How to invest sustainably

In the past few months, I’ve been thinking heavily about investing for retirement. I’ve never had a job with a 401(k) or retirement plan, so my retirement planning has been entirely on my shoulders. Unfortunately, for a long time that meant no retirement planning. Once my business stabilized a little and we got more important stuff (like health insurance) squared away, I decided that it was time to take my future into my own hands. I opened a Roth IRA and bought a couple of low-cost index funds. According to my research, that was the best approach for a casual investor since it represents a bet on the future of the entire market rather than on the future of a particular company.

The moral drawback is that I’m investing in companies I disagree with, like RJR and Exxon. The mechanical drawback is that our economy can’t sustain the kind of market growth we’ve seen in the past (at least, not without also causing the kind of market crash we’re seeing now). The alternative is sustainable investing.

Sustainable investing has two parts: investins in sustainable organizations and investing in a sustainable way. Sustainable organizations have both sustainable products and sustainable business practices. Obviously, drilling for oil isn’t sustainable because eventually there won’t be any more oil. Problematic business practices are often harder to figure out, but just ask yourself if it could work forever. For example, outsourcing to developing countries for cheap labor isn’t sustainable because eventually prices will increase. On the other hand, supporting a living wage is a sustainable business practice because it can be supported indefinitely (and, as Henry Ford realized, it can help create or expand a market for your product).

Investing in a sustainable way requires treating your money the same way that you’d treate any non-renewable resource. This means taking a long-term view and focusing on growth. Money primarily grows through compound interest, so you want to avoid touching your nest egg as much as possible.

As long as you like your local credit union, the easiest way to invest sustainably is to put your money into a savings account or certificate of deposit (CD). It’s not risky, which means that your principal is safe, allowing you to treat the interest as a renewable resource (think of it as tree farming). This money will also go to work in your community by supporting local businesses and individuals through bank loans.

Unfortunately, saving account and CD rates are currently at an all-time low. The best rate I can find locally is about 2.5%, which is less than inflation. Once the economy picks up, so should rates, but this means that CDs probably aren’t the best investment choice right now.

The two other big options are stocks and bonds. Although they have their own problems, I’ll talk you through the basics of investing sustainably using both in the next couple of articles.

The  second part, on investing sustainably in bonds, is now up!

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Can compound interest save the evironment?

A stock graph bursting out from green paperThe site was down for a while this evening, so Maggie didn’t have a chance to post anything before she went to bed. In lieu of a real post, I’ll leave you with something I’ve been thinking about today. A lot of people feel like it isn’t worth changing their lifestyle because they’re just an individual, so they can’t make a real difference. Think about where we’d be if an individual could make an immediate and obvious difference, though. That world would be in terrible trouble if it was at a point where one person’s additional greenhouse gases or electrical use would be enough to plunge the world into chaos.

Wouldn’t you rather be where we are now, where you don’t have to make a huge difference to do some good?

It reminds me of compound interest. When you hear about Adam who invests $12k and lets it sit for 30 years versus Bob who invests $100 a month for 30 years, the obvious winner seems to be Bob. After all, Bob put three times as much money in as Adam, so he made a much bigger difference, right? Sure, if you’re talking effort. But if you’re talking results, Adam is the real mover and shaker here. His initial $12k is worth over $300k, while Bob’s take is half that even though he put in more money!

If you wait until change is forced on you, you’ll have no choice but to make a huge difference (or die off). But, if you start making little changes now, you’ll make it so that you won’t have to be a super-sacrificing Bob.

Call it the compound interest theory of sustainability.

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Learning About Mortgages

Coin TowerWill and I went to talk to a mortgage broker today at Lotus Mortgage. We’re starting to get serious about buying a house and we figured our next step was finding out if we even qualify for a loan. It turns out that we do, which is very reassuring. We don’t make a lot of money but we have really good credit (the broker told me I have the highest credit score he’s every seen for someone under 40) and we have quite a bit of money in savings – at least as a percentage of our income.

I felt really good hearing that we’re doing all the right things financially but really bad hearing that there are a lot of people out there – of all income levels – who are not doing it right. It is very scary to me that there are people making six figures who have less money in the bank than we do. It’s especially scary as I start to hear more about increasing foreclosures and an impending recession and people being abruptly reminded that credit is not a source of free money.

I think part of the reason we’re doing well financially is that we put a lot of effort into living sustainably and in accordance with our values.  (Part of it is also an ingrained terror of debt.)  We have a strong set of goals we’re working towards and we spend (and save) our money accordingly.  It’s frustrating sometimes and a lot of times I struggle to identify my next goal but in general it keeps me going in the right direction.  I’ve also learned that not buying something very rarely makes me unhappy.  There are moments when I think “If only I had enough money to buy a fancy compost tumbler!” but they honestly don’t last that long.  And those times when I do spend $50 on something I thought I desperately wanted, I generally lose interest within a couple of weeks.

I believe a house will be a satisfying purchase.  Will and I are still debating about some of the details like which house and what features are we looking for but I’m sure we’ll figure it out eventually.  Or perhaps we’ll buy one of those charming country homes with a 1200 square foot detached garage and one of us can just live there.

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Globalization is Green

Sorry for the late post, but time and migraines wait for no man.

The Undercover Economist by Tim HarfordI’ve stolen this counterintuitive title from a section in Tim Harford’s interesting economic book (and who thought that phrase would ever be used?), The Undercover Economist. The book as a whole is a great overview of economic thinking applied to a variety of topics, from finding a good used car to pricing coffee. Near the end, Harford attempts to debunk the idea that trade protectionism prevents globalization from damaging the environment.  I find most of his arguments very persuasive, although there might be more arguments against globalization that he doesn’t cover. Hardford identifies three main anti-globalization arguments: a “race to the bottom,” transportation costs, and the idea that economic growth inherently hurts the planet.

In a “race to the bottom” view, globalization encourages production in countries that have lax environmental laws. To promote production in their countries, poor areas of the world would weaken their environmental laws, leading to no environmental protection at all. Harford argues against this on multiple fronts. First, he points out that the vast majority of trade is between rich countries with similar environmental standards. Harford also notes that many of the strategies with the most environmental impact, like energy efficiency, also save money (the same is true on an individual level!). In addition to arguing theory, Harford looks at the numbers behind the claim and find that companies are much more likely to invest in polluting industries in rich countries than in poor ones. This counterintuitive claim makes sense when you realize that the most polluting industries, like Harford’s example of bulk chemical processing, require infrastructure like roads that poor countries just don’t have. Finally, Harford looks at two competing situations: the increase in China’s air quality as foreign investments increased and the increase in environmental problems (high-yeild farming, primarily) caused by protectionist agricultural policies around the world.

Even if a race to the bottom isn’t likely to happen, it’s obviously true that transportation costs are high when buying overseas. Harford agrees, but points out that the transport costs of moving a CD player from Osaka to LA is less than that of moving it from LA to Arizona. Of course, buying locally is better yet, but even then there’s the possibility that the transportation costs are very high. To combat the environmental effects of transport, Harford suggests, as he does throughout the book, that a direct cost on externalities like air pollution caused by travel make the most sense. That way, the final cost of the item will give you a direct idea of how much environmental damage it’s done, whether it originated in LA or in Osaka.

Finally, Hardford takes on the claim that globalization leads to damaging environmental growth. For the poorest countries, the environmental problems they face, things like pollution from wood-burning stoves and unsafe drinking water, can be alleviated or eliminated with trade. Developing countries do have increasing environmental issues, but Harford brings up the moral dilemma that this creates: to reduce their environmental impact, we have to keep nations poor, which leads to preventable deaths by the problems poor countries face. Once again, Harford’s solution is a tax on externalities like the US tax on sulfur emissions. This would make cleaner technology even more attractive to developing nations, helping them leapfrog the environmentally worst stages of a developing economy.

Although Harford’s last claim seems the most dubious, I’m willing to grant that it’s better to figure out ways to encourage green economic production than to keep countries from developing at all.

So maybe globalization can be green after all. What do you think?

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