Best stock to invest in – Should I Sell My Mutual Fund To Go Solar?

Best stock to invest in

by Tom Konrad Ph.D., CFA

An enthusiastic solar volunteer recently asked me: “What
can I invest in to prepare for the next financial crisis?”

The situation made the question deeply ironic. The woman asking
me was trying to help people invest in solar systems through
Solarize, a nonprofit, community-sponsored group buying and
discount program. Our town of Marbletown, New York and the
neighboring towns of Rochester and Olive have just launched Solarize Rondout Valley, a campaign open to
residential and commercial building owners in Ulster County.

Solarize campaigns are designed to make it easier and cheaper to
go solar. While defensive stock market investments are my
specialty, I can’t think of a single financial investment that
combines the expected high returns and relatively low risk of a
home solar system. 

Just like buying value stocks when they are cheap, buying your
solar system at a discount through Solarize
or a similar program only increases the expected returns while
lowering the risk. Solarize Rondout Valley offers a 14
percent discount compared to installers’ standard prices. The
installers can afford this discount because volunteers help them
reach new customers.

Customer acquisition costs make up nearly
17 percent
 of the cost of a typical home solar system.
The customers benefit because it boosts their returns. Even New
York state and the federal government benefit, because lower
prices reduce the size of tax credits, which are currently 25
percent and 30 percent of the purchase price of the solar system,
respectively (capped at $5,000 for the state credit).

It turned out that my fellow volunteer had a roof she thought
would be great for solar, but was hesitant about signing up
herself. I told her solar was one of the best investments I know
of for a financial crisis, because it will still be generating the
same amount of electricity and savings, no matter what the markets
do. And I asked her what sort of payback she thought she was
getting from her mutual funds.

Two minutes later, she was our next signup for a free home solar

If you finish this article, live in Ulster County and own a home
without solar, I’m betting you will be our next registrant. But
even if you don’t have a Solarize campaign going on near you, this
article should give you the tools you need to evaluate any
installer’s bid as a financial investment.

Investment criteria

When considering any investment, most professional investors
focus on these criteria:

 1.    Expected
return, or how much you expect to make on your investment.

 2.    Risk, which
has two components:

 a)    The
likelihood of things going wrong

 b)    The
expected losses if things go wrong

Liquidity/cash flow: Can you get your money back when you need it?

Many professional investors, including myself, also focus on the
moral aspect of our investments, but I will not focus on that
variable here. If you think it’s important to promote your local
economy or reduce carbon emissions, it’s clear to just about
everyone that a home solar installation is the best choice. The
financial comparison is a lot less readily discernible, so that is
what I will focus on here.

A note on mutual funds

There are more mutual funds than anyone can count, so, for
simplicity, I will focus on two that readers are most likely to
own. According to Investopedia, the two biggest mutual funds this
year are the Vanguard 500 Index Fund Admiral Shares (VFIAX) and
Fidelity Government Cash Reserves (FDRXX). These funds hold more
investor money than any other mutual funds. Even if you do not own
either of these funds, most investors own something similar.

VFIAX is a stock market index fund, designed to mimic the return
of buying a proportionate share of the entire market. For the
purposes of this analysis, most funds that contain the words
“stock market index” in their name will have substantially similar
investment characteristics. If it makes sense for you to sell
VFIAX to invest in home solar, it will make sense to sell any of
these other stock market index funds for the same reasons.

FDRXX is a money market fund, and almost every investor owns
some money market or short-term bond fund in their portfolio. If
it makes sense for you to sell FDRXX to invest in home solar, it
will make sense to sell any of these other money market or short
term bond funds for the same purpose.

Example home solar installations

The economics of home solar vary widely depending on local and
state incentives, future local electricity prices, installation
cost, local climate and the angle and degree of shading of your
roof. In my experience, a reputable local installer is likely to
give you reliable estimates for all of these except for future
electricity prices. 

As examples, I will use two fairly typical installations using
prices from Solarize Rondout Valley. The first system is a
best-case scenario, installed on a house with a large, open
section of roof with moderate tilt oriented at least a little
south and with limited shading. A 5-kilowatt installation using 18
panels and 320 square feet of roof space will cost $3 per watt
($15,000) before state and federal tax incentives at the
discounted Solarize price. The New York state tax incentive is 25
percent of installation cost up to $5,000, while the federal
Investment Tax Credit is 30 percent, so the net cost after
incentives for this installation will be $6,750. Because of the
orientation and limited shading, this array will produce about
1,300 kilowatt-hours per year, per installed kilowatt (6,500
kilowatt-hours total) in Ulster County. Call this System A.

On the other end of the spectrum, consider a 7-kilowatt array on
two sides of a building with the panels facing due east and west,
and with some shading. The customer has high electricity usage and
wants to get as much production out of the given roof space as
possible, and so opts to use 19 of SunPower’s (SPWR) highly efficient 360-watt AC panels
using only 340 square feet of roof space. Each of these panels has
its own microinverter to best handle the shading. While this
installation will probably still produce 7,000 kilowatt-hours per
year (1,000 kilowatt-hours per year, per installed kilowatt)
despite the less-than-optimal conditions, the premium SunPower
panels will cost $4 per watt, or $28,000 before tax incentives.
After tax, the system will cost $14,600. Call this System B.

To find out the financial returns, we also have to make
assumptions about the price of electricity saved. I will use 14
cents per kilowatt-hour, increasing at a rate of 1 percent for the
next 25 years. This is more conservative than most installers’
assumptions of annual electricity price increases of 3 percent or
more, but I find it pays to be conservative when making investment


With these assumptions, we can use an online return calculator
such as PVCalc.
Below are the assumptions for System A, as I entered them into


I assumed a 25-year life, 1,300 kilowatt-hours produced and
skipped the “own consumption,” as well as “feed-in tariffs” and
“tax” sections — which do not apply in New York state. Setup cost
is the cost per kilowatt after tax incentives ($6,750 for 5
kilowatts), and financing is 100 percent the customer’s funds,
because we are considering selling a mutual fund to pay for the

(Note that the euro ‘€’ symbol is displayed by default
in this European calculator under levelized cost, even though
the levelized energy cost displayed is actually $0.076, not

PVCalc gives the following results for System A.


I think the most useful factors here are “levelized energy cost”
and internal rate of return (IRR). 

The levelized energy cost of 7.6 cents per kilowatt-hour is far
below the price we pay for retail electricity in New York. IRR is
a financial measure that allows us to compare the system on an
apples-to-apples basis with fixed price investments that bear
interest, such as CDs, bonds and money market funds like FDRXX. An
IRR of 12.7 percent is a better return by far than you can find on
any investment available to the retail public.

The economics of System B are less attractive because we’re
paying for an additional panel and more expensive panels in order
to produce only a little more electricity than System A on a
suboptimal roof.

Still, System B may be a better bet than many mutual funds. Here
are the results from PVCalc.


You will note that the levelized energy cost is close to
break-even at 14.9 cents compared to the 14 cents, plus the 1
percent annual increase I used for this scenario. That said, the
IRR is 4.3 percent, meaning that it is still worth considering
selling a money market mutual fund like FDRXX to buy this system.
FDRXX has a yield of just 0.1 percent. So as long as the risks and
limited liquidity of a home solar system (discussed below) are
acceptable to you, it will make financial sense to sell a money
market mutual fund like FDRXX to buy System B.

It is more difficult to gauge the expected return of a stock
market mutual fund like VFIAX, but over 25 years, it is possible
to come up with some reasonable estimates. Since we are looking at
a 25-year life of the solar system, we should consider a similar
time period for our mutual funds. Historically, long-term stock
market returns have been driven by the valuation of the stock
market at the beginning of the period. One widely used valuation
measure is Robert Shiller’s cyclically adjusted price-to-earnings
ratio (CAPE). The CAPE is currently high by historical standards,
meaning that stock market and VFIAX returns for the next 25 years
are likely to be below par. 

Extremely long-term stock market returns have been in the 9
percent to 10 percent range, but a CAPE this high has usually
preceded long periods where returns have much lower, like in 1929
and 1966. The CAPE was even higher in 2000, and stock market
annual returns have been around 3 percent over the past 17 years.
With these past results as a guide, we can expect long-term stock
market returns to be between 3 percent and 8 percent over the next
25 years.

From this we should subtract the expense ratio of a mutual fund,
which is a negligible 0.1 percent for VFIAX, but could be much
higher for other stock market mutual funds. We should also reduce
the return to reflect the expected tax on dividends and capital
gains of about 15 percent. All together, the expected return for
VFIAX is between 2.5 percent and 7.5 percent. People in high
income-tax brackets should reduce these expected returns even

If you are worried about future stock market returns, even the
mediocre 4.3 percent expected annual return from System B looks
good against a 2.5 percent after tax return for VFIAX. If you are
a stock market optimist, you should jump at the chance to sell
VFIAX if you can get the expected 12.7 percent annual return from
System A, but you will probably find System B less enticing.


Risks for mutual funds

Expected return is not the only consideration; we also need to
consider risk. Stock market mutual funds like VFIAX are known to
be risky, and in the next 25 years, we can reasonably expect to
have one or two financial crises like we saw in 2001 and 2008.
Given the high CAPE ratio discussed above, a bear market in the
next few years seems more likely than not. 

Over long periods, the stock market does tend to make up for
past losses, so a 2.5 percent annual return for VFIAX over the
next 25 years is a reasonable worst-case scenario. 

The attraction of a money market mutual fund like FDRXX is the
limited downside. The fund should be able to pay its 0.1 percent
interest without losing value (at least before inflation) over the
next 25 years. The biggest risk for FDRXX is actually inflation
itself. If inflation accelerates, and short term interest rates do
not keep up, the real value of FDRXX will fall faster than the
dividends it pays can make up for. Even if dividend payments rise
to keep up with higher inflation, these are taxable, and they are
very likely to continue to fall short of inflation after tax.

Given the the country’s high debt, and the Trump
administration’s stimulus plans, rising inflation is quite
possible. If it does rise, the interest paid to holders of FDRXX
should rise with it.  Since that interest is taxable, rising
inflation will lead to small net losses for holders of FDRXX.

Risks for solar

Unlike FDRXX, a solar installation should benefit in the
high-inflation scenario, since electricity prices and savings
should rise with inflation. Nor should a prolonged stock market
downturn hurt the returns from a solar installation. Another way
to put this is that, as investments, solar installations have the
attractive property of holding their value when financial
investments are falling. This makes investing in even a relatively
unattractive solar installation like System B a good way to
diversify a larger investment portfolio.

The main risks for solar installations are falling electricity
prices, the chance that the system breaks down, and the chance it
is damaged in a house fire and insurance does not cover its
replacement. There is also regulatory risk: the chance that
regulators may change the way solar owners are paid for the
electricity they generate.

The breakdown of solar risks

Falling electricity prices

Lower electricity prices equate to lower savings from solar.
Most people assume that electricity prices will continue to rise
over the long term, as they always have in the past, but this may
not be a valid assumption. The falling prices for renewables and,
perhaps most importantly, natural gas have been causing
electricity prices to fall in recent years, and renewable energy
technologies like wind and solar are almost certain to continue
their price declines. These price declines are likely to be at
least partially offset by the need to repair and expand our aging
electric transmission and distribution infrastructure. How these
two trends will balance is hard to predict. 

A scenario where we see electricity prices continue to fall as
fast as 1 percent per year seems quite possible. If we put this 1
percent annual decline into PVCalc, the IRR of each system falls
by 2 percent. The IRR for System A becomes 10.7 percent, which is
still pretty hard to beat. The IRR for System B falls to an
unattractive 2.2 percent, but this is still better than we can
expect from a money market mutual fund like FDRXX.


Most home solar systems come with warranties. Solar panels
usually have a 25-year power warranty that guarantees that
electricity generation will not fall too much faster than
expected. The expected return calculations already account for
some degradation, the rate of which is specified in the
“degradation” field of PVCalc. The rest of the system usually
carries a 10- to 12-year product warranty, and the electricity
produced in the first years of a solar system is the most
important in determining the expected return. 

If, for instance, in the highly unlikely case that System A were
to break down and be completely worthless after 15 years, we can
see the effect on return by putting 15 into the “useful life”
field. In this case, the IRR of System A falls only to 10.2
percent from the initial 12.7 percent, still a far better return
than we should expect from a stock market mutual fund over the
next 15 years.

Part of the reason System B was more expensive was that it was
made with SunPower AC panels, which come with a comprehensive
25-year warranty on all of the expensive system components. Hence,
if System B were to fail during the 25-year useful life I assumed
(and it will likely last longer), it could be fixed under

House fires

Including an annual insurance premium of 0.5 percent of the
initial system cost reduces the expected return for System A to
11.2 percent. In that scenario, the expected return for System B
changes to to 4.0 percent from 4.3 percent, so the cost of
insuring against property damage to a solar system is manageable.
Such insurance makes sense if the solar system is accounts for a
significant portion of your net assets.

Regulatory risk

In the stock market, companies often deal with regulatory risk.
Large importers like Walmart are worried about President Trump’s
proposal for a “border adjustment tax,” because it would increase
their costs. A recent petition
filed by bankrupt Suniva
with the International Trade
Commission could result in a 40 cents per watt tariff levied on
solar cells imported into the U.S. This worries solar financiers
and residential solar installers.

The recent rise of stock market index mutual funds like VFIAX
since the election also has to do with regulation, namely, the
anticipation that regulations will be reduced and businesses will
become more profitable. If those reforms fail to happen or the
profits fail to materialize, the market and mutual funds will

Regulatory risk can also affect the value of a home solar system
by changing the expected future payments. Net metering and other
payment structures to compensate homeowners for the power they
send to the grid are created by state regulators, and what
regulators give, regulators can take away. Although state utility
commissions have a great deal of power to change rates, they are
generally appointed by elected state officials. As such, they are
subject to political pressure, and usually avoid actions that will
be unpopular with a large number of voters. Yet they also have a
mandate to ensure the financial stability of the utilities they
oversee. This can lead to unpleasant surprises for solar customers
if utilities persuade regulators that their financial health is at

The most stark example of regulatory risk for solar was when the
Nevada Public Utilities Commission reduced
solar customers’ payment
 for net excess generation by
three-quarters in December 2015. The commission also tripled fixed
charges — and retroactively applied all of these changes to
existing solar customers. For someone considering investing in
home solar today, it is the fact that the change was retroactive
which should be most disconcerting, since the possibility of a
future retroactive change makes it impossible to accurately
estimate the future returns for solar.

Any possibility for a retroactive change should concern
homeowners considering going solar, but the Nevada example should
be comforting to many. This is because it is the exception that
proves the rule: No other state regulator has ever retroactively
reduced payments for existing solar customers. Moreover, the
public outcry was such that the retroactive aspects of the ruling
were eventually reversed.

Although regulatory risk is generally low for home solar, it
does vary from state to state. The safest states are those like
New York that have recently reached decisions regarding the
compensation for home solar.  The New York PSC recently ruled
that existing residential solar customers could keep net metering
for the life of their systems, while homeowners who install solar
over the next five years would benefit from net metering for 20
years. The certainty of receiving net metering rates for 20 years
should be sufficient for New York homeowners to make an informed
investment decision.

Most homeowners should be fairly confident that whatever rules
apply to their system at the time it is installed will last (at
least for them) a long time. But there is still some chance of
retroactive changes. The reason the Nevada regulators’ action was
so drastic was that the rapid growth of solar caught them by
surprise. State regulators that are currently planning ahead for
the time when solar takes off in their state should be able to
manage a more orderly transition to new rules that adequately
address both the costs and benefits of adding large amounts of
residential solar on the grid.

All told, regulatory risk should be less of a worry for home
solar customers than for owners of stock market mutual funds like
VFIAX. Money market funds like FDRXX have minimal regulatory risk;
however, it is even less than that of solar.  

Opportunity cost and timing

If you are considering selling a mutual fund, opportunity cost
is the risk that it will go up in price after you sell. Nobody
likes to sell today, only to find that they could have sold for a
lot more at a later date.  Conversely, the opportunity cost
of not selling a mutual fund is that the price of the fund may
fall before it is sold.

For a homeowner installing solar, opportunity cost is the risk
that the cost of home solar installations will fall after they
sign the contract. The opportunity costs of not installing solar
are that the cost to install a solar system might go up, or that
the compensation and incentives may fall.

Although the costs of solar installations have been declining
over the long term, in the shorter term, prices seem more likely
to rise than fall. The Suniva petition mentioned above could add
40 cents per watt to the cost of solar cells manufactured outside
of the U.S. within the next year. Since the U.S. no longer has a
significant manufacturing base, that cost will directly increase
the cost of a solar installation. 

The Trump administration and Congress are also planning on tax
reform in the near term. The largest solar incentive, the 30
percent Investment Tax Credit (ITC), could be a target for cuts in
order to pay for Republicans’ tax priorities. It is very unlikely
that tax reform will be retroactive, so solar installations
completed in 2017 should still be able to benefit from the ITC.
Even if the ITC is not cut as part of tax reform, it is currently
scheduled to phase out between 2019 and 2021.

State incentives for solar may also decline in the near term. In
New York, the NY-Sun state incentive for solar installers is set
to decline from its current 40 cents per watt to 20 cents sometime
this summer. Your solar installer should be able to tell you what
is happening with incentives in your state, although what they say
should be taken with a grain of salt, since they have an incentive
to exaggerate any upcoming declines. There are also other
resources. DSIRE,
for instance, offers a comprehensive database for both state
and federal renewable energy and energy efficiency incentives.

Finally, for people in my home Ulster County or nearby Orange
County who are currently or about to sponsor group buying discount
campaigns like Solarize, these campaigns only run for three
months. The discount will end on July 31 in Ulster County and
September 1 in Orange

All told, the medium-term trend for the cost of a home solar
installation is likely to be up.

While the price of a money market mutual fund like FDRXX does
not change over time, the price of a stock market fund like VFIAX
will rise or fall with the market as a whole. Two widely used
methods for evaluating the near-term risk/reward of the stock
market are the CAPE ratio discussed in the expected return section
and the VIX, or Volatility Index. 

The CAPE ratio is currently high by historical standards,
meaning that the risk of a stock market decline is greater than
usual, while the chance of the stock market going up in the near
term is lower than usual.

Conversely, the VIX is usually high when stock prices are low,
and low when stock prices are high. In mid-June, the VIX was
trading around $10.50, which is lower than it has been at any time
in the last 10 years. It is currently lower than it was at any
time since before the financial crisis in 2008. As the VIX fell to
its recent low from a 2008 high, VFIAX has risen 167 percent, or a
compounded 12 percent per year for the last eight and a half

In terms of timing and opportunity cost, taking money out of
mutual funds and putting it into solar seems like an excellent
risk/reward tradeoff in June 2017.


The biggest downside for a home solar installation is liquidity.
The only way to get your money out of a solar system is to sell
your home, or wait for it to come back to you over time in utility
bill savings. The great virtue of mutual funds is that you can
sell them and get cash within 24 hours. If you expect to need the
money you have in mutual funds in the next few years, you are
better off using some other sort of financing such as a loan to
pay for your solar system than selling your mutual funds.


For a homeowner looking for a long-term investment, or one with
money in mutual funds looking for more attractive investments,
home solar is an excellent choice. For many homeowners, it offers
very attractive returns compared to almost any mutual fund. Since
every solar installation is different, finding that expected
return is best done using a dedicated solar or other financial
calculator, such as PVCalc. 

While a higher expected return is often a good reason to invest
in solar, there are usually other important considerations. People
who expect to need the money they are investing in the next few
years should avoid difficult-to-sell investments like solar. 

Most other considerations favor a solar investment over most
mutual funds:

  • Stock or equity mutual funds are generally considered much
    more risky than a home solar installation.
  • Gains from mutual funds are taxable, while electricity bill
    savings from solar are not.
  • Current stock market indicators show greater-than-usual risks
    and lower-than-usual potential rewards.
  • While the price of solar is likely to decline over the long
    term, recent sharp declines and political and regulatory risks
    mean that solar installations could easily become more expensive
    over the next few months or years.

You may not own a home, or your roof may be shaded, in need of
replacement, or otherwise unsuitable for solar. If it is, a
reputable solar installer will tell you so. 

If your roof is right for solar, there may never be a better
time to sell your risky mutual fund and put it in something that
is as safe as houses: a home solar system.

Tom Konrad Ph.D., CFA is the editor of and
an investment analyst specializing in environmentally
responsible dividend income investing. He is Chair of the Environmental Conservation Commission for the Town of Marbletown , New York.

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