How Rich Are You?

I saw an interesting link today in a post in the Wall Street Journal Wealth Report Blog. It highlighted the Global Rich List.

Using World Bank income data, it lets you put in your income and find out how you compare to the rest of the world. Granted, it does so based on income rather than assets, but it's illuminating nonetheless. Out of curiosity, I played with the numbers until I found out what the top percentile would be. At aboout $47,500/yr, you'd be the 60,000,000th richest person in the world and would in the top 1% of all people.

According to the website:

We are obsessed with wealth. But we gauge how rich we are by looking upwards at those who have more than us. This makes us feel poor.

We wanted to do something which would help people understand, in real terms, where they stand globally. And make us realise that in fact most of us (who are able to view this web page) are in the privileged minority.

We want people to feel rich. And give some of their extra money to a worthwhile charity.

It certainly helps us to put our relative wealth into perspective.

The Costco Effect

A few months ago, I had mentioned in my post about "25 Ways I Save Money" that I saved by buying in bulk at Costco.  A couple of weeks later, I wrote a "retraction" saying that I end up not saving money when I go to Costco because I end up buying stuff I didn't originally intend to buy.  I thought it was interesting that in this Sunday's New York Times, Julie Bick wrote about this, dubbing it the Costco effect.

In the article, she quotes Joel Benoliel, a senior VP at Costco:

We try to have hundreds of items that are different each time a customer comes to the warehouse, to create a treasure-hunt atmosphere.  We’ll always have the same staples — the cereal, the detergent — and then we add in the ‘wow’ items.

She also cites a typical shopper who says that he goes every month or two to get household supplies and while there, usually ends up throwing in some books, DVDs, and baked goods.  Looks like I'm not alone in being tempted by all the goodies at Costco.

How Did You Really Do Last Year?

Chances are pretty good that your investments did well last year since the markets were up overall. The question is, what should we consider "good" performance?

In order to be able to answer that question, you first need to look at how you really did. If you have an investment account that you didn't put any money into or take money out of last year, then the answer's fairly simple. Look at the balance at the beginning of the year and the end of the year and calculate the percentage difference. (We'll have to look at the more complicated cases where a significant amount of money was going in and out of your investment account over the course of the year in another post).

Some people make the mistake of just looking at their current unrealized gains on the stocks they hold. For example, if you keep track of your portfolio on something like Yahoo Finance, you can instantly see how much the stocks you hold have gained. The problem is it doesn't tell you how it performed over a particular time period. So, the gains could have come from a couple of years ago, and your stocks could have stagnated last year, but you can't tell that from just clicking on your portfolio on Yahoo (or most other popular portfolio sites).

So, you've calculated your gain for 2006. Say it was 12%. Is that good? On the surface it sound good, but the questions should really be how did you do compared to the market overall? If the market soared 20%, then getting 12% in that year isn't very good. So how did the market do in 2006? Probably the most popular benchmark is the S&P 500 index. It's an index of 500 large U.S. companies picked by a committee at Standard and Poors. So, it isn't really the whole market, or even the whole U.S. market, but since it represents a large slice of the total U.S. market cap, it's a decent proxy.

Last year, the S&P gained 15.79%, so you can see that 12% isn't anything to brag about. Furthermore, there are other broad indexes that performed better. A GREAT chart to look at is this one by Callan Associates. This chart shows how different indexes have performed over each year since 1987. The color coding helps you to see how different categories vary considerably in relative performance from year to year. It highlights the uncertainty of investing in various segments.

For example, you can easily see how from 1995-1998, the S&P 500 Growth Index (a subset of the S&P 500 that focuses on growth stocks, such as Microsoft, Cisco, etc.) came in first every year (remember the Internet bubble?). Then, ever since 2000, it's come in second last every year. This illustrates the danger of looking at past years' performance and extrapolating it into the future. Back in the late 90's, it looked as if S&P 500 Growth stocks would continue going up for the long run. As the last 6 years have shown, that would have been a costly assumption.

Getting back to the question of how you really did last year, you should also consider how you would have done compared to other benchmarks. For example, how would the 12% have compared to MSCI EAFE (a index of International stocks from developed countries)? The MSCI EAFE went up 26.34% last year. So, without picking individual "winning" stocks internationally, you could have had close to 26% gains buy going with a mutual fund or ETF that tracked the MSCI EAFE (I say close to 26%, because there are some fees and transaction costs that cause index funds and ETFs to generally trail their benchmarks buy a small amount).

To sum it up, to really gain an understanding of how you did last year (are you really a stock picking genius?), you need:

• Accurately calculate your performance investment for the period in question (taking into account cash inflows and outflows).


• Compare that gain to a benchmark rather than an arbitrary figure (like 10%).


• Compare that gain to other benchmarks as well, to consider whether you would have done better had you been diversified into other categories of the stock market.

Followup On Online Savings Accounts

As a followup on my earlier posts on online savings accounts, it looks like my forecast on October 2 is still holding true--that online savings accounts from major banks had reached their intermediate-term peak when E-Loan came out their 5.5% account.  Recently, E-Loan lowered their rate to 5.38%.

I had planned on opening up an account there, but after reading on MyMoneyBlog about the many problems people have been having with their accounts at E-Loan, I've decided against it.  I'm still at ING Direct for now, but would really prefer another institution since ING doesn't let me link to my Fidelity brokerage account (via the United Missouri Bank account that serves as the cash account for Fidelity).  I do like ING Direct's system for being able to easily open subaccounts, though.  If there was another bank which allowed links to my Fidelity-affiliated account and easily let me set up subaccounts and had a competitive interest rate, I'd move there.  If you know of any, please let me know.

Wal-Mart Deserves the Nobel Peace Prize?

With $330 billion in annual sales, Wal-Mart certainly attracts a lot of shoppers--and unflattering attention. It's often blamed for paying workers poorly, driving small merchants out of business, buying from overseas sweatshops, and killing downtowns. When you read about them in the news, it's usually about how their latest proposed store is being opposed by local civic groups, right?

Well, in an article in the January 2007 edition of Kiplinger's, Jeremy Siegel writes about the flip side of Wal-Mart's impact. He notes that "for millions of people, Wal-Mart is a lifesaver that provides what they want at prices they can afford." He also pointed out that Wal-Mart pays more than $10 an hour, on average, and that when they opened a new store in Chicago, they had 25,000 applications for 325 jobs. Despite that, Chicago City Council had voted to hold have higher minimum wages requirements for Wal-Mart and other big box retailers. Though the bill was vetoed, Siegel noted that it sends the message to prospective employers, that "We will penalize you for being a large, efficiently run company that offers consumers the lowest prices. Would Chicago prefer less-efficient companies with higher prices and fewer jobs?"

Wal-Mart's huge size means that other competitors, such as grocery stores and other merchants, need to be more competitive in price. Siegel cites a study that found that Wal-Mart's growth from 1985-2004 resulted in food-at-home prices that were 9.1% lower and overall prices that were 3.1% lower than they would have otherwise have been. Don't ask me how they figured that out, but that means that if it hadn't been for Wal-Mart, we'd be paying higher prices on most things we buy.

Siegel also addressed the criticism that Wal-Mart encourages sweatshops in the developing world. Here, he cites an editorial by Brian Tierney of the New York Times. Tierney makes the argument that Wal-Mart is as deserving of the Nobel Peace Prize as is Muhammad Yunus, the 2006 prize winner, who founded Grameen Bank. Grameen Bank helped people in poor villages in developing countries through microloans. Tierney makes the point that Wal-Mart is actually responsible for the creation of far more jobs in the developing world than Grameen.

Well, nominating Wal-Mart for the Nobel Peace Prize may be a bit much to swallow, but Siegel's article does point out the positive side of Wal-Mart that is rarely mentioned in the press and gives some food for thought.  I'd be interested in what readers have to say.

The Pursuit of Happiness: Experts' Own Advice

Wow, it's been nearly a month since I last posted. Things had been very hectic at work, but hopefully it's slowing down now.

In today's Wall Street Journal, Jonathan Clements wrote about six academics in the field of "happiness research" who took some of their own advice and made changes for the better:

• Relish the day. The problem is that when we get a raise or promotion, we're thrilled at first, but quickly get used to it. UCSD professor David Schadke's advice is to celebrate the small things, not just save up the celebrations for big occasions. Also, take photos and buy souvenirs to help you to recall the good times long after a vacation or event is over. For example, when his undergrad school, the University of Texas, won the college football championship last year, he bought T-shirts to help him remember.


• Dodging traffic. Studies have shown that commuting is one of our least favorite activities and one of the main reasons is the lack of predictability. This lack of control is what induces the stress. Warwick University professor Andrew Oswald too his own advice and moved closer to his office, reducing his commute from 60 minutes to 20 minutes.


• Seeing friends. Chances are you enjoy seeing friends and family more than you enjoy spending extra time at the office. So why do we take the higher-paying job that leaves less time with our loved ones? Part of the answer is that we sometimes don't thing about how things will play out over time. We'll get used to the extra money fairly quickly, but we don't realize the long-term effects on our social lives. Professor Richard Easterlin from USC used to sacrifice family time for research time, but does that much less now and enjoys the extra time with his family.


• Buying memories. Alan Krueger from Princeton suggests that we may be able to boost our happiness by thinking carefully about how we spend our time. To that end, he suggests "buying memories." For example, he cites taking his dad to the 2001 Superbowl. Even though his Giants lost, he enjoyed the anticipation of the game and the event itself. He even framed his ticket to remind himself of the event.


• Limiting options. Clements writes about a study by Jane Ebert and Daniel Gilbert where participants were told that they can take home an art poster. Some were told they could exchange it if they didn't like it, others were told that their selection was final. Which participants were happier? The ones that didn't have the option to exchange it. Gilbert says "When options are open, the mind generates debate. When options are closed, the mind generates satisfaction." To that end, Gilbert took his own advice and proposed to his girlfriend, who is now his wife. He says that "sure enough, now that she's my wife, I'm happier."

Worse than a Coin Flip

I was recently reading about the possible end of Bill Miller's win streak against the S&P500 Index. His Legg Mason Value Fund has beaten the S&P500 for an impressive 15 years in a row. However, this year he's trailing the index by about 10% at this point. The manager with the next longest streak is Manu Daftary, who's Quaker Strategic Growth Fund has beaten the index for eight years in a row. However, he's also trailing the S&P500 by almost 9% this year. After him, there's a handful of funds with a seven year streak.

It got me wondering how many funds you would expect to beat the S&P500 if the results were represented entirely by chance: flip a coin, heads you beat the market that year, tails you lose. There are approximately 8,600 mutual funds out there, so if the results was entirely by chance, half (4,300) would beat the market after one year. If half of those beat the market the next year, then 2,150 would have beaten the market for two years and so on. After eight years, there would be 67 who beat the market for eight years in a row. Instead, in real life there are only two, Miller and Daftary.

True, beating the S&P500 each year isn't the only goal of all mutual fund managers, but it's still interesting nonetheless to note that only two out of thousands of mutual funds--with managers paid millions of dollars a year to beat the market--have managed to beat the market for even eight years in a row. A coin flip would have done much better.

Fundamental Indexation: The Next Generation of Indexing?

Underweight overvalued stocks and overweight undervalued stocks. Sounds like a simple recipe for beating the markets. Essentially, that's the idea behind what some have called the next step in the evolution of indexing.

The argument is that traditional capitalization-weighted indexes (such as the S&P 500) by their very nature will overweight stocks that are overvalued since the amount of stock that they hold in a particular company is based on the market value of that company in relation to the rest of the companies in the index. So, for example, during the tech bubble, stocks with huge market valuations, such as Cisco, dominated the index. Basically by definition, if a stock is overvalued, it is overweighted in a cap-weighted index.

The idea behind fundamental indexation is to weight the holdings by some fundamental measure, such as sales, income, book value, or even number of employees, instead of by the value that the market places on a stock. By doing so, you reduce the amount by which you are overweighting the overvalued stocks and avoiding their drag on your returns. Rob Arnott, who introduced the idea to the mainstream investing public a year or two ago, found that such an index outperformed the regular cap-weighted index by about 2% annually on average over the last 40 years or so.

The idea has enough merit behind it that individuals such as Jeremy Siegel (my old Wharton professor and author of "Stocks for the Long Run") have gotten behind the idea. He has joined Wisdom Tree, a startup investment company that offers a number of ETFs based on fundamental indexing using dividends as the weighting critieria. In addition to Wisdom Tree's offerings, there are also offerings based on the Research Affiliates Fundamental 1000 Index, an index based on Arnott's research that is weighted by a composite of several fundamental criteria.

Even William Bernstein has called fundamental indexing a promising technique, though he cautions that the advantage over cap-weighted indexing is small and could be overwhelmed in practice by fees and transactional costs.

Though it's still a new idea, it's definitely one that merits further exploration, particularly as the offerings from Wisdom Tree and those affiliated with Research Affiliates develop a real-world track record that one can examine for the effects of fees and the costs of trading.

Your Disease Risk

Your health can definitely have an impact on your finances.  For example, I recently wrote about how losing 10 pounds can save you thousands of dollars on your life insurance.  So, even though it's not directly about personal finance, I recommend taking a look at Your Disease Risk, a site developed by the Harvard Center for Cancer Prevention.  It was mentioned in an article today in the Wall Street Journal.

After answering a handful of basic questions (such as your weight, height, about your diet, exercise, smoking, etc.), it assesses your risk of developing diseases such as heart disease, diabetes, stroke, osteoperosis, and various types of cancer. The good thing is that the site doesn't leave you hanging after reporting that your at high risk of developing one of these diseases.  It also makes some general recommendations on how to decrease your risk.

Investor Returns Trail "Regular" Returns

Earlier this month, Morningstar announced that it is going to begin reporting what they call "Morningstar Investor Return" in addition to the traditional time-weighted returns of mutual funds. Time-weighted returns are the returns that you usually read about. They are the return that you would have received on your investment had you put it in at the beginning of the the period, left it alone and reinvested the dividends along the way.

This contrasts with the Morningstar Investor Return, which is their term for dollar-weighted return. This measures what investors have actually achieved in the fund. The returns are weighted by the amount of money in the fund at the time. So, if a fund did really well when it had lower assets, attracted a lot of new money, and then didn't do so hot, its dollar-weighted return would be lower than its time-weighted return.

If investors are good at timing their moves into and out of funds (piling in money before a period of good performance and bailing out before a period of bad performance), the dollar-weighted return would exceed the time-weighted return.

So, what does the evidence show?

According to an interview by Mark Hulbert of Morningstar's managing director Don Phillips:

Phillips provided the following telling statistics, which were based on dividing all mutual funds in Morningstar's database into four groups according to the volatilities of their returns relative to comparable funds. Consider first the quartile of funds with the greatest relative volatilities: On average, their dollar-weighted returns were just 62% of their time-weighted returns.

In contrast, the quartile of funds with the lowest relative volatilities exhibited dollar-weighted returns that, on average, were 98% of their time-weighted returns.

So, the lowest-performing group had dollar-weighted returns 38% below time-weighted returns. The lowest volatility funds were only 2% below their time-weighted returns.

Interestingly, in a table accompanying the article, Hulbert looked at the top 25 funds in terms of assets and picked out the ones where the dollar-weighted returns trailed the time-weighted returns by more than 1% annually. What was notable to me is that two of these eight funds were index funds from Vanguard. This suggests that despite the buy-and-hold philosphy that often accompanies index investing, many people also try to move in and out according to when they think a particular index is overvalued or undervalued. As the numbers show, investors haven't been very succesful when they try to time the market.

Need Help Choosing Online Savings Account

I've been with ING Direct for years. One of the things I like about them is the ability to easily set up subaccounts--for example, one for saving for a car, one for home repair, etc. Also, it's easy to buy CD's from the main account, without having to setup a whole new account and going through the whole setup and verification process again. One problem has been that they lag in rates (4.4% compared to 5.05% at HSBC Direct or 5.5% at E-Loan). More of a problem for me is that they've apparently changed their linking policy over the last couple of years and won't link to my Fidelity account (which is actually a United Missouri Bank account that is swept into/out of by Fidelity each day). So when I went to add a link to my main savings account at Fidelity, they rejected it.

I had written a few weeks ago that I felt that interest rates on such accounts were topping out and the 5.5% at E-Loan was likely to be the top for a while. So, I was all set to move to E-Loan. The problem there is that you have to setup a whole new account for each "subaccount" you'd like and for each CD you want to purchase. You have to go through the whole procedure of setup and verification all over again each time. Also, there's a $5,000 minimum so I can't setup that car account yet since I don't have that much saved up for it.

Any suggestions? I'd like a place where I can (in order of importance) 1.) link to my Fidelity account, 2.)easily create subaccounts or extra accounts, 3.) setup monthly transfers from a linked account to the savings account, 4.) get a decent rate, and 5.) easily buy CD's. I know I can't get that all in one place, so I'd settle for getting the first three or four.

Scorecard: Index v. Active

How are active managers doing compared to indexes this year? As cited in Sunday's New York Times article by Paul Lim, so far through September 30th of this year, only 28.5% of actively managed large cap mutual funds were beating the S&P 500 index according to a new study by Standard and Poors. When looking at the most recent quarter alone, only 20% beat the S&P 500.

One reason why the percentage has been low lately is that it tends to be more difficult to beat the index when market leadership changes. Energy and small cap stocks have been outperforming for years, but that changed lately and active managers haven't kept pace. However, it's not just over the short-term that the index has been outperforming actively managed funds, however. Over the last five years, only 29.1% of large-cap funds have managed to beat the S&P 500.

What I found a little surprising was that even a smaller percentage (19.5%) of actively managed small-cap funds managed to beat their benchmark, the S&P 600 (an index of small-cap stocks, not the S&P 500 plus the next 100 stocks). This goes against the argument that it's easier to outperform the market in small-caps due to less competition and less institutional research coverage of smaller cap stocks.

Getting back to large-cap stocks, Lim writes that even though the S&P 500 index surged in popularity in the late 90's (when mega-cap stocks like Microsoft and Cisco were driving impressive gains of more than 20% a year) indexing advocates like John Bogle (founder of Vanguard) point out that indexing is even more valuable when returns are more modest. During a period in which returns average 6-7% a year, for example, transaction fees, taxes, and investment management fees of actively managed funds will eat up a proportionately larger share of the returns.

Judging by the numbers, it's hard to make a case for actively managed funds either in the short or long term.

Percent of Actively Managed Large-Cap Funds that Beat the S&P 500

Staples' Not So Easy $250 Rebate

I don't want to make this blog an outlet for consumer complaints, but I recently had a problem with Staples.

The other day I saw that HP had a 50% off rebate on a LaserJet 3055 All-In-One.  The rebate was for $250.  Being a fan of Staples, and having just tried out their EasyRebate online submission for the first time for another purchase the other day, I figured I'd buy the printer from Staples so I wouldn't have to go through the usual hassles of sending in barcodes, forms, and hoping they'd pay the rebate, especially since it was going to be for $250.

I ended up buying it through staples.com and received the printer the next day.  Then, when I went to submit the "EasyRebate" online, it said that I'd need the product's serial number and to come back when I had it.  Even though I had it already, there was no way to continue and put in the serial number.  I waited a couple of more days and tried again.  Still no luck.  After contacting rebate support through an online form, I received an email saying to try it again and if it still doesn't work, to call the number on the rebate form.  Well, it still didn't work, and since there isn't a rebate form for EasyRebates, I didn't have the number, either.  After digging up one up through the website, going through the interactive phone maze, reaching a live person, getting transferred, and then waiting on hold for about 5 minutes, they then played a message that they were sorry and weren't able to take the call at this time, and hung up.

After calling through the maze again, I reached someone who basically said they think the problem was because the printer was sent from a different warehouse so the item number they use is coded differently.  My only solution would be to call another 800 number, this time at HP to find out how to submit a rebate to them directly, since they're the ones that ultimately handle the rebate (well, I guess more correctly, they're the ones that hire the company to process the rebates) or to Google "HP rebate" to see if I could find a form.  I tried the latter and finally found the form and will end up submitting it the old fashioned way.  That's OK with me, but my frustration was that it took a half an hour of my time for them to tell me, we can't help you, Google it yourself.  This was made more frustrating by the way they promote EasyRebates as an easier alternative to regular rebates.  If it was for a $10 rebate, it definitely wouldn't have been worth my time and I would have given up.  Since it's $250, I'll stick it through and have to hope that the rebate doesn't get rejected for some reason.  I'll report back what happens.

My New Credit Card

Thanks to Jonathan at MyMoneyBlog, I finally decided to switch my main rewards credit card (used for business purchases) to the Starwoods Preferred Guest Business American Express Card (the personal version of the card basically has the same features). I had been using a United MileagePlus Visa Card, which gave me 1 mile/dollar spent.  There are a few advantages of the SPG Amex card:

1. I can use the Starwood points (earned at 1 point/dollar spending other than at Starwood properties (you'll get a bonus there)) to transfer to a number of different airlines, most at 1:1 (United is a notable exception at 2 points:1 mile).


2. You get a bonus 5,000 miles when you transfer 20,000 points, so you really get 1.25 miles/point.


3. You could instead use the Starpoints for their original intended purpose, staying at a Starwood hotel (like Sheraton, West, St. Regis, Four Points by Sheraton, or W Hotel).  There's 6 different categories, which require different amounts of Starpoints.  The nice thing is there are no blackout dates, so if they have a room available, you can book it using your Starpoints.  Since hotel rates have been rising, so has the value of a Starpoint.


4. The card has no fee for the first year and just $30 annually after that.

Also, there's a 10,000 point bonus after your first purchase.  I'm not signed up as an affiliate or anything so I don't get anything if you apply for the card, I just think it is one of the better travel reward cards out there and definitely better than my old United MileagePlus Visa card.  If you do apply, you might as well do so through MyMoneyBlog's post since I assume he gets a referral fee, or you can do directly through Amex here.  One caveat is that the points expire after a year of inactivity (you don't have to redeem them with a hotel stay, just have some activity, such as earning points through purchases on the card).

Two Money Tricks

Most of the time we know what we have to do to save money. The problem is lack of knowledge, it's lack of discipline. When the money's in our checking account, we spend it. That's what it's there for, isn't it? Sometimes we just have to trick ourselves into saving.

Kiplinger.com recently posted an article on Ten Financial Tricks and Treats. Here's two of them that I've either found helpful or plan to try:

1. Use cash for all your expenses. Right now, I try to minimize the amount of cash I use and use a credit card for most expenses. I reason that it's easier to track since I can download my credit card transactions right into Quicken and I also get a 1% rebate from my credit card company. The problem is that it makes it harder to stick to a set amount each month. Next month I plan on taking out the amount of cash I need for the month (not including things I'd normally pay by check or online such as cell phone bills, utility bills, etc.) and not using my credit card. I'm sure it will help me make my spending more conscious. Right now, it's too easy to just put it on the card and not realize how much it adds up until I get the monthly statement.

2. Save regularly for recurring expenses, too. I do a pretty good job of "paying myself first" by having my paycheck broken up into two direct deposits, one for savings at my brokerage account, the other for monthly spending in my checking account. The problem is when I receive bills like my semi-annual car insurance bills. I sometimes have to cheat a little bit by "borrowing" from savings. The problem is that I don't always get around to paying myself back (good thing I don't report myself to a credit bureau). To avoid this, I'm going to add up such expenses for a year, divide it by 12 and set aside that amount in a separate account each month. I'm also setting aside a set amount each month in a separate account for our next car purchase in about 4 years. Otherwise, I'll find it's too easy to blow any savings from scrimping by going over budget on that next trim level.

None of these steps are really necessary if you can just set a budget and stick to it. For those of us who can't commit to that 100%, at least there's tricks that can help us overcome our shortfalls and help us on our way.

Will Hybrids Solve Our Oil Problems?

The EPA and DOE yesterday released the 2007 Top Fuel Economy List which featured the Toyota Prius hybrid as the car with the best fuel economy at 60 mpg city/51 mpg highway (at least based on current official EPA reported mileage, which is higher than real world mileage according to most tests). This brought to mind a recent report I received from AllianceBernstein entitled Ending Oil’s Stranglehold on Transportation and the Economy: The Emergence of Hybrid Vehicles, which makes the case that hybrids will greatly reduce our dependency on oil in the coming decades.

Today, transportation accounts for about 50% of oil demand. Of that, 45% is accounted for by light-duty vehicles (cars, SUV's, minivans, and light trucks). AllianceBernstein figures that light-duty vehicles will use less oil by 2030 than they do today. After reaching 21.5 million barrels a day in 2010, close to what the International Energy Agency projects, they figure demand will fall to 16.1 million barrels a day (half of what the IEA predicts). This is despite the increase in number of vehicles. The difference: better fuel economy due primarily to hybrids.

Hybrids are predicted to gain mass acceptance not only due to lower costs due to fuel efficiency gains, but also due to superior features, including faster acceleration and lower emissions. They also don't face some of the hurdles that alternative fuel (such as ethanol) vehicles do--you can use them just like you use a "regular" car now, you don't need a new infrastructure to deliver an alternative fuel. Their main drawback right now is the price premium, which is expected to drop rapidly since a large component of the cost is electronics and batteries.

The next step beyond our current hybrids is plug-ins. While today's production hybrids cannot use electrical power alone for significant distances, that changes once higher capacity batteries (which will be charged by plugging in, rather than solely through regenerative braking and the gas engine) become more affordable. According to AllianceBernstein, 40% of Americans travel 20 miles or less a day and 60% travel 30 miles or less. If a plug-in hybrid could go just 20-30 miles on a charge, many people would never have to use gas for routine driving, but still have it available anytime they needed it for longer trips. You can see how that would greatly increase MPG. There are already some people who have modified their Prius' in this way (albeit at a high cost).
The report considers the implications:

If most consumers recharge the batteries in their plug-in vehicles from the electrical grid, the fuel ultimately powering their vehicle is likely to be coal, natural gas or uranium, rather than oil...This could reshape the foreign policies of such oil-importing countries and regions as the US, Japan, Western Europe, China and India. The economic and political implications for the few oil-rich exporting nations, by contrast, are likely to be grim. Indeed, the transition to hybrid power could change the world!

That would be great news for us. I'm wondering, though, if there's a self-limiting mechanism in this march towards hybrids. As the recent volatility in gas prices have shown, we seem to worry only when the prices are high and quickly forget about the long-term when prices are low and oil is plentiful. If hybrids do help to keep a cap on gas prices by lowering demand, that would make hybrids themselves less attractive, slowing the development of economies of scale.

Maybe an increase in gas taxes would help? I'm sure that would be politically impossible right now but perhaps concerns about security in the Middle East will be enough to tip the balance in the near future.

Retraction: Costco Doesn't Save Me Money

I've only been blogging for about a month, but it looks like I'll have to retract something I posted recently. In my post on 25 Ways I Save Money, one of the ways I mentioned was using Costco. It looks like I'll have to retract, or at least amend, that statement. The problem is that when shopping for stuff like eggs and milk (which are usually a great deal cheaper at Costco than our regular grocery store), I end up being tempted by the big screen flat panel TVs, the books, the tools, and all the other stuff that I didn't go there intending to buy.

The problem isn't that these things aren't a good deal at Costco. They usually are. I think Costco almost always offers a great value and I love their selection. The problem is that I didn't really need these things to begin with. I'm not saying that I've bought a flat panel TV from there on impulse, just that everytime I go in there, I think "Hmm, that's a great deal on that TV, maybe we should get a new one since the price is so good." Or, I end up picking up a cool flashlight or a book or a software package, just because it's a good deal.

It happened yesterday when I went there to get some groceries and ended up buying a two pack of those windup flashlights with built-in radios. I wiped out any savings from the eggs, milk, and groceries that we bought by buying those flashlights. I reasoned that Costco always has good prices and that I could leave these flashlights in the cars without having to worry about the batteries running out. Still, if I hadn't of seen them there, I wouldn't have gone out of my way to buy them and I would have been $23 richer.

Do you ever encounter the same "problem" at Costco?

A Free House Can Be Too Expensive

A recent post at PFAdvice on 10 Hidden Costs People Fail to Consider reminded me of the dangers of determining affordability of a home by just focusing on the mortgage payments which have been faciliated by easy credit, low interest rates, and "innovations" like interest-only mortgages. Even if a house is affordable--that is, the bank says it will lend you the money--doesn't mean that it's not too expensive for you. In addition to costs like maintenance, there's also the cost of furnishing, upkeep, etc. which tend to go up with the price of the home. Often overlooked, there's also the additional cost of ratcheting up our lifestyle.

An extreme example of this is a family who won a gigantic, well-equipped, house, plus $250,000 and a big SUV, in the HGTV Dream Home Sweepstakes. An article in Money magazine describes the 6,000 square foot house:

Each feature seemed more fantastic than the one before: the massive great room with its 30-foot ceilings and six-foot-wide fireplace; the master bedroom suite--in effect, a separate cottage connected to the main house by a breezeway, replete with a hot tub; the indoor elevator and the outdoor pool and fireplace; the guest house by the lake...The house is really three structures: a main building, a separate master bedroom suite and a lakefront guest cottage. Some 550 tons of limestone went into the construction of the main house, much of it used to build the 30-foot fireplace in the great room. Ten cedar trees were used to support the beamed ceiling, the trunks shaved down to square posts around the perimeter. Six sets of glass french doors let in sweeping views of the yard and lake.

You get the picture. The problem is that even though they were given the house and $250,000, they still can't afford it.

Upkeep is $2,900 a month. Homeowners insurance runs $7,000 annually. The insurance and gas bill on the Cruz fleet (they own seven vehicles, including the SUV they won in the contest) costs $1,000 a month...Then there are the incidentals. Fixing up the family boat, which got little use in Illinois, cost $11,000. A dog run for their three dogs was $6,000. Between family and friends eager to see the Dream Home, the Cruzes have company nearly every weekend. The tab: about $1,000 a pop. They've donated $40,000 to charity. And then there have been the splurges--$5,000 on Christmas presents; $2,000 for scuba lessons; an $1,800 go-kart.

So now, after a year in the big house, they're down to $36,000 and have put the home on the market. This example may be extreme, but it does remind us that we also have to factor in the associated costs (like upkeep, maintenance, etc.) AND the other costs that are rarely factored into the equation: lifestyle costs. Call it the "keeping up with the Jones'" factor.

We tend to judge our standard of living in comparison with our peers (such as our neighbors). If we move into a neighborhood that we can barely afford we're going to subconsciously feel the need to spend even more to have the same type of vacations as our neighbors or drive the same types of cars. The end result: we're either less happy or have less money, or both. If we don't factor in all of these costs, even a free house can be too expensive.

Clements' Nine Tips for Investing in Happiness

Jonathan Clements at the Wall Street Journal on Sunday pointed out that academic studies suggest that having more stuff doesn't equate to a permanent increase in happiness (while we may get a temporary boost from acquiring something new, the boost generally doesn't last). Based on his review of some studies, he suggests the following nine tips for investing in happiness:

1. Make time for friends. According to a 2006 report by the Pew Research Center in Washington, 43% of married people say they are "very happy," versus 24% for those who aren't. Seeing good friends regularly can also increase happiness.


2. Foget the pay raise. "Soon enough, you are taking the extra money for granted and you're feeling dissatisfied again. Experts refer to this as 'hedonic adaptation' or the 'hedonic treadmill.'" Now, I don't think he means that you should turn down any pay raises you're offered, just that you shouldn't focus on the extra money as a source of happiness.


3. Don't trade up. If you move to a neighborhood where those around you are wealthier than you, you'll be reminded of your relative financial standing. Being around those who have more makes us less happy with what we have.


4. Keep your commute short. In addition to being unpleasureable, a long commute can also be unpredictable, making it harder to adapt to the hardship. It also gives us less time for leisure.


5. Count your blessings. "Instead of obsessing over your neighbors' riches, try focusing on the riches you have -- and that will likely make you feel happier."


6. Enjoy a good meal. Eating a good meal is one of those activities that brings us pleasure.


7. Challenge yourself. Be more active, maybe starting an exercise routine, instead of vegging in front of the TV.


8. Volunteer. Not only does volunteering make you feel good, it also helps to be around others who do good.


9. Give it time. Surveys have shown that we tend to get unhappier as we approach our 40's but then rebound from there.

I think these tips for investing in happiness can have just as much of an impact on whether we have enough than tips on investing in stocks, bonds, etc. Since in some sense what we really want out of money is the happiness it gives us, by being happier without spending more, we increase our wealth.