In my previous post I described the stock and bond markets by analogy with a casino, but you might reasonably question the validity of that analogy. Are market returns really as unpredictable as coin flips? The real payoff probability distributions obviously aren’t binary; what do they actually look like?
After spending a number of afternoons and evenings with friends and family over the last few months reviewing their retirement planning and investments, I’ve gone and done something a little bit crazy: I suggested to the GSC at Caltech that maybe I could give a talk on retirement investing to the grad student/postdoc population. Incredibly, they thought this sounded like a good idea, and so now I’m scheduled to give a talk in a couple of weeks. I’m going to try and write it up here in prose form first, to get it organized. It’s gotten to be a bit long… so I’m going to break it up.
Main Points:
- Taking responsibility for funding your own retirement is arguably more important now than it has been for a couple of generations. 100 years ago we had much more in the way of traditional (family, community) support in old age, and the systems that we put in place after the Depression (corporate pensions demanded by organized labor, social security) show few signs of being fixed any time soon. Generally today you do not even have the option of signing up for a “defined benefit” plan. It’s a 401(k) or the highway.
- Investment returns are for all practical purposes random, unpredictable events, and because of this there’s really no such thing as an “expert investor” in the sense that most people selling their investment management services try and imply. Nobody can reliably beat the broad markets, but you can do a perfectly good job of managing your own retirement funds if you’re willing to spend about 4 hours per year on it, say the other half of the day you spend doing your taxes.
- To maximize your chances of success, you must habituate yourself to spending less than you earn, making investing as automatic as possible, starting early and aggressively, and continuing throughout your entire career, regardless of what life and the markets throw at you. Because returns are exponential and not linear, the difference between starting to save at age 23 and age 32, assuming roughly an 8% rate of return, can be on the order of a factor of two in the final value of your retirement funds. Being comfortable living well below your apparent means makes it possible not only to save money now, but also reduces the amount of money you need in order to have “enough” in retirement, where “enough” means about 25 times your expected annual withdrawals, as you can take about 4% of your money out each year indefinitely.
- Maximizing the returns on your investments largely comes down to managing investment costs: how much you pay the people doing the actual investing (i.e. the mutual fund companies), and how much you pay in taxes. The difference between paying 0.2% and 2% in fees and taxes each year might not seem huge, but over the course of 35 years of investing, it makes roughly a factor of two difference in the amount of money you end up with.
- The two most important tools you have in managing investment risk are diversification and asset allocation. Diversification reduces the overall impact of many kinds of unpredictable events (high oil prices, the demise of the newspaper industry, war between India and Pakistan, collapse of the Icelandic currency… etc.) reducing the overall volatility of your portfolio. Asset allocation (mainly the split between stocks and bonds) allows you to choose what kind of financial risk you are exposed to, and to shift it over time as you get closer to actually needing to live off your investments. With stocks, you get the potential for future growth, at the expense of having to put up with wild fluctuations in their value. With bonds, you get less price fluctuation and less potential for growth, but the ability to draw a reliable income stream. With cash you get little to no price fluctuation, but essentially zero potential for real (inflation adjusted) growth.
Continue reading ‘An Introduction to Retirement Investing for Scientists’
I’ve realized recently that it is becoming difficult for us to continue marginally increasing the sustainability of our household.
Pasadena has a relatively enlightened “pay as you throw” garbage collection service. You can choose one of three different sized garbage cans depending on how much trash you generate, and the smaller ones cost less. Both the front house and the back house have the smallest size (32 gallons). Last week when I wheeled the garbage out to the street for pickup one of the two containers was empty, and the other was only half full. The previous week there had been no garbage whatsoever in the bins. In two weeks, between two houses, we’d managed to half fill one container, and it was already the smallest size the City could imagine one house filling on a weekly basis, meaning we generated something like 1/8th as much garbage as we were “supposed to”. Instead most of our refuse ends up either getting composted or recycled. If only we could cancel the garbage service for one of the houses, or have them come only once a month. Thankfully Pasadena does actually have a stated goal of zero waste-to-landfill and incinerators (by the year 2040), as does San Francisco (by 2020) and Vancouver (no firm date for zero yet… but a 40% reduction from their current, already low, levels by 2020). Last year we “diverted” 66% of our solid waste as a city, and both the total amount of waste landfilled, and the per capita amount have decreased over the last several years (as reported in the 2009 Green City Indicators report), though as I’ve noted before “diversion” means some strange things in this context. The city currently considers it likely that we will achieve this 2040 goal. I wonder if the economic downturn has meant less purchasing and discarding of disposable crap. It’s almost certainly responsible for much of the recent reduction in vehicle miles traveled. I’m not sure what additional waste-reduction incentives have been put in place (but then, I’m clearly not the target audience… so maybe I just haven’t noticed).
Another similar strange experience recently was realizing that our natural gas usage, which goes exclusively to heat domestic hot water (we refuse to turn on the furnace in this fine Mediterranean climate…) hardly varies at all with our water usage. The difference in our gas bill between both of us being here and neither of us being here is less than 10%. About $1 out of $15 goes to heat in the water we actually use. $14 out of $15 goes to heat that escapes from the water heater into the air in the crawlspace under the house. Sadly, it was replaced two years ago (after the bottom of the old tank rusted out… that replacement dropped our monthly bill by 2/3, as leaking hot air is a lot better than leaking hot water!) and it could have been replaced with a European style tankless water heater like we had over winter break in the Earthships in Taos, where it’s just a backup for the solar hot water heater on the roof which would also work wonderfully here in SoCal.
I think there are about 6 big things you can do on your own, if you’re at all serious about sustainability:
- Have fewer than 2 offspring.
- Eat a vegan diet, or close to it.
- Don’t own a car, and dramatically reduce the number of miles you drive.
- Avoid flying.
- Live in a small, durable, energy efficient dwelling.
- Stop buying things that will eventually be sent to a landfill or incinerated.
If you’re not doing any of them, I don’t really see how you can say you care about sustainability with a straight face. But what if you’re doing all of them? And also volunteering for organizations that try to promote these behaviors in general? And donating money to others, in a similar vein? And writing your elected officials about the things you care about?
I’m not trying to go off on some holier-than-thou trip here: I haven’t really committed to stop flying (it’s just an idea at this point, one that Amtrak might well talk me out of), and I certainly enjoy eating an omnivorous diet (with the animal products coming as much as possible from discarded food). I’m just saying that I’m starting to feel a little limited. To go much further than the above list, infrastructure and society itself have to start changing, in North America anyway, and that’s an entirely different kind of problem. An interpersonal problem, with which I’m much less comfortable.
Charter Communications, our local co-axial monopoly and recent bankruptee, sent a technician out to our house today, to hook up our new net connection. As is almost always the case, the tech was friendly, helpful and generally knowledgeable, in stark contrast to just about anybody you can ever get on the phone if you call the company. The customer service people are like robots. Sometimes, like robots with buggy firmware. They are, quite literally, running a program written by someone at Charter, codified in a choose-your-own-adventure style script booklet or web application. They seem to have no intrinsic knowledge of the business they work for, or the systems they are meant to support. Honestly, I wish Charter (and other such companies) would just put these resources on the web directly, so I can page through them on my own without having to be on hold first. They probably won’t do this, at least not in full, because one of the most important jobs this script/program does is to retain as much of their customer’s money as possible, whether or not they’re really supposed to have it, and to direct people into more lucrative service contracts, aggressively if need be.
Continue reading ‘To Charter Communications: transparent bills get paid faster’
I’ve been gone. Not just from Pasadena, but from the world at large, for at least six months. I can probably count the number of times I left Mike and Susan’s house in 3.5 months on two hands, or maybe three, but some of those were just hiking. I didn’t see much news. Thankfully I missed the entire healthcare debate. I didn’t spend time with other people. I was checked out. Now I’m starting to check back in, and of course things seem kind of surreal.
I went to a mall last Friday. The one by the Santa Anita racetrack. I went with Ian to see Avatar in IMAX-3D, and to get a little exercise. I’ve mostly been laying around trying to stop being sick for the past week. When we got there, the show had sold out, so we decided to walk around the mall — to literally circumambulate it, not walk around inside like shoppers — and decide whether we wanted to go to the next showing, and kill some time. It was bizarre. The whole place. I felt like an alien, first for having biked there (they have a giant valet-only parking lot), second for clearly not wearing culturally acceptable Friday-night-at-the-mall attire, and third for having a giant crazy-homeless-guy beard. The homogeneity of the people just seemed bizarre somehow. Lots of black and white clothing. Lots of text messaging. Lots of makeup and trying to look tough. The scene was so strange we decided to pee in the bushes in the parking lot rather than try and find a bathroom inside. Continue reading ‘Checking back in with the world’
Fossil Fuel Futures
Smil’s take on the future of fossil fuels seems very similar to that of Steve Koonin (and thus BP), namely that there’s plenty of all of them in the ground for us to damn ourselves to a hothouse hell, if we should so desire. I’m not entirely sure whether this strikes me as an optimistic, or pessimistic statement, but I suspect it’s pessimistic. If we were forced to change our energy systems, I believe (unlike many Peak Oilers) that we would be up to the challenge, dramatically reducing demand without reducing our standard of living, increasing conversion efficiencies, and innovating our way out of the mess partly technologically, and partly socially. If, on the other hand, we have to choose to stop burning fossil fuels, I’m much less confident that we’ll do the right thing.
Continue reading ‘Energy at the Crossroads by Vaclav Smil (Part 2 of 2)’
I will remember the past decade as graduate school. Only 6 years actually enrolled, but also another 1.5 or so working at Caltech beforehand, trying to get in. However, all the highlights took place in the other times. The 2.5 years yet unaccounted for. Of that time, about 18 months was spent traveling, and that’s where the memories really are.
A wolf in our camp by the calving McBride glacier. Paddling over Pacific swell with seaweed and a wright whale by George Island. The miracle of getting over sea sickness while fishing for salmon on the M/V Radio out of Pelican. A brown bear and her cubs on the beach. Lonely, wordless, solo backpacking in the Beartooth range. Two weeks in Dark Canyon with the ringtails eating cattail roots. A half eaten deer and mountain lion tracks in the morning by our campsite in the Zion narrows. A night with Concept One and Aphex Twin in a Subaru crammed full of camping gear during a rain storm in the redrock country.
Where does our energy come from today, and how do we use it? How much does it take to live the Good Life, and what, really, should that energy be used on? Where might it plausibly come from in the future, and what does the Good Life consist of anyway? Energy at the Crossroads by Vaclav Smil at least attempts to get at this stuff, looking at humanity’s utilization of energy, in the past, present, and several possible futures. But the book is a such a dense mass of numbers and graphs that I think I’m going to have to do this in several posts.
The first two sections Long-term Trends and Achievements and Energy Linkages, look at how energy use correlates with other variables of interest, how those correlations have changed through time, and how they vary globally today. If there’s an overarching message here, it’s that nothing about today’s global energy system is straightforward. You can’t make many useful comparisons by looking at only one dimension, such as the total primary energy supply (TPES) utilized or the energy intensity (EI) of a nation’s economy, or by simply looking at mean values without considering the distribution they come from. These variables are not normally distributed. Another clear message is that the 20th century was an anomaly. The explosive global growth in fossil fuel utilization that we have seen over the last hundred years will not be sustained, for a variety of reasons, any one of which would be convincing, but which in combination are downright scary. Either the way our civilization uses energy will be utterly transformed, or the sources of that energy will change dramatically. Or both.
Continue reading ‘Energy at the Crossroads by Vaclav Smil (Part 1 of 2)’
In class Peter Goldreich once said “You don’t get smarter in grad school. You just get older.” I don’t know if I agree entirely, but there’s a grain of truth in there somewhere. It is a strange kind of scientific hazing ritual. An induction and an indoctrination. Highly skilled and intelligent people, doing difficult technical work, for years, earning something close to minimum wage. Why? Is it for a chance to play in the tenure-track tournament, with the odds stacked 10 to 1 against you? If you win, you can study anything you like (as long as there’s funding…). Is it because we think having a PhD will get us somebody’s respect? Whose? Our parents? Our advisors? Society at large? It’s certainly not because we’re seeking power or riches. That way lies law school, or the dreaded MBA. Is it because we don’t know how to do anything else? Because our self esteem has been so entangled with school for so long? Because we are a people addicted to understanding? What fraction of PhD students finish feeling good about themselves, or in love with their research? Or even learning in general?
Dear District Attorney Stone,
I have been a daily cyclist in LA County for more than 15 years, using my bike as my primary means of transportation. As a result, I have experienced many instances of either reckless or malicious behavior by drivers on our streets and highways. Teenagers “having fun” and people out to “teach me a lesson”, no doubt. These are very serious offenses, which needlessly endanger me, and infringe upon my right to use our publicly funded infrastructure in a healthy, economical, fiscally responsible and environmentally friendly manner.
The case of Dr. Thompson is an extreme one, and I believe that he deserves the harshest penalty under the law for his violent act, which might well have ended the lives of one or more cyclists in Mandeville Canyon. However, he is only one person, and there are many lesser and some greater offenses committed against cyclists in LA County every month, which go largely unnoticed by the media or law enforcement, or if noticed, are dealt with in a manner which does not appropriately apportion responsibility. Drivers wield hundreds of times more power, in the literal sense, with their vehicles than cyclists do, and travel at much higher speeds, with much greater energies. They have the ability to cause much more harm than cyclists. This should result in greater responsibility. “I didn’t see him”, as drivers often say after an accident involving a cyclist, is not a valid excuse; it is evidence of their dereliction of this responsibility, a responsibility that all road users have to be aware of their surroundings, and the potential consequences of their actions.
More than any particular sentence for Dr. Thompson, I would like to urge you to take less spectacularly reckless behavior by drivers more seriously. For instance, driving while using a mobile phone, while now illegal, is not being aggressively ticketed, despite being an impairment on par with driving while under the influence of alcohol. Drivers who do not take their responsibilities seriously, or worse, who use the power their wield with their vehicles as a means of intimidation against other more vulnerable road users, should have their drivers licenses revoked for a long period of time. They need to be taken off the road. Losing your license is often seen as an extreme punishment, because we have built our city, and more broadly our society, so entirely around the idea that everyone will own and drive a car on a daily basis. But driving is not necessary, even in LA, as I can attest having never owned a car here, and I do not believe we should confer the right to operate a motor vehicle on every citizen when they turn 16. It should be a privilege that is earned and maintained through consistently responsible actions.
Thank you for your time and attention,
Zane Selvans
