Our Revised Energy Hedge

 

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Our New Energy Hedge

Most of the investments in our retirement accounts are ridiculously simple. We own a LOT of shares of Vanguard’s 2045 Target Index Fund (which Vanguard lovers know is just a dead-simple combination of their Total Stock/Bond, and Intl Stock/Bond funds that are designed to stay within “age appropriate” asset allocation ratios). We own a fair number of shares of lowish cost SP500 tracking mutual fund, and a lowish cost bond fund.

But there’s one that’s less simple. And, as a result, more expensive. It’s an energy industry mutual fund and I chose it when I set up my 401K at my current job in late 2008. The fund is not an awful one, but certainly not as cost-efficient as most of our other investments. And still, I chose to include it. Why?

My Relationship With Energy Prices

This is oddly one of the few investments I’m a tad on the emotional side about. Energy and utility prices have always been something I’ve been a little hyper-aware of.

I’d like to blame it on the fact that I was born on the tail end of an energy crisis. (See the big peak in this graph here? That’s right around when Mr PoP and I entered this world.)

Whatever the reason, this hyper-awareness was pretty well ingrained by the time I was 16-years-old and I filled up the gas tank in my mother’s car on my own for the very first time. On that day, Exxon was charging $0.99/gallon. I remember it so clearly, because never once since that day have I ever filled a gas tank on prices that low.

What’s Happened Since Then?

Here my memory translates a bit and I remember mostly the cost of a barrel of oil at different significant points in my life.

  • In the fall of 2000 while in high school macro-economics class we speculated about the market forces causing oil to spike at over $30/barrel.
  • Six years later when I bought a car and moved to Florida to begin my career oil was in the high $60’s per barrel. (More than double!!)
  • Then in the summer of 2008, right before I started my current job, oil prices spiked over $130/barrel (and I kept hearing echoes of that macro-economics class that felt like a lifetime ago price-wise, but was actually less than 8 years prior). (And again, another ~2x increase!)

Why Am I Reminiscing About Oil And Gas Prices?

Well, mostly to explain why, in late 2008 when I was setting up my 401K that I chose to include that energy fund.

It doesn’t have a huge allocation, and the financial planner I get to see through my 401K plan calls it my “fun money”. But that’s not really an accurate description. When I set it up, it was more like my “fear money”. I felt like I had been whipsawed by energy prices in my (at that point all too brief) adult life, and allocated a small, but steady, percentage of my 401K to this energy fund.

The allocation was on the small side to start with, and has only grown increasingly small as our overall investment portfolio has expanded since then with real estate purchases, and Mr PoP’s own 401K as well! So as it stands now, it’s <3% of the value of our retirement accounts and ~1.3% of our total net worth.

Really, it’s small enough that I would be ignoring it for the most part were it not for a change in my 401K that is requiring me to liquidate the position.

Basically, I have two options:

  • I could let it roll over into another energy fund, but the new fund has an even higher cost…
  • Or liquidate the position and allocate it to low cost total market stock/bond funds like the rest of our portfolio

And I feel the need to address a couple of questions…

Did The Fund Provide A Good Hedge?

When I set this up, I was kindof hoping (naïvely, perhaps?) that this fund would basically be what paid for my energy costs in retirement. Gas prices go up? It wouldn’t matter to me since this fund would be what I paid for gas out of… So did it do as promised?

Not really. Here’s a graph from Google Finance comparing the energy fund I’m in with the UGA (United States Gasoline Fund – a commodity pool that aims to track the spot price of gas).  The red is UGA, the blue is FANIX, the energy fund in my 401K.

EnergyFundvsGasSnip

Is There A Better Hedge?

Turns out there is, and Mr PoP reminded me of it when we talked about this last week. It’s called using less gas. Sometimes we get new readers who see our income statements and marvel at the ridiculous amount we spend on gas every month. But dear readers, you have no idea how much LESS gas we use than we used to.

Check out this table and try not to gag when you see where we used to be with gas spending…

Year $ Spent on Gas Avg Retail Price/Gal Approx Gal/Month
2010 $4,124 $2.85 120.6
2011 $6,413 $3.53 151.3
2012 $5,726 $3.69 129.3
2013 $3,947 $3.44 95.6

My guess is that 2014 will come in around 60-70 gallons/month. So far, January was just 53.

Feel free to gag. I kindof do when I see those numbers from a couple of years ago. I know why they climbed so sky high – a new job for Mr PoP that had a decently long commute started in 2011 – but that’s not really an excuse since he’s still got that same commute today.

It just turns out the best hedge against rising gas prices that we can find is simply using less gas, a feat that we’d already committed ourselves to.

And the fewer gallons of gas we purchase, the less I care if the price doubles. At least that’s the hope.

So it looks like I’ll be liquidating that energy fund (sadly at a nominal fee), and rolling the funds into the low cost stock index and bond funds in my 401K plan where the rest of my money is with a renewed drive to keep our gas usage nice and low.

 (Mr. PoP edit-We actually own 2 energy hedges! I bought 500$ of BP shares on a whim in late June of 2010 when the Deepwater Horizon was still spewing oil into the Gulf. BP was trading at 30; can’t remember what the PE was, but it was obvious that people were panicking by that point.)

Has anybody else tried to hedge their energy or housing costs?

 

 

31 comments to Our Revised Energy Hedge

  • We paid $35,000 for solar panels with a 25 year warranty. If it lasts 30 years( hopefully) as our roof is pretty new it should save six figures. Someone challenge my assumption on a possible $200,000 lifetime savings as our energy cost went from $400 a month to $14, they’re assuming prices stay constant with no inflation. Much like your theory on oil at $30 won’t my energy cost be higher in 10 years, however solar will offset that.
    Charles@Gettingarichlife recently posted..The Advantages Of YOLO In Your FinancesMy Profile

    • How many Megawatts is your system? Do all solar systems in your area come with a 25 year warranty? That seems very long.

      I briefly looked into solar, but our household energy costs are significantly lower than yours, and getting lower all the time, so the breakeven would be quite a bit further out for us.

  • They say not to invest in things you don’t understand…so I’ll be sticking with my vanguard index funds! I don’t know what an energy fund is or really what a hedge fund is (but at least I’ve heard of a hedge fund???).
    Becky @ RunFunDone recently posted..No Car Commute Month!My Profile

    • well, these funds are just mutual funds, so not a whole lot more complicated than index funds. They’re just tracking one industry – the energy industry.

      Actual hedge funds are completely different beasts and we don’t have enough money to play that game. =)

  • I like the new hedge! Much simpler and more in your control. I’ve never spent a ton of time worrying about energy prices, but the gas bill in our apartment has been really high the last few months. But that’s from use, not an increase in price. We definitely need to work on that.
    Matt Becker recently posted..The Stock Market is Falling! In Other News, Grass is Green!My Profile

    • I’m sure the snow storms that you guys have been getting hit with are at least part of the reason that your bill was higher, so I wouldn’t feel too bad about it. =)

  • Ivy

    We have a similar hedge – our high efficiency wood stove – we even used the biomass tax break, so partially government-funded:-) We use it almost daily, wood is free, compliments of hurricane Sandy and my husbands sweat equity. It’s fun to see how at much lower monthly temperatures we also have used half the gas and electricity we did before.

    Biking is not really an option for us. My husband will be hard pressed to fit 2 children and himself on a bike in his daily commute to the daycare. I could possibly do it since my office is 20 min by car (if I wanted to brave the NJ highways), but have opted for the more convenient option of working from home 4 days a week:-). We spend about $2k a year on gas.

    I wish we could do solar panels, but our house is in a shady spot (also not good for vegetable gardening:-(. But my husband reminds me this is also good for our air conditioner cost in summer, so I guess there is a good side.

    • I can’t blame your husband for not wanting to do a day care drop off with a double-seater kid trolley on the back of a bike. =) Really, $2K per year isn’t all that bad for gas – and I am very jealous of your option to work from home 80% of the time.

    • I actually met someone at a park riding two kids–ages maybe four and one and a half–in separate child seats on the back of an extended-length bike! But he said it had been so cold, his wife had been late to work a couple of times driving the kids in the car after all. And the bike was over $3K, so it was a definite lifestyle commitment. The option exists… but I don’t blame you for not jumping at that option.
      frugalparagon recently posted..Cloth Diapering: What Not To BuyMy Profile

  • My hedge is the same as yours, to drive less.

    My extremely irrational side keeps begging for a Tesla and solar panels on the roof. The latter may actually be a good idea since I could install them myself and the cost of panels has dropped like a rock. However, a $70,000 car to save a little money on fuel is completely ridiculous, especially considering that we don’t drive that much.

    If I ever did have to drive lots of miles, I’d hit up eBay for a first generation Honda Insight: http://en.wikipedia.org/wiki/Honda_Insight#First_generation_.281999.E2.80.932006.29
    Mr. 1500 recently posted..Ask the Readers: How big do you celebrate Valentine’s Day?My Profile

  • That 2008 period was influential for my wife and I, too. When gas prices went above $4 in California, we went and bought our first scooter. I hadn’t thought of it as a hedge, but it kind of is: we get 80-90 mpg, so that makes gas price fluctuations less important.

    My dad has worked for nuclear power plants since the early eighties and he, too, invests in energy funds. However, they represent a majority of his portfolio, which is not great from a diversification perspective. I figure if this is your ‘fun money’, then why not go for it and get a hedge?
    Done by Forty recently posted..Give Yourself Credit (Progress is PROGRESS)My Profile

    • I’m not sure I would invest in energy funds if I worked in the energy industry… that’s like my friend who works for a gold mine investing a lot in gold. Just feels like a lot of eggs in a single basket.

  • Yes, driving less is my hedge. I’m almost embarrassed to admit this on the web, but distance to daycare is likely going to be a deciding factor in where we pick to take our kid. After a year with no commute and ridiculously little spent on gas, I just can’t commute to the next town over twice a day to drop off/pick up a little one. Right now, we fill up once every 3 weeks or so unless we’re doing a road trip, so I’m pretty sure our average gas costs are under $50 a month. I’ll try and snag the records from our car (I keep a tally of each tank in there on an index card) and do a post one of these days.
    Leah recently posted..Seattle PrideMy Profile

    • I think you’re probably not alone in looking for a daycare nearby. Otherwise it’ll be so hard arranging drop off and pick up all the time. Was that your inquiry on N&M the other day about daycare?

      • Yup, that was me. I’ve been talking to folks we know and getting a lot of good advice. I made up a list of 9 places to call in town (all within 10 minutes, thankfully) and some questions, and hopefully I’ll find time tomorrow. I’ve been sick and have tons of work (even in the evenings), so I have been putting off calling.

        I liked the N&M advice, so many of those questions will go for our in-person interview. We have a few phone screening questions just to make sure that there’s space for our little and the person isn’t crazy.

        In any case, to get back to your post/challenge, we still love the one car and want to make that work as well as possible. We’re saving our pennies for an eventual new car and also for maxing out Roth IRAs again (hopefully before the baby comes, so this is a do-by-July goal). I hope we can see an update on the car challenge from you soon.
        Leah recently posted..Seattle PrideMy Profile

    • I don’t see why you should be embarrassed about making the commute a key factor in day care placement. Extra time in the car is bad for your kid!
      frugalparagon recently posted..Cloth Diapering: What Not To BuyMy Profile

  • Anne

    Driving less is definitely the best hedge, and in retirement presumably your driving will go down with the commute gone.

    Like Mr Pop I also bought some BP after the spill, I think I paid $32. With the dividend being $2.28/year now I’m happy to hang onto it.

    • Nice! I think Mr PoP’s BP was purchased at $29ish, but if the right rolex comes along for sale he’ll probably sell it since it was gifted funds that he used to make the stock purchase. =)

  • Travis

    “We own a LOT of shares of Vanguard’s 2045 Target Index Fund…”

    If you want to pay a premium for the simplicity of it, then the target fund is good. But, if you don’t mind being a little more hands-on, you can cut your expense ratio quite a bit since the target funds don’t have Admiral shares (yet!…come on, Vanguard!).

    Vanguard 2045 has a 0.18% ER with basically 3 funds that it holds (there is a fourth, International Bond Index, but it is <2%). If you get the Admiral shares of the individual funds instead, you could have:

    VTSAX – 0.05% (Total Stock Market Index)
    VTIAX – 0.16% (Total International Market Index)
    VBTLX – 0.10% (Total Bond Index)

    VTSAX would be the heaviest weight (2045 holds 63.2% in Total Stock Market), so that 0.05% ER really helps out. Personally, I skip the international market index since several of the VTSAX stocks have good international exposure already. I go with about a 90/10 split between VTSAX and VBTLX. By doing that, my ER is about 0.055% — a little less than 1/3 of what Vanguard 2045 charges (which I used to use).

    While it doesn't seem like much and that 0.18% ER is already extremely low compared to most non-Vanguard funds, figure over 10 years at $100,000 it would be about $1,700 extra in fees for staying in Vanguard 2045 vs using the Admiral shares. (Assuming 7% yearly return in each.)

    And as far as the energy hedge, I do the same thing: cut back on driving. Over the last year I drove about 2,700 miles. It certainly pays to work from home and live close to everything I need!

  • When we have our taxable account, we’ll probably stick with the shares you listed rather than the Target Date fund. But within our Roth IRA it’s been so nice to be hands off even if it is a slightly higher cost as we don’t have to worry about rebalancing and can focus on other things.

  • Debbie M

    I don’t really have an energy hedge. My current 2008 Toyota Carolla gets significantly worse gas mileage than my old 1985 Nissan Sentra did. (Why, why, why? And hardly any gas cars are better, certainly none that are as reliable.) I do take a bus to work and walk to close places, but I don’t call that a hedge because rising prices don’t make me better at saving gas.

    (I’m afraid of the low-gas car technologies–except maybe for Tesla’s, which are still out of my price range.)

    I do sort of have a housing hedge–I bought a house. Hopefully property taxes and insurance costs will rise more slowly than rents. And if those costs get out of control, it probably means the house is worth a lot and I can sell it and hopefully move somewhere cheaper. A better hedge would be to also have a rental house and use the rent to pay all the insurance and property taxes. But I already have way too much of my net worth in real estate!

    I seriously looked into solar panels, but decided I’d rather have shade trees. Even if just one of your panels gets shade on it, that reduces the efficiency of the whole array. :-(

    • Corollas continue to get larger :-( My family has owned many Corollas over the years, and the gas mileage is going down as the cars get bigger. I own an ’04 Corolla, and it is significantly bigger than the ’87 one I started with or the ’01 I shared with my brother. I don’t think I’d buy that model again. I’ll still look at Toyotas when it’s time for a new car, as they are dependable, but I’ll look at the smaller size models.
      Leah recently posted..Seattle PrideMy Profile

  • Love the new hedge! Much more under your control, and simpler too, which I think you like….now, if everyone else would be as conscientious as you all are!
    Retired By 40 recently posted..Blog Carnivals are the Best!My Profile

  • The way I hedge energy costs is living in a super energy efficient home and taking public transit. The interesting thing is that public transit is not immune to energy hikes, but it does insulate me a bit.

    I’m also hedged against rising real estate prices because I invested in a REIT. I’ll have to evaluate in 10 years if it was actually a good choice.
    Cash Rebel recently posted..cottage food laws: How to sell homemade foodMy Profile

  • Great minds! I also bought BP at that same time (I should have sold it by now and purchased an energy ETF….).
    Joe @ FFA recently posted..The 14 Leadership Traits of the Marine Corps and How They Can Make You a Better InvestorMy Profile

  • I don’t have anything productive to say, though I just wanted to say thanks for writing this in an understandable manner as I try to learn and observe the thought processes with investing. :) Shorter commutes is key for us to use less gas, as well – B has to drive to different sites for his job, but I can usually get away with 1.5 tanks of gas per month for my commutes.
    anna recently posted..Transitioning the “Me” Thinking Into “We” ThinkingMy Profile

  • I wouldn’t say I have an energy hedge per se, but diversify my investments and limit my exposure by conscious decision making. In reality, on a micro level, owning a really small investment in an energy company isn’t really hedging as the investment doesn’t cover but a fraction of the potential increase of gas. For you and Mr. Pop, you’ve nailed the only real hedge, which is limiting your driving. Ultimately that will reduce the potential downside of increased spending due to rising prices.
    writing2reality recently posted..How to Invest in Lending Club and Prosper – My 2014 Investment CriteriaMy Profile

  • I don’t drive much but a bigger concern living in NYC is tolls! To leave the city and come back, you have to pay $11 round trip just for a bridge or tunnel. And people do that everyday to work! it’s crazy. At least in New Jersey, gas is cheaper than in New York and PA so we always take advantage of their prices when we do have to suffer paying the high toll to leave this city.
    Tara @ Streets Ahead Living recently posted..I had my first “free” vacationMy Profile

  • […] PoP’s are hedging energy in the same manner I do [….] well one way.  My gasoline usage is down – I drive about 3000 miles per year thanks […]