Precautions Before You Green-Up Your Investments

Todd Walker, Greenvest

With all the talk of divestment in the air, many investors are looking to rid themselves of investments in fossil fuel companies – or other socially offensive firms – and switch to greener companies such as clean energy.

But before you sell everything at once to go green, it’s important to avoid some possible costly consequences. In fact, before you make wholesale changes to any investment portfolio – green or not – you should always consider these factors:

Taxes. Gains on securities are subject to capital gains taxes of up to 23.8% (including the Net Investment Income Tax), if they have been held for more than one year. (Gains on those held less than a year are taxed at ordinary income tax rates.) So, instead of selling in one swoop, you may want to sell appreciated securities over several years to mitigate capital gains taxes. Another tactic is to use any security losses to reduce or eliminate gains. One thing many people don’t realize until too late is that on securities that are given to you when the donor is alive you usually assume the original “cost basis” of those securities. In other words, the original purchase price of the securities is used in calculating the tax. So, before you sell a bunch of securities given to you by your parents/grandparents during their lives, you should understand your cost basis to avoid a potentially huge tax hit. Securities inherited from a will follow different rules, and typically there are no gains taxes on sales in a qualified retirement plan such as an IRA. The best idea is to always consult your accountant before selling or buying securities if you are uncertain of the IRS rules.

Change in Asset Allocation. Proper Asset Allocation is vital to long-term performance, which is why investment professionals diversify portfolios into certain percentages of large company stocks, small-company stocks, bonds, etc. So when you green up your portfolio you need to keep your recommended asset allocation in sight. Consider, for example, that selling big oil stocks (large company) and reinvesting in alternative energy stocks (usually small companies) could add some investment risk to your portfolio since small stocks tend to be more volatile. Still could be a sound idea, but you need to keep your mix and risk in mind.

Loss of Dividend Income. Are you depending on a portfolio for income? Then something else to consider is that selling high-dividend “non-social” stocks such as oil companies, utilities and tobacco/alcohol may reduce your dividend income unless you replace them with greener income alternatives, such as clean energy power producers, real estate investment trusts, socially-screened preferred stocks and bonds and more.

Timing. The latest market environment is another factor to think about. Is this the best time to sell/buy various types of securities? For example, those who sold everything in 2008 now regret it, since the market has more than recovered since then. Or you may want to avoid some overvalued sectors right now. Or a major election or tax law change is just ahead. The point is that you should not ignore what’s going on in the economy/marketplace before you act.

Fees. Depending on the type of investment account you own, what it costs to realign your portfolio might also be a consideration. While transaction costs may be low in a fee-based account (where commissions are waived in lieu of an annual management fee), in a commission account your costs may be 2-5% on both sales and purchases. One solution to this is to convert to a fee-based account before you green up.

Research. Finally, it goes without saying that both security sales and purchases should be carefully researched before proceeding. If you are dedicated to investing with your values, this requires both economic and social screening. It’s important to invest with your heart, but as with most things in life, let the head have a say, too.

So, as you divest, divest intelligently! Whether you invest on your own or use a financial advisor, make sure to include all these critical steps as part of any portfolio realignment.

That way you won’t unnecessarily lose green … as you go green!

Todd Walker is a Financial Advisor and Cofounder of Greenvest, a Vermont-based personal financial advisory firm specializing in socially and environmentally responsible investing. Securities offered through Vanderbilt Securities, LLC, member, FINRA, SIPC, registered with MSRB. Advisory Services offered through Vanderbilt Advisory Services, LLC. Clearing Agent: Fidelity Clearing & Custody Solutions. Supervising Office: 55 Main St, Suite 415, Newmarket, NH 03857 (603) 659-7626.