But first . . .


Donald A. Coffin: ‘I agree that hybrid cars are a great idea. But right now there is little if any financial incentive to buy one. According to prices and mileage I saw in a recent issue of Consumer Reports comparing hybrid to gas-only models (Civic to Civic, and so on), it would take about 6 years to cover the higher purchase price of a hybrid – at $3 per gallon of gas.’

☞ Well, yes and no. First off, if the car lasts 10 years before being junked (few are junked after 6), the internal rate of return on that extra investment could be pretty good. Say you paid $3,000 extra for the hybrid and saved $500 a year n gas to break even after six years. You (or the new owner you’ve sold it to) have a further $2,000 in savings those last 4 years. My financial calculator tells me that to invest $3,000 now for ten years of $500 savings is to ‘earn’ an 11.2% rate of return on your money – tax-free. Not so bad.

Of course, it’s not certain the used car market will reflect this if you sell before you’ve realized the full savings. And it’s possible that gas prices will fall. But it’s also possible the resale value will more than reflect the gas savings – and that six or eight years from now gas could be $4 or $5 a gallon (it’s already $6 in Norway, I believe). Or that the car will last 11 or 12 years before being junked. You could be talking 20% or more in after-tax annualized return on investment.

And then, of course, there are the ‘soft’ benefits of driving a car you know puts less strain on the environment.

And now . . .


Why can’t they see the wisdom of President Bush’s plan? Thanks to the Los Angeles Times for this. In small part:

May 11, 2005
Experts Are at a Loss on Investing
Nobel winners and top academics fumble the sorts of decisions Bush’s Social Security overhaul plan would ask average Americans to make.
By Peter G. Gosselin, Times Staff Writer

. . . [A] growing body of research shows that millions of Americans fail to get even the most elementary investment decisions right.

More than one-quarter of those eligible for employer-provided 401(k)s fail to sign up for them, according to the Federal Reserve. More than half of those who do sign up funnel their money either into overly conservative or overly aggressive investments, according to the Employee Benefit Research Institute, a Washington think tank sponsored by hundreds of companies.

Even more disconcerting, new research suggests that most people don’t behave anything like the economically savvy men and women that free-market advocates and economic theorists claim they are. They often shut down in the face of many choices. They sometimes even fail to go after free money.

In committing investment errors such as these, ordinary Americans turn out to be in good company. Even some winners of the Nobel Prize in economics admit to making similar mistakes, either by failing to pay attention to their own retirement arrangements or by making faulty decisions when they do.

. . . That Nobelists and other highly educated professionals get tripped up by retirement is hardly proof that people can’t handle their own retirement investments. But it does suggest that few are terribly good at the job, and fewer have the time or inclination to get better quickly.

And the president’s accounts plan would require people to do a very good job at investing.

Under the proposal, Americans born in 1950 and after would be able to divert a portion of their Social Security payroll taxes into individual investment accounts. But in return for doing so, their traditional Social Security benefit would be reduced – by the amount diverted plus a 3% annual after-inflation charge on that amount.

With inflation now running about 3%, that means account holders might have to earn 6% a year just to break even. Anyone who followed Markowitz’s approach – putting half of their balance in a low-interest investment – would almost certainly lose money by signing up for accounts. So would someone who followed Akerlof’s approach – placing a substantial amount of it in money market accounts, which now pay about 2%.

Markowitz, Akerlof, Kahneman and Granger are not the exceptions among the nation’s most-educated elite or the general population in taking a cautious or hands-off approach to retirement investment.

In interviews and e-mails, five of the 11 Nobel winners in economics during this decade and a handful of others since 1990 said they failed to regularly manage their retirement savings. One even says he missed the mark in how he invested his prize winnings.

Several had or have retirement funds parked in money market accounts or other low-interest investments that they say are probably too conservative.

The same is true of an estimated 50% of Harvard’s 15,000-member faculty and staff, who permit all of their retirement savings to be funneled into money market accounts, according to the university, by failing to specify how they want their funds invested.

The forget-about-it approach also applies to most of the 3.2 million members of TIAA-CREF, or Teachers Insurance and Annuity Assn.-College Retirement Equities Fund. TIAA-CREF oversees retirement investments for most of the nation’s college professors and research scientists. Almost three-quarters fail to make a single adjustment in their retirement accounts during the course of their careers, despite repeated urgings by experts that people change their mix of investments as they age.

“If the creme de la creme of the economics profession and American academia can’t get these sorts of things right, why should we expect everyone else to?” asked Yale finance theorist Robert J. Shiller. “Why should we be surprised that people who already carry a heavy burden paying their bills and keeping up with their 401(k)s, if they have them, are reluctant to take on new responsibilities with these [Social Security] accounts?”

☞ There’s also the question I keep coming back to: why should we all have to save enough to last us until we hit 107 years old (since we might), when only a few of us will? Why not pool our resources, so that anyone who does make it that long knows there will be at least bare subsistence – but we won’t all have to save enough to provide for that possibility? We could call it – oh, I don’t know – Social Security?


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