Investing in alternative energies, or “green energy” may seem like the only bright spot on the investment horizon. As stories circulate about peak oil and the prospect of running out of fossil fuel, alternative energy investing seems to make good sense. But here are a few things you need to consider before converting your entire portfolio into alternative fuels.
The wind and solar energy industry is still relatively young and capital-intensive. A lot of research and development is still necessary create products and delivery systems that will be affordable to consumers. When researching new companies to invest in, it’s important to determine whether or not they are sufficiently capitalized for the long term. Many new alternative energy companies were started within the past few years in response to the high cost of oil But as oil prices decline to more affordable levels, the demand for alternative energy softens, and some of these newer alternative energy companies are finding themselves with cash flow problems.
This means that due diligence before investing is just as important in the alternative fuel sector as it is in any other sector. Recently there seems to have been a misconception that any stock that was “alternative” or “green” was a sure winner. That’s simply not true. A strong balance sheet and healthy cash flow is as important as ever. Maybe more so, due to the volatility in the energy markets right now and for the next few decades.
It also makes good business sense to remember that most alternative energy companies are start-ups without long tracks records of success. That simply means that they are inherently higher-risk than established companies, no matter how attractive the thought of “green” energy may be. So treat them as you would any higher-risk growth stocks in terms of our overall portfolio strategy.
A good way to invest in alterative fuels if you are philosophically motivated in that direction, yet sill mitigate some of the risk is to invest in established energy companies that are expanding into the alternative fuels sector. Although the thought of investing in one of the major oil companies may not appear to be very “green” on the surface, the fact is that they are actively participating in the research and development of alternative fuels as well. So finding the existing energy companies that are putting the most effort and resources into providing viable alternatives in the near future may be the smartest way to safely invest in alternative fuels right now.
Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at http://www.Invesmint.com.
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