Thursday, January 07, 2010

Engine 2 and Expense Ratios

I recently stocked up on sweaters when I realized that I only had one sweater that I actually liked. The newly reoffered Bean's Norwegian Sweater (knit in Norway!) caught my eye, but is only available for men, so I shot them an email about making a women's version. So I ordered two boys sweaters, size L, from Lands' End and L.L. Bean. When they came in, they were a bit baggy, short in the arms, and boxy in the torso. That's the trade-off for saving money by getting kids' clothing. That is OK with me, but I was disappointed to see that both pieces were Made in China. I have been feeling convicted lately of buying cheap items manufactured in poor labor conditions. B sympathizes. Can we implement a rule of only buying made in the US clothing? That would make me buy clothes way less often, for sure. Still considering this.

I have never been one to jump on faddish diets. The only one I embarked on was the Lemonade Diet in college, and I was so snack-crazy then that I could only stick with it for three days before cheating at Fresh Plus (post). Another time, spurred by a suspicion that maybe gluten intolerance was making me tired, I went gluten-free for a week, and basically starved for the first couple days, since gluten foods (including many packaged foods) made up most of my diet. I tried out a gluten-free bakery in Westlake and found it very unappetizing (post); all in all, it was an extremely unsatisfying week of eating.

Austin is replete with people who adhere to alternative diets. Vegan, vegetarian, gluten-free, sugar-free, red meat-free, macrobiotic, raw food, the list goes on. I've known people who eat differently than I do for years now. But never once did I seriously consider joining them. Food was just food, and I had more important things to worry about. Besides, the fun level of restriction is pretty close to zero. 2009 was a big year of food thinking for me. Beyond taste, I was confronted with the political, social, environmental and personal effects of what I eat. We began to try to eat only locally grown produce (if not that, then USA/organic), local meat and eggs, and less processed foods. In all truthfulness, the health factor was less of an issue for me than ever, since I had somehow managed to lose ~15 pounds this past 18 months by allowing myself to be picky and let my moods get in the way of eating. I knew I wasn't fit or healthy, but it's so much easier to ignore the question when you look just fine.

About a month before the wedding, B resolved to start working out during his lunch break every weekday. With holiday and sickness-related exceptions, he has dutifully kept up this regimen. Concerned that he wasn't losing any weight (albeit gaining much more muscle), we discussed the impact of our diet, and how it had changed from when we dating. Turns out that he noticed that we ate way less greens because I dislike eating raw vegetables, and he did not want to fight with me. Same with fish. And I eat way less pasta, even though I love it, because he doesn't particularly prefer it. And I eat way more (red) meat, because he considers it to be a hearty and flavorful part of a meal. It was an unbalanced array of foods. You are what you eat, right? In the end, with our resolves armed, we decided to make another positive, all-encompassing change. I had heard of the Engine 2 diet, developed by an ex-triathlete and firefighter in Austin. I did some research by reading articles and reviews about the diet (conveniently located on his site), purchased the book at Book People, and here we are basically turning vegan for 6 weeks!!

The added restrictions of the Engine 2 diet to being vegan are no added oils, added sugars, refined flour, or alcohol. B's challenges: no cheese, no alcohol, no yogurt, no eggs, and of course, no meat. My challenges: eating "plant strong," no regular desserts, no regular baking, no Blue Sky sodas, no fruit juice. The rules are still hazy to me, and it will definitely be a work in progress, but I think it will be a worthwhile endeavor. With most Americans dying of disease, I don't want to meet my end that way and I have many years to get off this increasingly common, downward path. (Although I have to admit that I won't officially start until the weekend, as I don't want to just throw away the bread and lunchmeat that is my lunch for the rest of the workweek.)

A personal project at work is taking the bulk of this week. I'm investigating our 401k plan, specifically the fees associated with each of the funds offered. This comes on the heels of my own conversion of my Traditional IRA to a Roth IRA. My parents urged me to open an IRA (Individual Retirement Account) the year I started working (2007), and I did so begrudgingly. At this age, any amount of extra cash = fun, and it was hard setting aside the money, but I am so glad that I did it. Primer: a traditional IRA lets you put in pre-tax dollars, and the amount is taxed as you withdraw it after you retire. A Roth IRA is funded with pre-tax dollars, and your retirement withdrawals are tax-free. I chose to convert to Roth because I am quite certain that I am in the lowest tax bracket I will ever be in, as the common path is for income to rise along with years of experience.

Anyways, when I converted, I put all of it into index funds. Index funds are like the lazy man's surefire way of gaining interest on a long-term investment. It sounded too good to be true, but as I read more about it, I was convinced. This article in particular stood out to me. The results are based on very long looks at historical market returns. Instead of trying to figure out a way to pick the magic combination of funds, you get a slice of the whole market. There are ups and downs, but overall, it steadily goes up in the long-term. And a big part of that has to do with low fees, since they are not managed.

Anyways, the expense ratio, which is the fee you pay the investment company for a fund, of the particular index fund I chose was 0.18%. High fees and expense ratios specifically will eat away at your retirement fund, to the tune of tens of thousands of dollars (or even hundreds of thousands of dollars, if you earn and put in a lot). Please take a look at this chart. Now I'm no money hog, but I'd like to not lose money if I can help it. In poring through the fund information of my company 401k, I calculated that the average fee was around 1.5%. That is a far cry from the 0.18% in my Vanguard index fund. If you look at that chart, it shows that even a 1% increase in expense ratio for a one-time $10,000 investment over 40 years results in no small relative loss, 33.8% (1.5% ER) vs.12.8% (0.5% ER). All this could be avoided if you shop around for lower fees. The terrible thing is that fees are hidden away from the general investor who does not do his/her research, and they are losing so much interest to such fees. I am in the process of trying to find more funds with lower fees, or even new plans with lower fees to present to my boss. I don't want to go as far as to accuse our company's broker (who is by the way a personal friend of the owner) of reaping in huge benefits from our selection of funds, because that would harm me. Let's just say it happens.

If you don't have a 401k, I strongly advise you to open one if your company provides the option, or just open an IRA at Vanguard or somewhere else. Not doing so is pretty much the most financially damaging thing you could let happen for your future self in retirement, and not to mention your family. Any percentage, no matter how small, matters, because of compound interest over decades. (Side note, this is why I am averse to mortgages.) Lately, personal finance has been a consuming interest for me. Not only because I want to ensure that I am set, but because it pains me to see our culture of financial ignorance and the suffering it causes. I want to educate people my age, especially, about this, so they can take care of themselves and their families, and not be enslaved to the vicious side of money. If you have any questions, I would be more than happy to discuss. This is on my list of possible career paths, although I am told that hobbies don't necessarily translate well into jobs.

Vampire Weekend - "White Sky"

Mp3 source: All Things Go

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