This is a guest post by Brad Wright, who felt that my "Beginners"
series was a too high level to really live up to the name. He’s
probably right about that, so here is his effort to bring it down to basics for
the small Canadian investor. The links and section headers are
mine. Tom Konrad.
Motivation
The goal of this article is to assist with your future investments by
explaining investment options, how they work and potential alternatives that may
be of interest to you. The take away I’m looking for is with a little research
you can empower yourself to make more socially and environmentally responsible
investment decisions.
There are long term financial advantages to investors who identify and invest
in current and future clean and green companies. Recent developments in
technology and the world we live in have allowed opportunities for us to invest
in companies that can make a difference – and make a profit for themselves and
their shareholders. For most people, the stock market is a foreign concept, but
a little research can alleviate most concerns. Here are a couple of stories that
may help to see where we’re trying to go.
In a recent book I read, the author described this interesting story: He and
his friend ran into a ‘biker’ at a bar. The biker asked what they did for a
living. They replied that they were investors. The biker elaborated on how he
once received some advice on stocks, invested and lost all his money. The author
went on to say how this is such as typical notion of the stock market – people
get bad advice and lose their money. The author went on to say that the biker
should have purchased stock in a company that he actually knew something about
such as Harley Davidson. It turns out that assuming the biker had purchased
stock in Harley Davidson 5 years ago, his investment would have multiplied by 5
times.
Another example is my friend who went to speak to her registered retirement
savings plan (RRSP) manager. When she went in to discuss her investments, she
asked what the top 3 holdings of her portfolio were. The manager replied that he
didn’t know but that he could find out. A few minutes later he returned with
news – the top 3 companies were oil, diamond and uranium companies. Now, this
may be commonplace considering the resource extraction based economy known as
Canada. When you look at the companies that are listed on the Toronto Stock
Exchange the majority are mining companies. Anyways, my friend who is
environmentally conscious didn’t feel comfortable that she was investing in
these companies. The next question is how she can invest in companies that are
more inline with her ethics.
Investment Options
Well, first let’s just provide a quick overview of the investment options
that are out there. First off, there are bonds and GIC’s that are generally
fixed interest rates that may or not be locked in for long term investing. They
are generally around a 4% annual interest rate and can be held either inside or
outside of an RRSP.
The "Registered" part of RRSP means you have agreed with the
(Canadian) government that you will leave your money in the account and not take
it out until you retire. This is similar to a US 401(k) plan. The government in
turn does not tax you on those investments until you make a withdrawal. Now the
most common entities held within RRSP are mutual funds. A mutual fund is a
conglomeration of numerous companies (let’s say about 50) that the fund
invests in. These mutual funds are generally invested in larger companies and
may give personal rates of return of less than 0 to more than 20% per year,
depending on the volatility of your mutual fund. In general, it is assumed that
mutual funds provide a 10% annual rate of return. You can talk to your
investment manager and select conservative, balanced or aggressive mutual funds
depending on your situation, age and comfort with investing – or more
specifically, comfort with fluctuating annual rates of return. My last point
with RRSP’s and mutual funds is that they come with a manager who monitors and
adjusts the fund over time. They generally charge 2-3% per year for this
management.
An investment vehicle which takes a further step into the stock market is
called an exchange traded fund (ETF). It is identical to a mutual fund in that
there are normally 50 to 100 companies you can invest in. The differences are
that you purchase the ETF like you would for a stock, not just sign some papers
that your investment manager gives you for a mutual fund. Also, the management
fee is less, usually less than 1%. Finally, some have said that the advantages
of ETF’s are that they are actively traded when the markets are open while
mutual funds are adjusted when the markets are closed. The advantage is that the
ETF may get better deals during the day. The disadvantage of ETF’s could be
that they are more closely linked to the stock market and may depreciate more
when the market is doing poorly. [Note: You can find a list
of the available Clean Energy ETFs here, and a discussion of the relative merits
of each ETF here.]
The final investment vehicle is buying stock from one company at a time. When
you do this, the only fee is to a broker, either in person, over the phone or
over the internet. In person and over the phone is generally $50 to $100 to buy
or sell stocks, whereas competition on the internet lowers these broker fees to
the $10-$30 range. With respect to fees, the advantage of stocks, especially if
they are held for 5-10 years is that you may have to pay a total of $100 to buy
and sell a stock, you don’t pay a 3% management fee over that time period. For
example, with $10,000 in RRSP’s over a 5 year period with a management fee of
3% would cost you $1500!
Investment Goals
So, that is a summary of common investment vehicles. [Note: this series
also discussed the choice
between stocks, mutual funds, and ETFs in Part I.] Other factors that
you need to consider when investing are: what are you saving for, how much can
you save or allocate, and how comfortable are you with risk?
So the next couple paragraphs will deal with steps to help you move away from
investing in oil, diamond and uranium companies.
It just so happens that the first step is to say, hey, what if I just invest
in the best or most environmentally or socially responsible oil, diamond and
uranium companies. Well, you can.
The first step towards making more ethical investment decisions is
researching and finding more ‘ethical’ mutual funds. Some mutual funds use
social, economic and environmental criteria to select companies for their fund.
For example, ethical mutual fund companies are quite similar to Environment
Canada’s EcoLogo program (which is an environmental criteria program which
provides its logo on approved products, for example, green cleaning products) in
which the top 20% best performing companies that meet the criteria are selected
for the fund. For example, most ethical mutual funds invest in PetroCanada,
Royal Bank and Research in Motion. It just so happens that these are some of the
largest companies in Canada, so first, your investments are relatively safe, and
second, you will likely have a good rate of return.
With exchange traded funds, the exact same principles apply. For example, the
Jantzi social index (JSI)is
traded on the Toronto Stock Exchange and invests in companies like Royal Bank,
PetroCanada and Research in Motion. Also interesting, if you visit the Jantzi
website, they list companies that are included in the ETF and mention
companies that were kicked off the list because of bad company practices such as
buying-out other companies with poor performance. The issue with Canadian ETF’s
is that there are very few or are relatively new. For example, the Jantzi social
index just came out this summer.
What I find problematic of both ethical mutual funds and socially responsible
exchange traded funds is that they still invest in large companies. Large
companies in every industry sector, even sectors that you may not want to invest
in such as oil and gas exploration. These investment vehicles need to provide
investors with a sense of security and competitive rates of return compared to
the traditional investment types. So for most people, these options are
definitely a step in the right direction.
Finding Companies You Believe In
There is one final option where you can invest directly in an organization
that you believe in, such as buying stock in an individual company. This is
where, with a little research you can find an organization doing interesting
things that you can truly get behind. The reason more people don’t do this is
because of the word diversification. Most are not willing to invest in one
organization or one industry sector. If you are a small investor (< $10,000),
most experts say that you are unable to diversify your portfolio enough and you
are at greater risk when there are fluctuations in the stock market. This is why
many like the idea of mutual funds or ETF’s – the work is done for you, and
you don’t really have to worry.
But what if you did a little work, what’s the advantage, what would you
need to do and what could you find out? The best place to start is the Toronto
Stock Exchange. There are lots of companies in many different industry sectors.
Here are a few industry sectors that might be of interest to you:
- Wind
power - Solar
power - Small hydro
power - Cogeneration (usually natural gas that supplies energy and heat)
- Energy
efficiency and industry optimization - Organic food
- Solar and wind power conversion technology
- Wind
turbine manufacturing - Hydrogen
fuel
cells - Ethanol
production
This is just an initial list of the types of industries where there are
Canadian companies that are publicly traded on the Toronto Stock Exchange.
Personally, I was originally interested in wind, solar and hydro power, but
realized that I needed to diversify from the renewable energy field. For
example, what if the Canadian government decided not to give tax incentives to
the renewable energy industry or what if oil prices drastically reduced? What
would be the repercussions to a stock portfolio based on just renewable energy
companies? You could take the chance, but it would probably be best to
diversify. Therefore, although the above list is mostly renewable energy fields,
organic food or energy efficiency and other industry sectors could add to your
portfolio. Also, there are likely many socially responsible companies in other
industry sectors that I have not listed above.
Risk and Reward
Now the risk here is that the majority of companies in these industry sectors
are small, new or not making any money. Most invest in companies that are large
cap or blue chip companies (i.e., Microsoft, Apple, Google, etc.,) – these are
generally large companies. There are really three types of companies on stock
exchanges – large, mid and small cap. The word cap means market capitalization
and it is calculated by multiplying the price of the stock by the number of
shares that are available to be purchased. Large cap companies are generally
over 1 billion dollars, medium cap range from several hundred million dollars to
1 billion dollars, and small cap are generally less than 500 million.
Most stock investors like the idea of small cap companies because of growth
and that they could be the next Microsoft company. Also, once companies such as
Research in Motion mature, there is less growth over time. However, most people
shy away from small cap companies since there is more risk involved.
My answer to this is that depending on your age you are able to allow for
more risk because if you do lose your money you can still make it back over
time. For example, most retired people are very conservative with their
investments since they are dependent on those savings. Also, as I’ve mentioned
previously, with the world we live in and the rate of developing technologies it’s
possibly a very good time to risk investing in clean and green companies.
So where do you start looking? I started with internet searches. I find
companies that sound interesting or have a neat product and I check to see if
they are publicly traded. You can also order investment magazine subscriptions
or find investment advice websites.
These interesting companies that I look at are ones that are providing a new
product or is in a new field, has a market advantage, has a vision for the
future and is generally making the world greener or cleaner with their work. In
additional it’s good to see the experience of their board of directors,
overall financials, and the outlook for the industry, etc.
So I hope this has helped provide some insight into the crazy field of
investing. There are some interesting companies out there. It is easy to find
out what is going on and see for yourself what you think that your hard earned
dollars should be invested in. After all, these companies use your money
invested in stock to do things like build solar panel plants or buy land to
build wind farms. Wouldn’t it be great if you could invest in a company that
was doing good things for the planet while making you some money? Sounds crazy,
but it just might work. Maybe I’m optimistic, or maybe I just want to be smart
with my investments.
Brad Wright holds an Environmental Science degree from the University of
Guelph and a Masters of Environmental Planning from the University of Waterloo.
He is currently a municipal stormwater planner and has an interest in
sustainability issues. He has been researching and investing in green
companies for the past three years.
