There has been much talk in the blogosphere lately about boycotting gas companies, as a strategy for fighting high gas prices. Others have intelligently pointed out that delaying an inevitable gas purchase by a couple of days will do nothing to reduce overall demand, and therefore will not help to reduce prices. I have previously written that in my opinion, if anything, gas prices are too low...
Regardless of your position on the issue, I thought you might be interested to know where your gas money goes after you fork it over at the pump. On the way home last night I heard an intreresting news story on NPR that provided exactly that information. Briefly, the money is split as follows:
50% is the cost of crude oil
28% is the refining cost
14% pays for taxes
8% pays for distribution and marketing
If you are worried about your local gas station owner ripping you off and making a killing, you probably won't continue to think that way after you read that story. Turns out that your local gas station makes a rasor thin margin on the gas it sells and relies heavily on the sale of other items for its main source of profit.
Price gauging, if it exists, and I don't believe that it does, can only exist in the refining portion of the value chain. The retail gas business is highly price competitive. I mean, can you think of one other business that advertises its prices in foot high letters that you can read as you are driving down the freeway at 65 miles an hour? With such easily available information price competition is virtually inevitable.
If you have concerns about the high cost of gasoline, and want to place blame for that fact, look no further than the immutable law of supply and demand. When demand exceeds available supply the price rises until supply and demand come back into balance.
Of course, populist politicians on Capitol Hill and elsewhere don't care about market economics or about the truth. It is always easier to play to the masses and start pointless investigations about price gauging. If you think about it, it is pretty surprising in a country that prides itself on its capitalist system.
Wednesday, June 06, 2007
Tuesday, June 05, 2007
Investing in Emerging Markets
A good friend recently told me that he has decided to place a substantial portion of his portfolio in index funds that specialize in the Chinese market, as well as two other funds that specialize in other emerging markets. When I pointed out that the Chinese stock market has seen dramatic returns recently and that there is serious talk of a bubble (see this excellent post by 1st Million), my friend pointed out that in previous discussions I said that timing the market is a bad idea. He got me there. I did say it, and I believe it.
So how do I reconcile my position against market timing with my belief that my friend's investment carries a substantial amount of unnecessary risk? Well, I don't think that there is really a conflict. In opinion, market timing is not a viable strategy. You shouldn't sit on the fence and wait for a crash before you invest, because you never really know whether a crash is coming. However, taking a sudden and large position in a market that has seen outsized returns for years is probably not advisable either. Regardless of what you tell yourself, such a move probably contains some element of performance chasing. Ask yourself, would I really make the same move if the market lost 20% in the past year?
I guess I should re-state my concern about my friend's investment strategy: it's not that I have a problem with emerging market investments at this specific point in time for fear of a bubble (although the market looks overly ebullient to me). Rather, I am concerned about the speed and magnitude of the move. If my friend took a gradual, dollar-cost-averaging approach to entering this risky investment, I would consider it a much better strategy.
So here is my personal opinion on investing in emerging markets:
1. Investing in emerging markets is a good thing, when done as a part of a broader, adequately diversified investment strategy. Emerging markets have a large potential for growth over the long run, and over such periods their stock markets are also likely to do well. In fact, I would bet that over the really long run, say 20 to 30 years, most emerging market equity markets will outperform U.S. equity markets.
2. Investing in emerging markets is extremely risky. If you are going to invest in emerging markets, make sure that you have the stomach to hold on to your investments even if you lose 50% or more in a single year. Remember the crises in Russia, Thailand and Argentina in the late 90's? Will you be able to hold onto your investments through declines of that magnitude? If you can't weather the down markets, find a less risky investment.
3. Investing in emerging markets is a long term proposition. If you plan to withdraw and spend your money in only a few years, this type of investment is not for you. If your investment horizon is not sufficient and you happen to be hit by one of the massive bear markets that emerging markets are notorious for, you might not be able to recover your losses.
4. Because of the risk profile I outlined above, move into the market slowly. There is nothing nastier than putting a large chunk of change in the market only to see much of it go up in smoke within a few days. If you want to get into the market, set a target time line of a year or so to complete your move, and complete it over a number of trades spaced a few months apart. That will give you some protection against sudden downwards shifts in the market.
So how do I reconcile my position against market timing with my belief that my friend's investment carries a substantial amount of unnecessary risk? Well, I don't think that there is really a conflict. In opinion, market timing is not a viable strategy. You shouldn't sit on the fence and wait for a crash before you invest, because you never really know whether a crash is coming. However, taking a sudden and large position in a market that has seen outsized returns for years is probably not advisable either. Regardless of what you tell yourself, such a move probably contains some element of performance chasing. Ask yourself, would I really make the same move if the market lost 20% in the past year?
I guess I should re-state my concern about my friend's investment strategy: it's not that I have a problem with emerging market investments at this specific point in time for fear of a bubble (although the market looks overly ebullient to me). Rather, I am concerned about the speed and magnitude of the move. If my friend took a gradual, dollar-cost-averaging approach to entering this risky investment, I would consider it a much better strategy.
So here is my personal opinion on investing in emerging markets:
1. Investing in emerging markets is a good thing, when done as a part of a broader, adequately diversified investment strategy. Emerging markets have a large potential for growth over the long run, and over such periods their stock markets are also likely to do well. In fact, I would bet that over the really long run, say 20 to 30 years, most emerging market equity markets will outperform U.S. equity markets.
2. Investing in emerging markets is extremely risky. If you are going to invest in emerging markets, make sure that you have the stomach to hold on to your investments even if you lose 50% or more in a single year. Remember the crises in Russia, Thailand and Argentina in the late 90's? Will you be able to hold onto your investments through declines of that magnitude? If you can't weather the down markets, find a less risky investment.
3. Investing in emerging markets is a long term proposition. If you plan to withdraw and spend your money in only a few years, this type of investment is not for you. If your investment horizon is not sufficient and you happen to be hit by one of the massive bear markets that emerging markets are notorious for, you might not be able to recover your losses.
4. Because of the risk profile I outlined above, move into the market slowly. There is nothing nastier than putting a large chunk of change in the market only to see much of it go up in smoke within a few days. If you want to get into the market, set a target time line of a year or so to complete your move, and complete it over a number of trades spaced a few months apart. That will give you some protection against sudden downwards shifts in the market.
Monday, June 04, 2007
Protecting Your Portfolio From a Falling Dollar
The Dollar has been declining against some major currencies for some time. The reasons for this are many, and I certainly don't pretend to understand all of them, however the causes include the U.S. trade deficit; the federal budget deficit; and the expectation that the Fed will begin lowering interest rates soon vs. rising interest rates elsewhere in the world.
Since your income and spending are both in U.S. Dollars, should you care about a falling Dollar? Absolutely. For one thing, while you pay for your purchases in Dollars, much of what you buy is produced abroad and is imported to this country. With a falling Dollar, the price of those imports will increase and you will pay more at the store. For another, if you travel abroad like I recently did, you will immediately notice that things are more expensive since your Dollars buy less local currency. However, the thing that I am most vigilant about is the impact of a falling Dollar on our investment portfolio.
It is no secret that investors from around the world put their money into U.S. securities and assets. Stocks, bonds, and real estate all depend to some extent on foreign money. If the Dollar continues to fall, foreign investors will see their U.S. investments decline when denominated in their own currencies. If they no longer get the returns that they expect, these investors could flee the market, and in so doing cause asset prices to decline. On the flip side, companies that are publicly traded in the U.S. and that derive a substantial portion of their income abroad, are actually likely to benefit from a decline in the Dollar. Goods and services exported from the U.S. will appear to be cheaper to foreign buyers who will be paying for them in their own local currencies. Hence, U.S. exporters are likely to sell more and earn more, possibly causing their stock prices to appreciate.
So, what am I doing to protect us from a further decline in the value of the Dollar. In a word: nothing. I already did everything that I think needs to be done and I am sticking to my strategy. This strategy is a simple one: (i) diversify internationally; (ii) diversify locally. Currently, close to 25% of our portfolio is invested in highly diversified international index funds. I believe that a decline in the Dollar is a net positive for these assets. A highly diversified portfolio of U.S. companies is also some hedge against a falling Dollar, since many of those companies derive a substantial portion of their revenue from exports, and a falling Dollar will improve the fortunes of exporting companies.
I must admit that our bond portfolio is not internationally diversified, however, bonds only account for 12% of our portfolio so the impact of diversification is unlikely to be a be a dramatic one, especially in relatively stable assets as bonds.
Finally, if you are planning a sizable purchase in foreign currency, you may want to consider hedging yourself against exchange rate fluctuations by buying the currency in which your obligation is denominated. For example, if you are planning a big trip to Europe this summer, it might not be a bad idea to buy your Euros right now.
Since your income and spending are both in U.S. Dollars, should you care about a falling Dollar? Absolutely. For one thing, while you pay for your purchases in Dollars, much of what you buy is produced abroad and is imported to this country. With a falling Dollar, the price of those imports will increase and you will pay more at the store. For another, if you travel abroad like I recently did, you will immediately notice that things are more expensive since your Dollars buy less local currency. However, the thing that I am most vigilant about is the impact of a falling Dollar on our investment portfolio.
It is no secret that investors from around the world put their money into U.S. securities and assets. Stocks, bonds, and real estate all depend to some extent on foreign money. If the Dollar continues to fall, foreign investors will see their U.S. investments decline when denominated in their own currencies. If they no longer get the returns that they expect, these investors could flee the market, and in so doing cause asset prices to decline. On the flip side, companies that are publicly traded in the U.S. and that derive a substantial portion of their income abroad, are actually likely to benefit from a decline in the Dollar. Goods and services exported from the U.S. will appear to be cheaper to foreign buyers who will be paying for them in their own local currencies. Hence, U.S. exporters are likely to sell more and earn more, possibly causing their stock prices to appreciate.
So, what am I doing to protect us from a further decline in the value of the Dollar. In a word: nothing. I already did everything that I think needs to be done and I am sticking to my strategy. This strategy is a simple one: (i) diversify internationally; (ii) diversify locally. Currently, close to 25% of our portfolio is invested in highly diversified international index funds. I believe that a decline in the Dollar is a net positive for these assets. A highly diversified portfolio of U.S. companies is also some hedge against a falling Dollar, since many of those companies derive a substantial portion of their revenue from exports, and a falling Dollar will improve the fortunes of exporting companies.
I must admit that our bond portfolio is not internationally diversified, however, bonds only account for 12% of our portfolio so the impact of diversification is unlikely to be a be a dramatic one, especially in relatively stable assets as bonds.
Finally, if you are planning a sizable purchase in foreign currency, you may want to consider hedging yourself against exchange rate fluctuations by buying the currency in which your obligation is denominated. For example, if you are planning a big trip to Europe this summer, it might not be a bad idea to buy your Euros right now.
Saturday, June 02, 2007
Free Personal Finance Planning Tools
Microsoft is the company many love to hate. However, what you may not know is that Microsoft offers a wealth of free personal finance tools and templates for Excel. Here is a list of five good ones, but many, many more are available for free download on the Microsoft Office home page:
1. Savings Estimator Budget for a Specific Period - are you saving for a specific goal? This template will tell you how much you need to save during each period to meet your goal.
2. Retirement Budget - how much do you need for retirement? This template will help you to estimate if your planned income will be sufficient to meet your anticipated expenses.
3. Personal Monthly Budget - you need to build a budget but don't know where to start? This template would be a good initial step.
4. Wedding Budget - if you are planning your wedding you know that there are many expenses to keep track of - and boy do they pile-up quickly. This tool can help you plan your wedding and stick to that budget.
5. Personal Net Worth Calculator - want to figure out your net worth? This simple and elegant tool might come in handy.
1. Savings Estimator Budget for a Specific Period - are you saving for a specific goal? This template will tell you how much you need to save during each period to meet your goal.
2. Retirement Budget - how much do you need for retirement? This template will help you to estimate if your planned income will be sufficient to meet your anticipated expenses.
3. Personal Monthly Budget - you need to build a budget but don't know where to start? This template would be a good initial step.
4. Wedding Budget - if you are planning your wedding you know that there are many expenses to keep track of - and boy do they pile-up quickly. This tool can help you plan your wedding and stick to that budget.
5. Personal Net Worth Calculator - want to figure out your net worth? This simple and elegant tool might come in handy.
Friday, June 01, 2007
A High Class Dude
One of my regular readers and commenters, Plonkee of Plonkee Money fame who hails from the great land of England, posted a link on his blog to a NY Times tool that purports to tell you which social class you belong to based on your occupation, your education, your income and your net worth.
Well, you will all be pleased to know that you are in the presence of a high class dude. From now on I shall only answer to the name Sir Shadox!
So, what makes me a member of the nobility you ask? Well, apparently my graduate degree puts me at the 97% percentile of the population. Like anyone gives a damn. On the other hand, my noble profession in marketing management only puts me in the 63% percentile in terms of prestige. Apparently, I get no respect. To which I can only say, thank god I am not a telemarketer which would have barely got me to the 21% percentile. For privacy reasons I will leave out my income and net worth evaluations, but over all I just made it into the top quintile of the population. Hence, Sir Shadox. If I seem somewhat haughty from now on, you know why.
This is an amusing tool. Give it a shot. Don't forget to check out the other tabs available on the tool that explore interesting aspects of income mobility, across countries and across generations.
Well, you will all be pleased to know that you are in the presence of a high class dude. From now on I shall only answer to the name Sir Shadox!
So, what makes me a member of the nobility you ask? Well, apparently my graduate degree puts me at the 97% percentile of the population. Like anyone gives a damn. On the other hand, my noble profession in marketing management only puts me in the 63% percentile in terms of prestige. Apparently, I get no respect. To which I can only say, thank god I am not a telemarketer which would have barely got me to the 21% percentile. For privacy reasons I will leave out my income and net worth evaluations, but over all I just made it into the top quintile of the population. Hence, Sir Shadox. If I seem somewhat haughty from now on, you know why.
This is an amusing tool. Give it a shot. Don't forget to check out the other tabs available on the tool that explore interesting aspects of income mobility, across countries and across generations.
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