Rebalancing your financial portfolio on a regular basis is a fundamental part of maintaining a sound investment strategy. It is essential for investors and advisors to periodically assess whether their asset allocation strikes the right balance of risk versus return and, if it doesn't, to adjust accordingly.
That said, rebalancing isn't just for periodic care and feeding of a portfolio. It can also be an opportunity for investors to reassess priorities and realign their asset allocation to help them reach a different set of goals as their priorities evolve. One increasingly common imperative that investors are considering in their investment allocations is a desire to do something about climate change.
Working with retail investors, I've noticed that a growing number see the latest news of global climate change and feel the urge to incorporate this into their approach as to where to invest their money. These investors may have already made changes in their daily lives to reduce their carbon footprints and are now seeking ways to use their investment dollars to further emphasize these efforts.
Of course, most investors still want to put their money into vehicles that help them achieve their long-term financial goals, as well. They also want to ensure their investments are protected in economic downturns. And increasingly, investors are finding that investments in sustainable infrastructure are a good way to help them achieve these goals.
Green Energy For Diversification And Income
Diversification is a well-known technique that advisors and investors use to reduce risk by allocating investments so that a portfolio is not too exposed to one particular asset or liability. The technique aims to maximize returns by investing in different areas that would react differently to the same event.
Like other non-correlated assets, investments in solar and wind farms and other types of sustainable energy infrastructure can fulfill a diversifying role in a portfolio because their performance is generally not impacted by the ups and downs of public markets. These sustainable assets typically sell the power they generate to public utilities, established businesses or municipalities via long-term contracts, and with that comes steady recurring revenue.
As such, investments in these assets are often seen as somewhat insulated from many of the negative external shocks that other asset classes are vulnerable to. Power will continue to flow, and revenue continue to be generated despite fluctuations in the markets.
An 'Alternative' To Real Estate
One might think there is already an asset class investors look to as an alternative investment that offers diversification, cash flow and insulation from public-market volatility: real estate. As investment vehicles, solar and wind farms indeed have some of the same characteristics as real estate — they are real assets that can produce steady income over a long operating life.
But with the possibility of a recession looming after 11 years of economic expansion, the real estate market may be poised for a correction. In such a scenario, investors who have invested heavily in real estate may find that the holdings they counted on to mitigate their losses in a down economy may also lose value if and when a downturn occurs. At the very least, investors should consider the possibility that new investments in the real estate market may not be as profitable as those made at the beginning of the cycle.
Green energy is not recession proof. However, it will likely experience significant secular expansion in the next several decades as energy demand around the world grows and the economics of sustainable power generation become more favorable. A report by BloombergNEF estimated that by 2050 solar and wind will make up 48% of global power generation, up from just 7% in 2019.
To be sure, green infrastructure investment carries some risks that are similar to those seen in real estate. For one, solar and wind farms are vulnerable to the elements and to natural disasters, which can either limit their uptime or take them offline for extended periods of time. So, monitoring and maintenance programs, as well as appropriate insurance coverage, are required.
Test The Waters
Rebalancing is a natural time for investors to assess whether their portfolios are overly weighted toward a particular asset or asset class, potentially leaving them exposed to big downside risks if those assets don't perform to expectations. Beyond this baseline level of periodic maintenance, though, rebalancing also offers a chance to gain exposure to assets that fulfill a broader purpose, while still checking criteria that investors would ordinarily use to evaluate the soundness of any investment. Sustainable infrastructure can fill this niche for investors, particularly those who have been asking themselves what they can do in their own way to address global climate change.
This article originally appeared on Forbes.
