Why Willpower Isn’t the Secret to Saving Money

So says this article from Mint. The gist is that you need to set up tricks and games to stop yourself from doing the things you hate, or to prod yourself into doing good.

Willpower won't work for most any discipline that concerns us. And this has obvious implications for the religious, people who want to structure their lives away from some things and towards other. I suggest that the church calendar, traditions, and the disciplines are all part of it. Another reason to praise liturgy and ritual.

It's why the Freedom program on your computer makes you more efficient by turning off your internet for a set period of time. But it's $10! Couldn't you just hit the little wireless button, or close your browser? You could, but you don't. Adding in the extra burden of a computer restart prevents you from peeking at Facebook, "just for a second."

It's why Billy Graham wouldn't get into an elevator alone with another woman, not even for just a few flights. You might say that he was really disciplined. But maybe he realized that he was really weak, and therefore set up barriers far outside the realm of actual adultery, so as to never start down that path.

It's why we rarely snacked in our home in Bolivia, but always ate something in the street. Availability.

It's why people who belong to a religious community give more money and volunteer more hours. Every week you hear about another need. It's easier to do good when opportunities abound, and when everyone around you seems to be doing it.

If a temptation is far away, it's a lot easier to resist. No mortal can resist a strong temptation foever.

And we are all mortals.

"Jesús gave me hell today"

I actually said that to my wife, with a straight face, after a day of sub-teaching. Then I realized what I had just said.

thoughts on investing - part 2: why I gave up on Socially Responsible Investing

(Follow-up to Thoughts on Investing Part 1 - Basics I've learned)

[insert picture of me smoking a big, fat cigar]

Four years ago, I first explored the idea of Socially Responsible Investing (SRI) here and here, and our levels of involvement in shady economies. To what extent are each of us responsible for our complicated, integrated, globalized human economy? How much does it matter? I concluded it was preferable from a moral standpoint to reduce or eliminate my partial ownership (that's what stocks are) in morally dubious companies, as well as increase my ownership in potentially virtuous areas. I decided to move some of our savings into two "green" mutual funds, WGGFX and NALFX.

One year ago I wrote T. Rowe Price about my discomfort with owning Lockheed Martin stock, a manufacturer of certain cluster bomb components. They even took the time to write back and said that I wasn't the first person to voice this concern, which I was glad to hear. They told me they no longer owned the stock. But by the end of 2011, they had re-purchased it.

I chose to wait on the sidelines for a bit. As it turned out (which I didn't know at the time) had I completely cashed out my fund (which is most of my savings), I would have generated a large capital gains and completely lost my Earned Income Tax Credit (EITC), which was worth over $3.5K to my family in 2011! Close call.


Anyway, I'm pretty much done with most SRI, which might be bit of a surprise to people who know that I'm a bleeding heart idealist.

One of the misconceptions that I believed about owning stock was that I was somehow providing funds to the company. This is only the case when you directly purchase stock from the company at an Initial Public Offering (IPO). Otherwise, you (or your mutual fund manager) are simply trading ownership with another third party at an agreed upon price. When you buy a share of APPL on the Nasdaq exchange, you are paying ~$545 for the rights to share in the company's future profits. That's what ownership implies. (BTW it's roughly 5X what it was trading in 2007... the collective wisdom of the crowd believes Apple is 5X as profitable than just 5 years ago!) When Apple has a good quarter, they distribute profits to you with a dividend.

So by ditching stock in a company that you deem socially irresponsible, you are not affecting the day-to-day operations of that company. You are simply lowering the price (ever so slightly) for the next person to buy, potentially at a good valuation!

In fact, if you are using a blacklist of companies to pick stocks, you are limiting your own investable universe and possibly passing on some good deals. I just found out that my managers at NALFX sold shares in a solar company because it was bought out by a larger company that owned dirtier, more conventional fuels that overwhelmed the renewable energy side of the business. The managers sold because it was against the principles stated on their plan, not because it was advantageous for the fund's financial return. Sounds like how I inadvertently almost lost my EITC for 2011. If the action of selling the stock doesn't fundamentally change how much solar power the company produces, why should I accept a lower financial return?

I really sound like a capitalist now, don't I?

My last hesitation is more Puritanical, Evangelical, and Pharisaical. I don't want to be stained by sin. I have decided to move to total market index funds that own a tiny, almost infinitesimal slice of the entire global economy. More later on specific portfolio changes, but my two stock funds hold ownership of nearly 10,000 companies across the entire globe, and my bond fund is loaning money to over 5,000 companies as well as the federal government. Even though it's in very tiny amounts, I am profiting off of "big oil," I'm putting money in the bank when my neighbor buys cigarettes, and when the local hotel sells adults movies to travelers.

These total market index funds are unrivaled in their simplicity and performance, mostly because of tax-efficiency and rock-bottom costs. To weed out every last potentially sinful company in a well-diversified portfolio takes a lot of time and cost. Cost because SRI funds are generally more expensive. I know my WGGFX and NALFX certainly are. I am going to save >1% a year by indexing (not just 1% of the returns, 1% of all money invested, year-after-year). It sounds trivial, but when you do the math, that is actually extremely significant. Costs are one of the few things that investors can control.

Choosing a fund with a 0.5% expense ratio vs. 1.5% could make a big difference. See this example here. The author points out that 0.5% will only cut into 13% of your returns over 30 years. A 1.5% ER means 34% less. If the market returned $100,000 on your portfolio before expenses, you get $87,000 in the first case, and 66% in the second. All from that seemingly insignificant 1%, year after year.

One could also argue that a more profitable return is better stewardship, allowing you greater flexibility in personal finances, or generating more wealth to give it away (if you have the discipline to do so). I found that a large portion of my motivation for SRI was Puritanical holiness. Who's to say which portion of that portion a true desire for holiness, and which was self-righteousness? Of late, I'm a little more cautious about my good intentions. And of all those intentions... the actual investing may not have been making much of a difference in the world. Straining out gnats and swallowing camels.

In the end, having cap-weighted ownership of thousands of morally questionable companies doesn't seem much different than our dilemma in buying clothes that are free from slave and child labor, from buying food without a monstrous ecological footprint, and the like. I'm not saying we are excused from all complicity in these systems, but there is more gray area than I would admit to myself 6 years ago. I guess this is part of being "sadder but wiser."

There is shareholder advocacy to consider. However, it is expensive. One might argue whether or not it is effective. I don't know. It is expensive if it means you are subjecting all of your assets to higher cost mutual funds. 

There might be a few more fruitful ways to use your resources:

*Evaluate your purchases, the goods and services you demand. When you spend money, you are building the world you wish to inhabit. Producers will change when consumers demand it (or if governments require it). Do you care who made your product, and how? Spend some time researching that, and go for the greatest bang for your buck.

*Vote. Support/oppose specific legislators and legislation. If one company manages to slightly reduce it's ecological impact, that's great; but it's almost always trivial in the larger scheme of things. (Besides, buying and selling their stock won't change what they do anyway!) But if we have a market-wise, science-informed policy in place, you can drag, nudge, or push industries towards a more optimal status quo. That's systemic change for the better.

*Invest in causes you case about when they align with your need, willingness, and ability to take risk. Buying stocks are an investment, for sure, but they don't actually change the companies themselves. Invest when those actual dollars result in an outcome that you would like to see happen.  I chose Microplace (my avg. return is 2.5%), Kiva (no return), and Energy in Common (no return) for microfinance. The Wesleyan Investment Foundation makes loans to build churches, though I suspect it's risk-adjusted returns are low. Lastly, I have a little money in an online savings account at Urban Partnership Bank, supposedly more of a do-gooder than the average. They are loaning out my deposited money. Other than these, I no longer consider anything else to be "socially responsible," "green," or otherwise virtuous. Considering how difficult it is to truly to good, and the little amount of cash I'm contributing, the results from even the above investments may be marginal. Oh well. I still take a certain amount of satisfaction from it.


For further reading (I'll let you judge which arguments are sound, but I found nuggets in them all):

*The Oblivious Investor challenges the idea of SRI while still looking at how to make it work, basically arguing that when you purchase a share, it is from a 3rd party. You are not doing the company any "favors" by owning it.

*"SRI is a Scam"

*SRI (Money Smarts Blog)


*Are Green and SR Mutual Funds Worth It?

*The Myth of SRI (Motley Fool)

*"Faith-Based or SRI Delusions of Righteousness." - a Christian perspective that seems to get a little too angry at times, then veering into the insightful at others. Here's a taste:

"The whole concept of faith-based investing reminds me of when Jesus blasted the Pharisees for straining out a gnat but swallowing a camel. We are still finding ways to emulate the Pharisees today – using legalistic rules to justify ourselves as righteous while neglecting the things God really cares about. We worry about investing in sinful companies, but we’re fine with planing for an early retirement or a second home when people (including Christians) are starving and homeless. Which do you think God cares more about?"

public health measures are not "environmentalism", or "mind-numbing cultural captivity by Evangelicals"

Just to be clear, when the state or federal government sets certain standards for air, water, nuclear radiation, etc, they are most often in regards to human health. These are not about newts, rare flowers, wolves, or pristine landscapes. It's about cancer, neural damage, asbestosis, heart failure, death.

It is a basic function of government: protecting citizens from doing unnecessary and unwanted harm to each other. It is protection of the weak against the strong. And it's what capitalism is about: you pay the full price for your good or service, you don't externalize that cost on others (socialism).

But politics is not really about truth, but power. So I guess I'll always be a little (or very) frustrated.

I was encouraged to see Evangelical Christians taking up the fight to protect the most vulnerable - children, especially those in utero. It was the Evangelical Environmental Network with their anti-mercury campaign. Again, here there is little "environmental" aspect, other than the damage that some humans do to another passes through the "environment" of air, water, and soil before it reaches the victims.

As a new father, I feel very strongly about this. My wife was not in the best environment for personal health; it was a semi-slum in Latin America, low on oxygen, and high on nasty flying dust and exhaust. I was fretting about her health and it's implications on our daughter. I'm not generally obsessive about it, but I knew that things were much cleaner in the U.S. and at times I began to doubt our decision to raise our daughter in a foreign country.

So, Evangelicals teaming up to protect the unborn. Pretty par for the course, no?

Wrong. These "tree-huggers" (again... where are the trees in this equation?) were ostracized by supposedly pro-life Republican Evangelicals (The Cornwall Alliance, their logo has an Orwellian tagline "For the Stewardship of Creation") who could not free themselves from their cultural and political captivity. Okay, as a dad I'm all for reducing/eliminating abortions. I'm pro-life. I love my daughter. It makes sense that I don't want these children to grow up with handicaps and diseases because a few companies didn't want to harm their next quarterly profit report. While there is obviously some gray area in terms of the need to allow productive economic activity as much as possible, it's a no-brainer that producers and consumers pay the full price of their products and not shift health burdens on the public. I would hazard to say this is even a Christian issue.

Anyway, you can read the sad story from these sources:
*a liberal site
*TIME
*a letter in support of EEN
*The Cornwall Alliance

Get a vise for your head... it's mind-blowing/mind-numbing, whatever you want to call it.

It's depressing, because I consider this as fairly low-level, uncontroversial neighbor-loving for the Christ-follower. Of course we're going to care for ourselves and our children - don't even the pagans do that? We'll care for the environment to the extent that we're self-interested and don't want to "foul our own nest." Harder yet is loving our neighbors across cultural, political, and religious boundaries. Nearly impossible is loving our enemies. These are Christian values and ideals.

What I consider a truly Christian approach to Creation involves care of human life first, but also stewardship of non-human works of God as well - all those newts, wolves, and scenic vistas - even at the expense of some of our short-term economic/fleshly desires. Maybe this is somewhere between loving the nice (though foreign) "other" and loving our enemies. This is what I think of when I use the term "environmentalism" or "Creation care."

I could go on by dissecting quotes from certain presidential candidates, but I'll leave it at a link-post: "Does Santorum think the pope is a 'radical environmentalist'?"

Sigh...

blog silence

Several reasons why it might be a bit before I get around to more blogging.

1) I'm in theory going computer-free three days a week for Lent.

2) I'm taking an intensive online statistics course because my math has atrophied and I need to get ready to do some science over the next two years.

3) I have spent way too much time on the computer lately. Like the last 3 months. And the last 8 years.

And if you came here after thinking I defriended you on Facebook, I just deleted my account. I'll start de nuevo come Easter. Doing a deep clean to erase 5 years of babbling noise.

when you've run out of things to blog about...

interesting stats: Christian vs. Islamic terrorism (or white v. Arab, if you will)

I was reading Freakonomics and came across the chapter "The Ku Klux Klan and Real Estate Agents."

According to the authors' data, there were 2,911 black lynchings between 1890 and 1969, starting with 1,111 in the last decade of the 1800's and decreasing steadily down to just three lynchings in the 1960's. Of course, 3 lynchings are exactly three too many, but it was a precipitous decline (if the data are indeed correct).

It struck me that this was about the same number of people murdered at 9/11 in four concentrated acts of terrorism.

But both of these paled in comparison to to the 13% of black babies who died in infancy around 1920 (presumably from lack of access to medical care). That was about 20,000 babies a year.

The authors' conclusion is that the post-WWII resurgence of the Ku Klux Klan, as nasty as it was, leaned heavily on scare-tactics (terrorism) and less on outright murder and violence than is commonly thought, although violence certainly happened as well. As a form of terrorism over time, it appears that lynching worked - the mere threat of which kept many blacks subjugated and marginalized. Until the Civil Rights Era, that was.

I think it's also plain that, unfortunate and frustrating as it may be, Al-Qaida's 9/11 terrorism worked fabulously well. It was incredibly effective at terrorizing the U.S. It cost relatively little in financial and human costs to cause the amount of panic that we have subsequently reacted with. And now we have lost more soldiers fighting a "war on terror" than victims we have lost in actual attacks. The obvious answer is what we've heard since 1st grade: "10% of life is what happens to you, and 90% is how you react to it". We could decide to simply not be terrorized. Easier said that done, of course. And it's all quite complicated, tragic, and painful.


Anyway, the authors' most controversial conclusion of the book is that increase in legal abortions in the wake of Roe v. Wade ended up reducing crime in the 90's. Less born-to-teenager youths roaming around with nothing to do = less crime. I haven't checked for the consensus on whether this data and analysis were correct or not. I'm guessing our presuppositions will override data, as usually happens with scientific discoveries. Either way, it could influence certain aspects of the abortion debate, but not really the ones we care most about (i.e. whether abortion is ethically wrong or right stands mostly on its own two feet, not on the sociological ripple-effects decades later).

this is partially why economic fundamentalism gets under my skin

I think economists are somewhere between biologists and psychologists... ?

"Purity" (before further to the right on this spectrum) seems to imply that the results found by such discipline are less influenced by human bias / error, and are more objective truths. I had an econ professor assert that her discipline should not be in the social sciences field. The vibe I got was that their economic perspectives were objective, rational fact not up for dispute. The problem I found with that is the human element. Economics has taught us a lot. A lot of things can be known. But humans are not rocks falling at 9.8 m / s^2. Sorry.

Let's start with a little humility. Then I think we can make some progress...

P.S. I was just reading the blogs over at Vanguard.com, and came across this:

The second book addresses our tendency to put too much faith in quantitative financial models. Models Behaving Badly is written by Emanuel Derman, the former head of quantitative analysis at Goldman Sachs. Derman’s premise addresses our tendency to put the same amount of faith in financial models as those based on the laws of science. Whereas the latter are good measures of reality, the former are less so. According to Derman, most financial models “fail to reflect the complex reality of the world around them.” It’s intriguing to think about the role financial models have played in the markets over the past five years. They work until they don’t work (remember subprime mortgages?). To be honest, we do employ several models at Vanguard when we think about measuring risk in a portfolio or forecasting future capital market returns. We always do so, however, with a healthy dose of humility about what they can—and cannot do.

thoughts on investing - part 1: basics I've learned

First, don't construe anything here as actual advice. Ok, let's get started...

I've been on an OCD binge again. Perhaps things are a little out of control for me right now (or when I wrote most of the this during the New Year), so investments are something I can control (or imagine I can). Or at least learn about.

Before we have money to invest, the first step for most of us is to simply get out of debt. Here's a good list of 35 resources for building wealth.

Some Assumptions:

*In a Christian sense, I don't see anything wrong with being productive or generating wealth / prosperity. "Go to the ant, you sluggard." However, once you seek to accumulate wealth with no specific investment purpose, or remove yourself from what you are actually investing in and only see it as a giant gambling game, your soul is in danger. So proceed with caution. When your time frame is short-term and you still demand high-return (read: high-risk), trading seems less like investment and more like greed. Not only bad for your soul... you're likely to end up broke too.

*Understand what exactly you are trading as much as possible.

*You can't predict the future. Do you really think you can predict the market? Don't try it. Remember that paid professionals managing billions are trying to do it to, and in the end they will crush you. Remember that 1) the price of a stock (or the entire stock market) is the collective assessment of the company's future profitability, and 2) when you buy the stock you buy a right to future profits. If it is obvious that the company is already wildly profitable, the price already reflects that. For example, a company might release a very strong quarterly profit, but if it is below the market's expectations, the stock may actual go down. Likewise, prices could rise after a releasing data on an unprofitable quarter if it was not quite as unprofitable as previously supposed. So start with a heavy dose of humility. Learn to accept some form of the efficient market hypothesis (while realizing humans aren't perfectly rational).

*To invest in the stock market, you must believe that stocks and other risky assets will, over the long term, appreciate or provide some sort of income. Broadly, it's a bet that capitalism works. And considering you are reading this with a full belly in a climate-controlled room on a device that probably has more computing power than NASA did in the 1960's, it seems a good bet. If you're not so sure, you might consider buying land, guns, and ammo (and never forget how good of friends we were :) But either way, you should plant a garden.

Basics I've learned:

*Instead of reading this, you should probably go straight to the Oblivious Investor. Simple and smart. Scroll down on right toolbar for the top 4 fundamental posts.

*Then check out the Bogleheads' investment philosophy.

*The Oblivious Investor suggests that the actual doing (buying, selling, rebalancing) of a simple investment strategy is almost no work at all. It's the education that takes work (that, and the patience).

*There are two basic ways to profit from a stock. Appreciation is the increase in value of a particular stock driven by assumptions about continued profitability into the future. Dividends are a form of income regularly paid out to shareholders. However, the share price is diluted as the dividends are paid out, so there is really no fundamental difference between the two (other than tax implications - you don't technically profit from appreciated stock until it's sold... just as you don't "make money" when your house is appraised generously. As we've learned, prices can tumble).

*Save yourself the trouble (and the fees) and use indexed mutual funds, instead of actively managed ones. The Oblivious Investor can explain to you in about 3 minutes why indexing makes sense.

*"Constant ownership change doesn’t alter the productive capacity of the asset." The majority of stocks are traded by huge institutions, banks, and pension funds. And much of their trading uses computer algorithms that rely on executing trades in the milliseconds to exploit tiny movements in the stock's value. Watch this TED talk if you want to be unnerved. Obviously, trading is necessary in order for people to express value and information about the stock, or for them to buy (when they have money) or sell (when they need it). It's far from obvious whether this shift to algorithm-dominated trading is good for society as a whole, or for individual traders. In the short-term, trading is actually a zero-sum game. If one person is truly getting a "steal of a deal", then the other is losing out. Actually, the intermediary (broker) is the only one who will consistently profit in these situations. Warren Buffet frequently says that he wouldn't mind if the stock market closed down for 10 years after a purchase, since it's only the purchase and sales prices that really matter. Ignore all the noise in betwen.

*Commodities (oil, wheat, gold) aren't income-producing, productive assets, and so are largely speculative. You have to outsmart someone else. Even in the long-term, it's zero-sum. One of you wins, the other loses. I don't see much difference between this and gambling - stay away.

*Psychology generally works against you. In theory, investing should be mostly just a combination of mathematics and risk-benefit analysis. It's much more. I've heard that the moderately-educated investors often do worse than the completely ignorant ones, who are more likely to admit they know nothing and don't try to outsmart someone or come up with a way to make quick money. Hubris bites.

*Diversify. You don't know which areas of the economy will do good or bad in a particular year. A good starting point is Vanguard's collection of 4 core funds. Pick through the details and figure out what exactly they are. It's a simple way to be exposed to the full diversity of the investable world. And closely related...

*Assets are correlated if they generally change value in the same direction to the same degree. If you can find two asset classes that could potentially return the same amount (say, 8% a year over time) but do so in different cycles, you've effectively reduced your risk while keeping the same return. It's as close to a free lunch as exists. Negative correlation means it will move in the opposite direction. (This is why the most common diversifier for a stock is a bond). If something is uncorrelated, it will occasionally moves in the same direction, for good or worse. The flip of two different pennies will be uncorrelated, but from time to time their sequences of heads and tails will line up "magically". But it's just math functioning over time. If you want to get technical, you can try comparing the last 10-15 years of returns of two assets (or stocks, or bonds) using the CORREL function on an Excel sheet.

Many people overweight Real Estate Investment Trusts (REITs) in their portfolios because their correlation with stocks has historically been somewhat low, while providing similar returns. In a broad index fund, REITs will already make up some 2-3% of the portfolio, so you are not deciding whether or not to include them, just whether or not to overweight them. Many investors with this train of thought (like the Bogleheads - click for the forum and investing wiki) add a REIT index fund to bring that total up to around 10%. Reading about it was enough to convince me, but I don't think it's critical.

*Rebalance your portfolio once a year. If stocks have done well in recent history, and bonds poorly, you may now have a riskier portfolio than you can accept. Sell off the winners and buy more of the losers to get things back in line.

*Risk = reward, generally. Do what you can to reduce risk (like diversifying), but you can't eliminate it without eliminating the potential for return. Don't contruct a more risky portfolio than you can truly accept. Expect stocks to lose half their value every once in a great while (like happened in 2007-2009). If you have 80% stocks and 20% bonds, you must be comfortable with seeing a 40% dip in value. Realize that the stock market has recovered from these crashes in the past (although in spurts, and not always quickly).
*It's not just about utilitarian money-making. People want different things out of the process of investing. Do it for the reason you want, not someone else's reason.

And for some depressing news...
*If you have a typical investment portfolio and over decades receive a "typical" return, you are only actually making 2% a year. Seriously. That's the cost of taxes, inflation, and expenses ("net-net-net"):

Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%.

All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%. (source)

Of course, if you don't invest in something, your cash deteriorates by around 3% a year. Basic law of the universe - things decay. So... if you are only growing your money 2% a year, it's still 5 points ahead of -3%.

*And lastly, never forget why you invest. This is my reason...

trial trail hike on the North Country Trail

The 4,600-mile North Country Trail runs from New York to North Dakota, passing just about 20 miles from where I'm now based in Michigan. It is one of eleven National Scenic Trails administered by the National Parks Service.

It's a long way from finished. Many of the miles are simply country road walks connecting the patchwork of local, state, and national public lands.

But once I heard about it, I found an excuse to buy some nice gear and get outside. Of course I joined the local chapter of the corresponding non-profit association and bought some maps for weekend adventuring. It's always easy to dream about doing this stuff... but it's harder to actually do it. I figure sinking some money into it and talking about it helps me get outside.

Here are some pictures from my first hike, just 5 hours of quick walking on about 12 miles split between road and wood. Cutting through the Middleville State Game area. It sure helps (in terms of speed, and soreness, and generally enjoy-ability) not to be carrying a sleeping bag, tent, food, and such!

Oh - I did see a pheasant. And a piliated woodpecker (the really big kind).

someone afoot

keep to the blue blazes

deer bedding sites (?)

I was not the first on the trail that day.