Reduce risk in your portfolio by skipping solar penny stocks and avoid these pitfalls of some alternative energy investments

Solar power has attracted a lot of investment in recent years. That has quickly moved the technology forward. For example, advances in manufacturing techniques continue to steadily push down the prices of solar cells and solar panels.

At the same time, alternatives to costly silicon, which is currently used in most solar cells, are emerging. Technological advances add considerably to the risk of solar power companies that are solely focused on developing or making a single technology. That’s because they constantly risk being overtaken by competitors with a superior product. This is especially true with solar penny stocks. As well, customers may hold off purchasing their solar equipment if they believe a new technology is about to emerge.

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Solar energy has been used to warm buildings for thousands of years by combining building materials that absorb and slowly release the sun’s heat. Design features, like large, sun-facing windows, have also been used.

New solar technologies use the sun to heat water, provide daytime lighting and generate electricity. Many people already own a solar-powered device—a solar-powered calculator, for example. Modern solar cells with practical uses were invented in the early 1950s, and have been used to power satellites since 1958. Solar panels began to be used for general applications in the mid-1970s, mostly for remote telecommunications, navigational aids and other rugged, remote industrial uses. Since the mid-1980s, they have powered devices that work in more urban settings such as roadside emergency telephones and traffic sign boards.

Uncertain future for government subsidies adds to risk

Wind power, solar power and other alternative energy sources have a lot of conceptual and emotional appeal as clean, renewable and environmentally friendly power sources.

However, while the technologies do have real prospects for contributing to power needs, they generally offer limited investment potential.

They may attract a lot of investor interest and go through flurries of speculation that can drive up share prices, at least temporarily. But many smaller companies have yet to generate the return on capital that you need for a profitable long-term investment.

That’s why we don’t recommend stocks that operate purely in the area of alternative energy.

Concentrating on wind and solar power, in particular, adds risk because these industries rely on uncertain government subsidies. Some alternative energy companies sell virtually all of their electricity under long-term government-guaranteed contracts. However, governments do sometimes change the terms of “guaranteed” contracts, or tax away some of the provider’s profits.

Many of these subsidies seem likely to continue, at least for now, in China, Japan and the U.S. They help fuel demand from utilities for large-scale solar plants. However, subsidies are losing support in many countries. Meanwhile, low prices for oil, natural gas and coal make solar power less cost-competitive.

Don’t invest in solar penny stocks. Here’s why:

The reason why people invest in solar power companies is obvious—a pure source of clean, endlessly renewable energy that can replace fossil fuels like oil, coal and natural gas sounds like a great investment.

Solar power stocks are very tempting to environmentally minded investors. The idea of making money while helping the environment is noble, but it shouldn’t distract you from your core financial goals. After all, if you don’t care if you lose the money, you might as well donate it to an environmental charity and get a tax receipt for it.

Like many alternative energy sources, solar power has vast potential—but also risk to match:

• Reliance on government subsidies
• Competition from alternative power sources
• Rapidly changing technology

We recommend that investors take special care when investing in solar energy.

Stop risking your portfolio with speculative solar penny stocks

Speculative investments are higher-risk stocks with uncertain prospects. They are far riskier than what we call aggressive stocks—stocks with sound prospects, but that have added risk in their industry or particular situation. They also typically don’t have the secure hold on the growing or at least stable clientele that conservative stocks have.

Speculative stocks may offer significant returns to investors, but they will also have risk to match. High-risk, high-reward investors are typically drawn to speculative stocks.

Use our three-part Successful Investor approach for picking safer energy stock picks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What would you recommend to investors interested in solar and alternative energy stocks?