Monday, October 8, 2007

Random Walk Down Green Investment Street

I don't agree with everything Burton G. Malkiel has to say. For example, he believes in efficient market theory - the idea that at any given time the market is determining a sensible price for any given stock.

In other words, whatever news or information there is available on a stock is already priced into that stock by the market.

This is clearly a bunch of crap.

With all due respect to Professor Burt, the "strong form efficiency" model (i.e. that share prices reflect ALL information and no one can outperform the broad markets) would fail to explain about 90% of what I see happening in the markets on any given day.

And there are boatloads of analysts smarter than I who would agree.

Where Malkiel Is Getting It Right

However, I do agree with one of Malkiel's most persistent ideas: For most investors, it makes better sense to put your money into an index fund and park it there for the long term, rather than pick individual stocks.

Hell, less than 20% of professional money managers beat their indexes on a yearly basis. That tells you something right there.

Malkiel's major point is that funds provide instant diversification, and therefore lower your downside risk the moment you add them to your portfolio.

4 Advantages to Green Investing through Index Funds

The other advantages he cites in his excellent book The Random Walk Guide to Investing are:

1) Index funds simplify investing... Like the sector or the index? Buy the fund.

2) They're cost efficient... because many offer low or no expense charges and most index funds do little trading

3) They're predictable... You know you'll at least keep up with the index's model portfolio

4) They're tax efficient... By owning index funds that don't trade from security to security, you can avoid taxable gains

Of course my point here is that sustainable investors should consider adding at least one good index fund to their portfolio.

Our Powershares Cleantech Portfolio ETF (PZD) would be a perfect example. Not only does it give you broad exposure to this exploding clean tech sector in one investment... it lowers your overall portfolio risk in the process.

A great one-two punch, and further proof that you can invest sustainably, and prudently at the same time.

Our next recommendation could be even further along these lines... including a possible hedge or zero-downside play as the markets continue into a period of slow growth and volatility.

Good investing,


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