for clean energies, infrastructure focused on green jobs, and allowing states to put mandates on car emissions.

So let's put this all in a bit of perspective: yes, it's bad. But it's not all bad. Especially if you move your world view beyond the walls of the US markets.

Green investments now are almost universally at or near their 52 week low. Hell, they are at or near their 3 year and 5 year lows. Some of them? All time lows. And finally, we have governmental support in the US for green. So ultimately, ask yourself this: where else would you put your money?

This is a question I've spend the last 4 months posing to some of the largest institutions in the world - CalPERS, CalSTRS, NYCERS, and others. Some of them are selling investments to make payroll. Others are making cuts. Many of them are literally pulling out and investing everything in Treasuries that are yielding between 0 and 1 percent - the equivalent of putting money in the mattress. But when posed the question, they have no answer. Except green.

Why?

Here are the driving forces:
1.) Policy - everyone is holding their breath for Obama to make his first real move. It's coming, and it's coming soon. Policy favors green for the next 4 years, and where the government incentivizes, the money is soon to follow.

2.) Growth potential - in public equity markets, green is at an all time low. Does anyone think, that even if it were to sink another 10 or 15%, that it won't come back? Does anyone honestly think that ALL of these companies will be bankrupt? That there is no future in wind, solar, or other renewables?

3.) Cash - the biggest players have either been sitting on the sidelines with cash for a while, or have pulled out of the market in the last few months anyway. Some of this cash will go to avoiding the need for more ridiculous bailout money. But much of it, as in the case of some of the big institutions (and institutional like investors a la Warren Buffet), there will come a point in the not so distant future where everything looks cheap and the bottom feels near. When the money starts pouring in, where do you think it will go?

I'll leave you with this parting portfolio snapshot of Smug Green Global for you to ponder, it's our last trade allocation:

CRATX	CRA Qualified Investment Retail	13.52%
CXA	California Municipal Bond ETF	11.96%
DBA	DB Agricuture ETF	11.40%
FXS	CurrencyShares Swedish Krona Trust ETF	10.87%
INY	SPDR New York Municipal Bond ETF	12.74%
JJG	iPath DJ AIG Grains ETF	11.19%
PAXHX	Pax World High Yield A	15.95%
UDN	PowerShares DB USD Index Bearish ETF	12.37%

Bonds and agriculture. Things have changed, but this portfolio saved me over 20% during October's drop (Smug was down -7.58%). If you've followed our metrics in the past posts, you'll know why these things are "green". If not, do some catching up.

And hopefully I have time to keep this up!

Al Gore's Green Challenge: Ignore It and Start Small

Al Gore recently gave this speech challenging our country to use 100% renewable sources within the next 10 years.

Hooray?

While you would think that would make us green investors jump for joy, instead all I hear is a reverberating echo. As much as I love the challenge, and I love Mr. Gore's science, mission, and rhetoric even more, the problem is ideological. How do you take historically consumptive and self interested Americans, from Wall Street to Main Street, and get them to believe that green energy is necessary (or even possible)? Especially in a country that ridiculously fights the notion that global warming is even occurring!

Permit me one self righteous, proselytizing rant: not until green can line the pockets of the already wealthy while keeping the status quo will it ever be viable. That means paying government with special interest money to rival oil, gas, coal, and other pollutant energies. It also means venture capitalist cash flows, double and tripling profits of Wall Street financiers, and forcing (and I do mean forcing) the average joe to comply with green energy initiatives. If it's going to happen in 10 years, green will have some serious moving and shaking to do right now.


Green Energy Becomes Tradeable Commodity

Julian Murdoch of Hardassetsinvestor.com wrote a piece on the movement we could expect from a move to green. He points out one thing in particular that both caught my eye and gave me concern: "...wind, solar and geothermal power aren't tradable commodities..." This is both troubling and promising at the same time, and here's why.

When the CME figured out how to make weather derivatives a viable investment vehicle, who's to say we couldn't trade excess energy from solar flares (a fairly random occurance)? Or the excess energy from geothermal activity, or storm activity that generates stronger waves? The fact is, they will figure it out. It will be sketchy at first, incredibly difficult to understand, and basically akin to betting on football games, but they will figure out a way. The CME (and all of Wall Street for that matter) is easiest to describe as a giant Vegas, setting prices designed to have a market on either side. The brokers are the bookies, and you are the gambling addict. When viewed in that light, it's easy to understand how there's a market for just about anything you can bet on.

What troubles me about green energy as a commodity is it's inherently linked to natural occurences. A mine, once found, yields a certain amount of ore which can be manufactured and refined. This means there is a limited quantity for that commodity - when the mine runs out, the ore price rises. If green energy commodities, like wind and solar, come into being, you are dealing with sustainable, hypothetically infinite "mines". The market implications are totally unquantifiable at this point, and my gut instinct is to assume no Wall Street market maker is interested in a game that isn't rigged. To that extent, there may be pressure to force us, the consumer, to pay for the commodity in ways we don't pay for it now.

Call it my deeply ingrained cyncism, but I think there's danger in motivating green commodities too abruptly. I think Mr. Gore's challenge was primarily aimed at Congress, but I think what it lacks is the acknowledgement that Congress is elected by you and paid for by big business. I think the big change will come from you, the little guy.


Start Small, Not Big: Don't Wait For Big Brother

While Mr. Gore's challenge is inspirational, the serious change has to happen with you first. Wall Street will sit up and take notice when investors invest in green. If Wall Street sees money in it, expect profiteers to enter the market, prices to skyrocket, profits will be made, corruption will be abundant, and eventually the market will crash! But hopefully not before it's actually done some good.

Starting small can happen in many ways, all of which are in your control:

1.) Call your broker, call your 401(k) provider, call your retirement administrator and ask for green or socially responsible. Pressuring at the institutional level can easily help sway the tide from the inside.

2.) Self directed brokerage account? Set a percentage to be green and responsible, and rebalance once a year. Even if that percentage is just 5%, it makes a difference in the long run. Plus, it can't hurt to diversify.

3.) Do the little things around the house: recycle, don't use plastic bags, find a farmer's market, and maybe even if it's yellow let it mellow. Outside of urbana (and to large extent, suburbana), recycling still isn't the norm. You don't have to buy a hybrid or solar panels right away to make a difference. In fact, there is evidence to suggest that the environmental cost of making a new hybrid is far greater than just buying a used car (used hybrids top all, though). At the risk of standing on a pedastal, imagine if everything you threw away you were forced to throw in your backyard (or in a corner in your apartment). Suddenly those 20 beer bottles and used milk containers would be much better off in the recycle bin!

Need some guidance to step one? Start here, then move on to this.

New Investment Management Paradigm

I have been approached by the gurus at Rainbox Portfolios to be one of their premier portfolio managers. It is definitely a tempting idea, and could be a new way to invest, but I'm just not clear how viable it really is, especially for smaller investors. Here's how it works:

I would operate and maintain what amounts to a live portfolio and research platform. For a monthly subscription fee, the client would have access to Smug research reports and live updates on portfolio changes. This might appeal to the DIYer who isn't entirely sure how to DIY. Every time Smug gets a trade signal from the green trading model, you get the trade signal too, in the form of an email indicating a price to buy (with a cushion), number of shares, and cost information. The only thing left for you, the client, to do is to place the trade as indicated.

This appeals to me on a few levels. Firstly, there is no bias for portfolio size. If you have a $10,000 portfolio or a $1,000,000 portfolio, your fee structure is exactly the same: the monthly subscription fee plus the cost to trade, which you can control. For instance, I prefer using optionsXpress for some of my accounts. The trading cost is $14.95 per trade regardless of size of the trade (though bigger accounts can get lower per trade costs) and there are no annual fees. I haven't found any hidden fees yet, either, in my time using them, so all in all, I'm satisfied.

Assuming your self directed accounts are in the $15/trade ballpark, which most of them are, here is a look at what portfolio size corresponds to what annual fee. As you would be making the trades yourself, I built in a cushion for "hassle" and "time to trade" as follows (all values are annual):

Assumptions:

Hassle Cost:	0.45%
Time Cost:	$28.00
Trading Cost:	$14.95
Annual Fee:	$0.00
Turnover %:	50%
Assets:	12
Growth Rate:	5.00%

Annual Fee Breakdown:

Subscription
Fee	$2,500	$5,000	$7,500	$10,000	$20,000	$30,000	$50,000	$100,000
$7.50	11.38%	5.69%	3.79%	2.84%	1.42%	0.95%	0.57%	0.28%
$10.00	12.53%	6.26%	4.18%	3.13%	1.57%	1.04%	0.63%	0.31%
$12.50	13.67%	6.84%	4.56%	3.42%	1.71%	1.14%	0.68%	0.34%
$15.00	14.82%	7.41%	4.94%	3.71%	1.85%	1.24%	0.74%	0.37%
$17.50	15.97%	7.98%	5.32%	3.99%	2.00%	1.33%	0.80%	0.40%
$20.00	17.12%	8.56%	5.71%	4.28%	2.14%	1.43%	0.86%	0.43%
$25.00	19.41%	9.71%	6.47%	4.85%	2.43%	1.62%	0.97%	0.49%

You can see why this becomes incredibly appealing to DIYers with $30K or more invested in the portfolio. If I were to set the subscription fees at what I consider my midpoint (Rainbox suggests a $20/month fee, but that seems steep to me), $15/month equivocates to an annualized 1.24% expense ratio. That's in the ballpark of most mutual funds, only you're not obligated to make any trade you don't like. If your portfolio is bigger, in the $50K - $100K range or beyond, the savings are exponential. At some point, the cost of a "professionally run" portfolio decreases to below ETF levels, and eventually to almost negligent non existent levels. It offers complete control with investment manager research and advice. My expense ratios are higher than Rainbox's in part because I added in the "hassle" and "time cost" of managing your own portfolio. The "time cost" assumes trades take about 7 minutes each and your time is worth roughly $20/hour. The "hassle cost" component assumes you get the trade email and wait to trade for 5 days, either due to laziness, busy-ness, vacation, or any reason at all. It makes the assumption that for every day you wait to trade, you lose about 0.15% in profit. That's a fairly big assumption, as you could actually avoid losses by waiting, but adding it as a component makes it a more realistic model of how the subscription service would work.

Want to know the kicker? If you paid no one and totally self directed, a $20K portfolio costs you roughly 0.99% annualized fees using the assumptions above. That's why online broker houses exist and seem so cheap - they are actually making fair sums of money off small accounts. An account of $10K with 50% turnover and 12 assets costs you about 1.98% per year - on the high end of just buying and holding a mutual fund! So here's a look at the same chart above, only the numbers reflect the excess cost of subscribing (as in, how much you are actually paying for a "management fee"):

"Management Fee" Breakdown:

Subscription
Fee	$2,500	$5,000	$7,500	$10,000	$20,000	$30,000	$50,000	$100,000
$7.50	3.44%	1.72%	1.15%	0.86%	0.43%	0.29%	0.17%	0.09%
$10.00	4.59%	2.30%	1.53%	1.15%	0.57%	0.38%	0.23%	0.11%
$12.50	5.74%	2.87%	1.91%	1.43%	0.72%	0.48%	0.29%	0.14%
$15.00	6.89%	3.44%	2.30%	1.72%	0.86%	0.57%	0.34%	0.17%
$17.50	8.03%	4.02%	2.68%	2.01%	1.00%	0.67%	0.40%	0.20%
$20.00	9.18%	4.59%	3.06%	2.30%	1.15%	0.77%	0.46%	0.23%
$25.00	11.48%	5.74%	3.83%	2.87%	1.43%	0.96%	0.57%	0.29%

At the mid price point of $15/month, the equivalent management fee is only 0.86% for a $20K portfolio. That's not too shabby, considering most management fees run between 0.50% and 1.00% for mutual funds, and up to 2.00% for hedge funds. The nice part is, as the portfolio size increases, your management fee decreases!

So how do I get paid? The subscription fees go to me, though there are expenses I would incur in utilizing the service. For one, I incur the credit card processing fees, plus a 25% commission fee to Rainbox. Here's how much I would make based on subscriber accounts:

Smug Income Breakdown:

Subscription	ACCOUNTS
Fee	1	5	10	25	50	75	100
$7.50	-$47.54	-$6.10	$23.21	$105.12	$239.64	$373.82	$507.93
$10.00	-$45.72	$3.01	$41.41	$150.63	$330.65	$510.34	$689.95
$12.50	-$43.90	$12.11	$59.61	$196.13	$421.66	$646.86	$871.98
$15.00	-$42.08	$21.21	$77.82	$241.64	$512.68	$783.38	$1,054.00
$17.50	-$40.26	$30.31	$96.02	$287.14	$603.69	$919.90	$1,236.03
$20.00	-$38.44	$39.41	$114.22	$332.65	$694.70	$1,056.42	$1,418.05
$25.00	-$34.80	$57.61	$150.63	$423.66	$876.73	$1,329.45	$1,782.10

The breakeven is pretty low at 5 accounts for all but the cheapest subscription price. In fact, if I charged only $0.99/month, I'd only need about 40 accounts to barely break even after costs.

It sounds excellent in theory to me as a way to a.) create income for Smug and tap into a wider audience, and b.) allow investors to make their own choices at a minimum of cost. A new paradigm, right?

Well, I'm not entirely sure. First of all, the likelihood of DIYer's paying for advice is low, and the likelihood that online readers would subscribe and have $30K+ to invest solely in Smug's models is even lower. Rainbox is in beta form right now and actively soliciting managers (like me) to not only give it some credibility, but to help launch it successfully. The question I have is: will it work? I've set up a poll to the right side, I'm wondering how much you, the interested green investor, would be willing to pay for a subscription service like this? Nothing? $1.00 per month? $20.00 per month?

Comments and criticism appreciated, I'm looking to make a decision whether or not to offer the service in the coming weeks. Look out for more green commentary in the next few days, and a profile of the environmental services ETF, EVX.

Dividends: The Green Investor's Atlantis

Big media attention distracts from the fact that green is still a niche investors' market. As more and more utility companies sign on to green initiatives, steady yielding dividends should get easier to come by. Until then, there are ways to piece together some nice income, albeit more unstable than traditional income vehicles.

I've put together, at the request of a Seeking Alpha commenter (thanks EnfantTerribles) a Sort Of Incredible Green Income Machine. Here's the list, with some suggested allocations as well:

Asset	100.00%	Yield		Portfolio Yield
PAXHX	17.50%	7.43%		1.30%
CRATX	15.00%	4.64%		0.70%
DSBFX	15.00%	4.47%		0.67%
CSIBX	10.00%	3.87%		0.39%
DUPFX	5.00%	3.13%		0.16%
LRY	15.50%	7.28%		1.13%
IDA	10.00%	4.07%		0.41%
WFMI	5.00%	3.46%		0.17%
WTR	3.00%	3.29%		0.10%
ORA	2.00%	0.43%		0.01%
LNN	2.00%	0.34%		0.01%

Total Yield:

5.03%

Agriculture	7.00%
Bond	62.50%
Diversity	0.00%
Eco Reserve	0.00%
Energy	12.00%
Low Carbon	0.00%
Real Estate	15.50%
Recycle	0.00%
Social	0.00%
Technology	0.00%
Total Green	0.00%
Water	3.00%

As you can see, the majority of the holding are bonds, which isn't ideal for diversification's sake. All the yields listed are based on Friday (7/18) closing prices and the last dividend paid. They are most definitely not guaranteed, but the Smug systems do their best to weed out inconsistent payers. There are some non bond holdings worth looking at, and some stock holdings as well yielding above 3%. The overall stock allocation, however, falls less than 50% at around 38% instead. That should give some cushion for growth amongst the bonds and hopefully continue to flirt with that 5% yield mark.

Because of the high concentration in yielding bond mutual funds, there isn't much in the way of inter-green diversity either. Real estate is an obvious place for steady yields, and our one traded "almost green-ish" real estate stock pick, Liberty Property Trust (LRY), makes for a nice yield especially now that real estate prices have tumbled despite ever consistent cash flows. If those cash flows dry up, though, better watch out. Also in the stockpile is IdaCorp (IDA), an Idaho based energy company generating most of it's energy from hydroelectric sources. Utility companies are usually recession-proof tools, so I wouldn't be surprised to see the price tumble a bit if serious recession concerns start to fade in the backdrop. That said, over the last 7 years the price has remained fairly consistently around the $30/share mark, possibly a good sign for forward stability as well.

I also included Whole Foods Market, Inc (WFMI), as they are a nice solid yielder, but as a "specialty" grocery store with food prices on the rise, it's a bit of a risky play. If you're looking for a really steady yield without as much volatility involved, stick with the mutual fund options. Domini, Pax World, and Communtiy Capital Management are old hands with solid business models. PAXHX clocks in as the cheapest overall bang for you buck - currently a 7% yield, a 1% expense ratio, and a measly $250 minimum!

All in all, it's wise to tread lightly looking for green dividends. I wouldn't be surprised if they start cropping up here and there in the not too distant future, especially with the first pure green REIT on the horizon (in SEC filing stage), but for now, be careful and don't expect great stability except from some of the tried and true stalwart bond funds.

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.

Risk and Green Investing

My father in law just sent me an excellent op-ed piece written by Peter L. Bernstein in the New York Times (Sunday June 22nd paper) that got me thinking about risk. I've talked a bit about risk in creating your portfolio, and I've beaten to death already the fact that I am risk averse, but I think given current market conditions, it's not a bad idea to rehash the concept.

First and foremost, it's important to define what risk is exactly. Despite there being hundreds, if not thousands, of measures of volatility, the article points out that the market tends to muddle the definitions of risk and volatility. In short, volatility is NOT risk. Risk is the likelihood that something will happen (anything, really). Volatility in financial markets is usually a reaction to the perception that something will happen (just about anything). When working to manage risk, it's a twofold process: 1.) you need to treat the symptom (volatility), and 2.) understand "the consequences of being wrong" [Bernstein].

So what does that mean for your portfolio, and what does that mean for green investing in general?

Step 1: Treating the Symptom

Hedge funds and portfolio managers big and small have a multitude of tools, one of the primary being the VIX, the CBOE index tracking implied volatility of the S&P 500 thirty days in the future. As the VIX rises, it indicates speculators percieve increasing volatility in the S&P 500's returns in the next 30 days (it's more complicated than that, but that's the gist - see this for more). Other favorites include the Consumer Confidence Index, and the easiest, plain old standard deviation. With all these tools at our disposal, it's still almost impossible to predict actual volatility. But at least there are easy ways to lower it.

To lower volatility, the simplest solution is to invest in less volatile assets. For instance, high volatility periods often see a movement from common stock to bonds as people get nervous. This can tend to inflate bond prices in the short term, but volatility in bonds tends to be lower than in common stock, so the concept works. It's important to note that your return may suffer, but that often is the cost of fear. In the world of green investing, this would mean moving from something with high volatility (and often a chance at higher returns) like Renewable Energy (like this for example) to lower volatility investments like Socially Responsible Bonds (like this for example). What's better than removing volatility? Removing volatility without sacraficing returns. That's what non correlated diversification is meant to do, and why it's the cornerstone to modern portfolio theory - invest in multiple non correlated asset types to increase returns and lower volatility. For green investing, we've made it simple and done the work for you (if you want more detail, don't hesitate to give us an email or call, or keep reading as it comes out).

Step 2: Understand the Consequences

Understanding the consequence of an investment is absolutely necessary for any informed investor. At the risk of proselytizing, informed investing can mean the difference of thousands, if not tens or hundreds of thousands, of dollars. Most retail and institutional investors don't have the time, expertise, or desire to fully research their investments. This is why investment professionals exist. And even though I think most investment professionals are concerned with their own bottom lines, I believe that the free exchange of information is absolutely necessary in understanding the consequences of an investment. In ther end, a well informed decision is the key to any strong investment portfolio, as well as risk management. To that end, unless you manage your own portfolio, find someone you can trust. I said it before in my Beginner's Guide to Green Investing, but investment professionals are there for a reason (myself included).

The second part falls on you: decide how much risk you are willing to take, and what consequences you can live with. My former mentor said it best: "Why take more risk than you need to get where you're going?" It's an excellent philosophy in general, and it gets to the heart of the issue: your comfort level. The best risk management is not to take any more risk than you can afford, or if you do, never go outside your comfort zone.

Green Investing and Risk Management

In many ways, Mr. Bernstein makes a compelling argument for green and social investing. I believe green investing and socially responsible investing fundamentally address mitigating risk by understanding the consequence of investment. I'm not one to trust what I'm told even with responsible investments, but investing in a sustainable way in responsible companies avoids many foreseeable consequences like subprime meltdowns or Enron debacles. That green and socially responsible investments often have some measure at least of social risk management built in works in its favor.

In practical terms, a simple socially responsible screen (the standards are tobacco and firearms screens) avoids some measure of litigation risk, as these industries tend to be highly litigious in nature. Litigation leeches profits and creates unnecessary strain on cash flows. It can also lead to unethical behavior internally or public outcry externally, both of which generally have negative consequences in the long term. Green investments often employ more stringent corporate standards (the "reap what you sow" effect), but even the very nature of their products tend to err on the responsibility. Environmental consequences are often intangible and difficult to ascribe values, however the writers at Environmental Economics do an awesome job at breaking it down. The truth is, change to environmental policy in this country has taken so long in part due to our indifference when there is no clear pricetag attached. Even if the negative consequence avoided is somewhat intangible, it is still avoided just the same. That said, there are a number of risks avoided when comparing non renewable energy to renewable energy. For instance, coal plants are forced to comply with government regulations for pollution output (though enforcement has been virtually non existent for the better part of this decade). This places a burden on the coal companies to either pay fines or install equipment, both of which come at cost to the investors in the long run. A wind turbine farm, on the other hand, faces far fewer regulation due to its exponentially less pollutants, and can profit where coal can't.

Whereas Step 2 is in many ways built in for green investors, Step 1 (volatility) is most definitely not. This is where investment professionals can be most helpful, but as a good starting point, see our last piece on asset allocation within green investing. And watch out for more as we continue with the Smug take on reducing green volatility.

For those of you looking for more personalized help, please feel free to email or call us. The advice is free, and I welcome the conversation. So be green and invest Smug!

ETFs for a Complete Green Portfolio

I just recently published an article for the most excellent Seeking Alpha, a contributor ezine for the consumate DIYers, (read the article here), and I wanted to follow up for my Smug readers with some more in depth analysis. The gist of the article deals with what I think the key to green investing (and investing in general) is: asset allocation. I spent the last three years in alternative investments (hedge funds, non traded REITs, limited partnerships, etc.), which, for the most part, are accredited investors only. The number one takeaway from my alternative experience was investing outside the box matters. The 60/40 stock/bond portfolio of yesteryear is so anachronistic, we at Smug practice post modern investing - we fashion ourselves as sort of the hipster punks of the investment world. Take one look at the Yale endowment fund (PDF file) and you'll realize what the smartest of the smart have known for a long time - the name of the game is correlation and risk. They only have a measly 7% in domestic equity! Forget the narrow view that the NYSE is the only player in the game, there is much more to your overall portfolio than that, green or otherwise. ETFs and ETNs have started to catch up and allow everyone, not just the super rich, in on the game.

As a green investor, the challenge is creating a total green portfolio. Now, this is still a bit of a dream, but if we stretch enough, it's not so crazy. How can we make a complete green portfolio? Here are some suggestions:

1.) Commodities are the base of your portfolio. There is a lot of "bubble" type press about commodities now, that commodities are overpriced. The Smug philosophy suggests otherwise. What has more worth: a resource that people need to live that is physical, or intangible stock in ANY company? For the green investor, this means water, waste and agriculture. Yes, we view waste as commodity. These are things that people can neither live without, nor can they help create it.

2.) Invest globally on a macro scale. This seems sort of contradictory, since investing locally is more important to sustainability than investing globally. That said, global index and currency investments, especially emerging markets that have eco reserve and low carbon output, offer low correlation returns and aren't depending on "traditional" investment theory.

3.) Real estate can be your friend. While green real estate is hard to come by, it does exists in small ways, especially if you're willing to do a tidbit of soul swallowing. The traded REIT and asset manager sphere has a few green players, but I'm very excited about some new non-traded green REITs that are worth watching. Real estate, especially the non traded vareity, adds a level of mental cool to the portfolio, and tend to offer fairly steady income yields. Don't be afraid of "subprime" in the commercial real estate realm (yet), real estate is essentially a commodity in limited supply and always has value in the long (sometimes very long) run.

4.) Don't invest in your father's bonds. Bonds have come a long way, and as we've detailed here and here, they can offer more low correlation returns in sustainable, responsible ways. I'm still waiting with bated breath for some green energy preferred shares - if anyone knows of any, please let me know, I'd love to incorporate them.

5.) Green energy and socially responsible funds are just pieces. They tend to be highly correlated to traditional S&P and NASDAQ type stocks, so don't overdo it. That said, no green portfolio is complete without green energy and technology. There are new great opportunities to watch with ETFs coming out almost daily, the new wind ETF (FAN), solar ETF (TAN), and carbon ETF (GRN), not to mention the mutual funds and ETFs Smug's already detailed (here and here).

6.) The most important thing: BE PATIENT. Creating a long term portfolio takes time and effort, but pays off. When the market bips and jumps and skitters, don't rush for the exits. It's important to keep your head, create a timeline, and be mindful that investing is a long term thing. Even Gordon Gekko, the henchman of corporate greed, said, "Don't get emotional about investing." That's true even in green investing - being responsible, sustainable, and green is smart investing, not emotional investing.

Not enough? How about we introduce the Smug Total Green General Portfolio:

Asset Category	%
Agriculture	15.00%
Bond	12.50%
Eco Reserve / Low Carbon	15.00%
Energy / Technology	20.00%
Real Estate	5.00%
Social / Diversity	10.00%
Waste / Recycling	10.00%
Water	12.50%
Portfolio Total:	100.00%

This should provide a good baseline for an average investor, though it by no means suggests it fits your individual profile. Please contact your financial adviser, or call me directly, if you're looking for specific advice pertaining to your situation. And as always, read the disclaimer to the right about reading the prospectus first.

Be smug, invest green.

Smug News and Question of the Day

I've just returned from a meeting with a great firm who deals primarily with financial and estate planning in which we decided to move my licenses over to their office so I can begin offering green investments (and other alternative investments) to accredited and non accredited investors alike. It's exciting for me to join them (Capital Analysts of New England, excellent broker dealer and excellent firm alike), but it got me wondering.

As we went over the details of bringing in new clients, it occurred to them that most of their current reps and clients would be disinterested in green investing, and only slightly interested in alternatives like REITs and hedge funds. The establishment seems to be pretty firmly entrenched in the "gentleman's portfolio" of 60% stock and 40% bonds in their investable assets.

It's clear that even as I wax poetic about green investing, why you should do it, and why it makes sense, the old guard of antipathy or just plain anti-green investors could really care less. Not to generalize, but it tends to be an older crowd with accrued wealth, tends to be white, and tends to be male.

So the question of the day is: why? Why not invest green? Is it volatility? Is it that there is a feeling that global warming is a myth? Or is it perceived as just another tech boom waiting for that bubble to pop? And if you don't invest green, what do you invest in?

Smug thoughts of the day.