All posts by Bryce

Check Your Receipt and Count Your Change

receiptThis is a story that makes me happy just to think about.

I was at a local Taco Bell the other day to buy lunch. The drive through line was pretty long, so I parked and walked inside. There was hardly anybody inside, and the small crew was working hard to fulfill the drive through orders to keep the traffic line moving.

The woman working the window soon noticed me standing at the counter, and took my order. After paying, I stepped to the side to wait for my order. As I stood watching the food preparations, another customer entered and stood at the counter. The lady at the window turned and asked if she could help him.

He told her he had just been in the drive through and she gave him the wrong change. He said that she had given him back all the money in change that he had given her to pay for his meal. So he parked and came in to pay for his meal.

The woman behind the counter did not initially get it, so the guy had to repeat himself that he wanted to pay the proper amount for his meal. The woman then understood, took his money, and smiled from ear to ear.

I spoke up to the person paying for his meal, and told him he had just made my day. He asked if I worked there, and I said, “Nope. But I am happy to meet an honest man.”

I hardly ever pay for things with cash anymore, credit cards are much easier, but when I used to pay with cash, I occasionally received the incorrect change and would have to correct the cashier. It seems like at least 50% of the time, the cashiers would err by giving me too much money in change. And almost every time they would be defensive about not making a mistake until I showed them that they gave me too much change and I was trying to give the extra money back.

I distinctly recall one instance in a grocery store where I gave a cashier $10 and expected around $6 in change. The cashier handed me $16 in change! The cashier had already moved on to the next customer when I stated that she had given me too much money. At first she looked annoyed until I explained that I had only given her a $10 bill, and not a $20, so I wanted her to take back the extra $10. As soon as she understood, she took the $10, smiled, and gave me a big “Thank You!”

I always check that I am charged what I expect at the store, laser scanners often make mistakes, and I always count my change if paying with cash.

Have you ever received excess change that you’ve given back?

Cancer Can Happen to Anyone

cancer-blowsCancer is a very scary word for most people. Most adults know someone who has cancer or knew someone who died from cancer. There are many different types of cancer and many different causes of cancer. A recent publication from Johns Hopkins stated that, “All cancers are caused by a combination of bad luck, the environment and heredity,” and came to the conclusion that roughly 2/3 of cancer “is due to ‘bad luck,’ that is, random mutations arising during DNA replication in normal, noncancerous stem cells.” Luck was much more important than genetics or life style. Although things like smoking still cause the bulk of lung cancer deaths and genetics was very important in some cancers.

Unfortunately, I am one of the unlucky ones who got cancer for no apparent reason other than bad luck. I have a cancer of my blood plasma called Multiple Myeloma (MM). No one else that I know of in my family history had MM. It is an incurable cancer that I have been living with for at least 5 years. The average lifespan for someone diagnosed with MM is 4 years. I currently bounce from chemo drugs that have pretty bad side effects, to radiation therapy. The radiation gets rid of tumors that are just under the skin, and gives my body time to heal from the chemo drugs.

Even with all my various cancer treatments and their side effects, my wife and I continue to live and save as we always have. I want to leave my wife with ample funds for her retirement, and we both would like to eventually leave our son an inheritance. We certainly do not want to burden him with taking care of his mother later in her life. We have also saved quite a bit in our son’s 529 college fund, and continue to add $500 every month. We want him to be able to graduate with zero student debt.

We have great health and disability insurance through work. All my cancer treatments have hardly cost us anything. We also took out a 25 year $500k term life insurance policy when our son was born that we continue to keep current.

It makes me happy to know that my family will be financially OK because we had good insurance for health, disability, and term life prior to my cancer diagnosis. I always shake my head in disbelief when I read about someone who can afford it saying that they don’t want to waste money paying for health insurance because they are healthy. I was very healthy before I got cancer, too. As the Johns Hopkins study pointed out, many cancers, including mine, are mostly bad luck for which no one knows the cause.

Life, whether it’s long or short, is what you make of it. I continue to be the best husband and father that I can be under our current circumstances.

Please, if you are under-insured, or know someone who is, take heed of the recent “Cancer is Mostly Bad Luck” study. We are all mortal, and stuff happens.

My Wife Moves into Upper Management

upper-managementMy wife’s boss moved to another company last month. My wife was a natural to take over the now-vacant position, and after a bit of politics where an unqualified person with seniority also vied for the position, she got the job. Her new position is Analysis Group Lead of the Vibrations Division of the Space and Defense Group.

The good news is that she got a salary increase due to the new position, a year-end profit-sharing bonus, and a decent annual raise. The bad news is that the new position has more stress, requires more work, and more of her time. In just a couple weeks, she will fly to Dublin, Ireland to train our company’s workers at that site to perform coupled loads analysis. I won’t go into detail on what that means, other than it is a way to numerically model the acceleration and loads a spacecraft will see during launch before the spacecraft is even built.

After working with the analysis team in Dublin, she will be attending a meeting with European Space Agency representatives in Denmark.

For a little while, she was scheduled to fly out of Paris, France, and she was hoping to have at least a half day to sight see. Unfortunately, that plan got nixed, and she will just fly back home from Dublin. My wife will not be paid for her flight time, either, due to a budgeting error by the previous manager.

So, on the bright side, my wife got a substantial pay raise, and will not have an unqualified person telling her what to do. But she will be busier, work more hours, and probably have more stress. We are hoping, however, that as things settle down, she will be able to flourish in this new upper management position.

Happy 2015 to all.

What Will You Do With Your $550 Savings?

old-gas-pumpVarious news sources (ABC, CNN) are reporting that the current low gas prices will save the average driver $550 in 2015. The average driver will spend $1,962 on gas next year, according to the Energy Information Institute, which is down about 20% from this year. So, what will you do with your $550 savings?

I will first tell you what we won’t do. We will not use cheap oil as an excuse to trade in our gas-sipping Prius for a gas-guzzling luxury car that may have a smoother or quieter ride. The American auto industry is always saying that average Americans prefer large vehicles. Well, they haven’t spoken to me or my wife.

I do not expect the lower cost of gas to change our driving habits, although some sources are saying it’s cheaper to drive than fly for distances up to 2,500 miles. I might be up for driving around 400 miles to save money and have my own car and supplies to use at my destination, but I’m at a point in my life (part of getting old?) where driving for days and days just isn’t fun anymore.

I do expect to roll that extra $46/month into our taxable savings every month. And if we realize lower costs on things like electricity due to the low cost of oil in 2015, who am I to look a gift horse in the mouth? I will do as I always have done and roll all money that is left over after our monthly expenses into our taxable savings and investments. Right now, I am amassing $20,000 in our high-interest savings account to purchase our annual allotment of i-bonds for 2015. I may wait until May to make the purchase in the hopes that the fixed interest rate will be something higher than the current rate of 0%, though.

Fund Turnover Ratio Can Cost You Money

Cut-costs-with-low-turnoverSomething that isn’t often discussed about mutual funds is their turnover ratio. The turnover ratio is “the percentage of a mutual fund or other investment vehicle’s holdings that have been ‘turned over’ or replaced with other holdings in a given year” —Investopedia. A 100% turnover implies that the fund’s assets are completely sold and replaced every year. A 200% turnover implies that the fund’s assets are replaced every 6 months.

In general, actively managed mutual funds have a much higher turnover ratio than passively managed index mutual funds as the active managers trade stocks in an effort to beat their respective index. From Vanguard,

Turnover, or the buying and selling of securities within a fund, results in transaction costs such as commissions, bid-ask spreads, and opportunity cost. These costs, which are incurred by every fund, are not spelled out for investors but do detract from net returns. For example, a mutual fund with abnormally high turnover would be likely to incur large trading costs. All else equal, the impact of these costs would reduce total returns realized by the investors in the fund.

And from Investopedia, “A fund’s trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio.” So we need to look elsewhere for how much turnover may cost.

Stefan Sharkansky published a study in 2002 titled, “Mutual Fund Costs: Risks Without Reward,” that looked at the impact of fees in the form of expense ratios, transaction costs in the form of turnover ratios, and taxes. (Note that “bps” stands for basis points. A basis point is 1/100 of a percent.)

We find a consistent negative relationship between fund turnover and performance in every category of fund that we examined. In Larger-Cap U.S. equity funds, we observed that on average, each 100% of turnover was expected to reduce the fund’s average annual pre-tax return by 124 bps (1.24%). Similarly, each 100% of turnover was shown to reduce the expected annual return by 255 bps for Smaller-Cap U.S. funds, 154 bps for International Equity funds, 43 bps for Municipal Bond funds and 9 bps for U.S. Government Bond funds. There results are within the range of other studies that have examined the costs of institutional trading and the relationship between fund turnover and performance.

Thus, we see that turnover costs are a hidden cost that investors need to be aware of. According to Morningstar, “It’s not uncommon to see turnover rates of 300% or more, even in funds that aren’t particularly aggressive.” This would mean an annual loss of at  least 3.72% for funds with a 300% turnover ratio. And that’s before taxes.

300% seems high to me, but 100% turnover is very common for actively managed funds. 1.24% in turnover costs is still a huge amount for a fund to overcome just to pull even with a comparable low-cost index fund. And that does not even take into account the 1% or more in fees that most active mutual funds charge. This would put costs for an actively managed fund with 100% annual turnover at roughly 2.2% or more. Ouch.

If these funds with high turnover are held in a taxable account, much of their turnover will be realized as short-term capital gains, especially if the turnover ratio is higher than 100%. That means you could be paying capital gains taxes at your marginal income tax rate for stock sales in the mutual fund for which you never received any income.

Note that the turnover ratio for Vanguard’s Total Stock Market mutual fund is 4%, which according to Sharkansky would reduce earnings by 5 bps. Add the fund’s expense ratio of 0.05% to get a total annual cost of 0.1%, and it is apparent that low-cost passive index funds can easily beat comparable actively managed funds. Especially if you are investing in a taxable account where the added taxes due to high turnover make it almost impossible for the active funds to beat low-cost index funds.

Do you hold actively managed funds? If so, do you know what their turnover ratio is, and how much that may be costing you?