Guest Post: Economics of Fuel Saving Devices

This is a guest post from Basic Financial. If you are interested in guest posting on Money and Such, I would love to hear from you. Please take a look at these guidelines and drop me a line.
Without further delay, it is my pleasure to introduce Basic Financial:

Recently I posted on my site about the hydro4000, a hydrogen based fuel economy booster for your car. The biggest surprise to me in writing that post was the $1350 investment required to get the thing working, and that's if I installed it myself. It turned out that it would take 1,125 gallons at $4.00 to recover the investment, which would be around 1.5 years for me. Sure, gas prices will continue to rise for a while, but remember this is not a fuel shortage fallout like there was in the 70's when demand drastically outstripped supply. There is plenty of supply today, it's mainly that prices are skyrocketing due to increased demand in Asian countries and the weakness of the dollar. This leads me to think that the price of gas will fall below or around $3.00 a gallon within the next 3 years.

So the question remains, what time frame is OK for a return on your fuel savings costs? I prefer a 1 year ROI on just about anything I buy over $100 that is supposed to save me money, anything less I can amortize over 1 year and take it out of any discretionary income. So how much better fuel economy will I need to get to achieve a 1 year ROI. I drive a 2002 Ford Explorer Sport that gets around 20mpg I fill up 3 times a month with a 16 gallon tank. Here is my breakdown assuming $4.00 a gallon: a 5% improvement in gas mileage would save me 3 gallons, 10% would save 6 gallons, 20% would save 12 gallons and 30% would save 18 gallons.

Using these numbers, it would take me 9 months to pay off a fuel saver that gave me a bump of 5% in fuel efficiency and that cost $100. A $500 item that provided a 20% boost would take 11 months to pay-off, and a $1,350 device would take 29 months to pay-off if it were able to provide a 20% improvement to fuel economy. This is a pretty long time. While I still have 3 years left to pay off my vehicle if I don't pay it off early, in 3 years, I'll have to reinvest. Why not pay off early, and get a car with better fuel economy? I just don't think any of it is really worth it. Besides the EPA tests a majority of these devices and they only average a 6% bump, which makes only the $100 item economical, and I don't think that even that would be worth my time. I'll stick to combining my trips and driving less.

Editor's note: in e-mail correspondence with Basic, he explained to me that he does not think devices purported to improve vehicle fuel economy really work. His post is meant to show that even if they worked as advertised, the return on your investment would not justify purchasing them. Here is a link to a CNN article debunking the idea of add-on fuel saving devices.

Calculator: Does a Hybrid Car Make Sense for You

Have you ever wondered whether buying a hybrid vehicle can save you money? How much less will you spend on gas if you drive a snazzy Prius or Civic hybrid? Will the monthly reduction in gas spending off-set the potentially higher cost of the vehicle? How much CO2 will you be able to save by moving to a cleaner vehicle? Well here is your chance to find out.

Use the simple calculator below to figure out if a hybrid is the right choice for you. Use the sliders to set the cost of gas in your area; select the number of miles you travel on average each month; drag the dials to set the fuel economy on your prospective hybrid car and compare that to your traditional gas guzzler. Don't forget to enter vehicle price for the two cars you are comparing.

The results tell you how many years it will take you to break-even, how much money you will be spending on gas each year, and how much CO2 you will be spewing on your way from A to B. Enjoy.

While you are at it, check out some other nifty calculators:
Latte Factor Calculator
Cross Over Point Calculator
Value of Savings Over Time
Retirement Savings Goal Calculator
Are You Diversified Enough?

Reader Question: Should I Get Out of Commodities?

A couple of days ago I received an e-mail question from a good friend and regular reader. Here is the full text of the question:

"Hi Shadox,

A year ago, I put about 20% of my assets into commodity related stocks as a hedge for the blazing US and APAC economy: Metal and mining ETF; Mining companies; Brazil ETF (since their economy is based on commodities); Oil company stock. Since then, most of my portfolio has shrunk while this part has exploded.

It is now about 40% of my portfolio. Now, there is talk about a commodity bubble. I have some free money and I was thinking about putting it into a commodity hedge, but I don't know what that is? Cash? Bonds? Technology? What do I do?

Also, my gut tells me Oil is peaking (my gut told me that at $80 too so I am not sure using my intestinal system is a good idea). What is an Anti-Oil hedge? You could use this for a Blog post since I am sure anyone with commodities in his portfolio is thinking the same things...."

I have been wrestling with the same question in reverse, namely, is it too late to invest in commodities? About two months ago I have come to the (apparently premature) conclusion that hell yeah, it's too late. We are not currently invested in commodities. I recently rolled over my 401K which had a 10% commodities position into an IRA which does not include such a position. However, I do understand the benefit of diversifying into commodities and have written about this in the past (too bad that I did not actually take my own advice at the time).

When I think about diversification into commodities, I am thinking about a position equal to about 10% of your portfolio. However, the reader finds himself with about 40% of his portfolio dedicated to what is potentially a very risky asset class. Let me take the reader's questions one at a time.

First things first: we need to talk about portfolio re-balancing. If you are shrewed, wise or lucky enough to make a small investment whose value explodes, you should probably think about re-balancing your portfolio such that your investments in the various asset classes come back into line with your original plan. There are many reasons to do so, but let me name the most important one: regression to the mean.
Here's the idea - each asset class has certain typical historical returns. If the return on such an asset class in the short run is dramatically higher or lower than the historical average, there is a tendency for prices to return to their historical trend through a price correction (up or down). We are living through one such example right now. In recent years real estate prices have skyrocketed and returns on real-estate assets have significantly outpaced their historical levels. No more. Returns are now regressing to the mean by way of a sharp decline in house values. Tech stocks in the beginning of this decade went through the same process, and I believe that we may be in for a similar ride on the commodities side. If your portfolio is out of whack due to massive returns, take some money off the table to reduce your exposure to that asset class and re-balance your positions.

True, this is psychologically difficult to do because essentially I am suggesting investors should sell their winners rather than their losers... but, believe it or not, that's probably a winning strategy.

Let me address the second part of the question: what is a good hedge for commodity prices? Put in other words, if commodity prices go down, which asset classes would be unaffected or even benefit from this decline? The technical term from what reader is looking for is negatively correlated assets, or at least uncorrelated assets. The following asset classes have historically been negatively correlated with natural resources: U.S. Bonds (-0.14 correlation); cash (-0.12 correlation); high-yield bonds (-0.04 correlation). If you think about it, this makes perfect sense. Commodities tend to rise at times when the economy is strong, inflation is rising and interest rates are consequently being increased. These are exactly the times when bonds tend to do worse, and vice-versa. Stocks, especially large cap stocks, are also very loosely correlated with commodity prices (0.0 for large caps; and 0.01 for the S&P 500). A correlation close to zero indicates that the asset classes tend to act independently from each other: they are just as likely to move in tandem as they are to move in opposite directions. In fact, natural resources are very loosely correlated with pretty much all traditional asset classes. This makes them a very interesting diversifier, but not at 40% of your portfolio...

To read more about asset class correlations, take a look at this excellent article, which I have previously written about.

Recommended Articles

My post about finding a job in a tough economy was included in this week's Carnival of Personal Finance. It has been a while since I participated in one...

I also found a couple of other interesting posts - this one talks about how GM is trying to sell us a "green story". Many businesses are green washing these days - it's simply trendy and most folks don't pay enough attention to sift the real environmental reality from the crap claims. For example, the other day I saw a BMW ad announcing that the company has a hydrogen powered car available for sale and they are now simply waiting for the world to be ready. Come on! Give us a break! We are not THAT stupid.

This other article was particularly fascinating for me given that I have never bought or bid on a house. It talks about how a realtor was able to help her customers buy a house even when their offer was not the highest one that the owners received. Apparently, it's all about convincing the owners that the bid her clients are submitting is the most likely to close. Interesting.

Want to Make $100 in 3 Hours?

It is actually pretty simple - all you have to do is get all your colleagues from work together for a poker night, and totally clean them out. That's right, ladies and gentlemen, this is the sound of Shadox gloating.

Last night we had our monthly company poker night. This was my first time participating (since I have only been with the company for 2 months), and it was also my first time ever playing "serious" poker. I guess I had massive amounts of beginner's luck going for me, because one by one I knocked out everyone in the game. This was a tournament style game where there can be only one winner - the last man standing. The second place winner got back his original investment of $20, which left me with a total of 1 cool C note. You heard right, $100 for hanging out, eating pizza and drinking some beer. I really enjoyed myself - winning probably helped - and this morning in the office the legend of Shadox the lucky novice spread like wild fire.

What can I say. I don't gamble. Even when I find myself in Vegas I don't hit the tables or the slots. When people ask me why, I tell them it's because I understand the fundamentals of statistics... However, spending $20 to buy my way into a game of poker with my colleagues from work doesn't count as gambling in my mind. For me this is just the same as buying a movie ticket - I view the $20 as gone as soon as I get in the door, and consider it money well spent. It is also a good way to get to know my colleagues in a social setting, when we are not all about talking shop. This time, luck was on my side - but, since I know statistics I also know that in the coming months I can expect to leave behind small chucks of change on a regular basis. For now, bask in my glory mortals. OK, I am done gloating.