Linda, think of energy and economics as Siamese twins— they are that closely tied together. Take a look at what Philip Verleger, visiting fellow at the Peterson Institute for International Economics, writing in 4/24/2012 Financial Times has to say about the subject:

“Today, few realize that the U.S. stands on the cusp of significant economic gains stimulated by low energy costs. Ten years from today, [we will] celebrate a decade of unexpected strong growth, and the credit will go to countrywide gains from the very low energy prices found only in the U.S.. Low-cost energy will have spawned an export surge in all sorts of goods, from chemicals to tires. Fracking and the other technologies that gave us low natural gas prices will have added more than 1 percent a year to U.S. growth.

Four conditions will contribute permanently to a big improvement in the competitive position of the U.S.

1. The U.S. has perfected a means of “manufacturing” natural gas from shale, in effect breaking the monopolistic control on hydrocarbon supply once enjoyed by the majors.

2. This advantage gives manufacturing plants in the U.S. up to an 80 percent cost advantage over those operating in China, Japan, South Korea or European countries.

3. U.S. financial markets (principally futures markets) enable producers and consumers to lock in profits for years ahead. Low cash prices now do not deter producers that sold today’s production a year ago at much higher and profitable prices.

4. Competitive and open pipeline systems prevent any single large participant from denying these economic benefits to any producer or consumer.

No country other than Canada enjoys U.S. competitive conditions. Nor will any other country probably enjoy them in the future. Recognizing this, groups such as Michelin and Shell intend to build plants in the U.S. to take advantage of the country’s permanently lower-cost energy supplies. Steel mills are also being planned.

In short, low-cost energy provided primarily by shale gas production advances will almost certainly contribute to an investment boom across the U.S. economy. As a result of these circumstances, the benefits of low-cost energy supplies will spread throughout the U.S. economy, stimulating exports of goods and services and creating millions of jobs.” I hope this helps answer your question, Linda. I’m Mr. Sensible, and I take the mystery out of making money.

Mr. Sensible

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Hi Josh,

First things first. You are not alone, my friend. There are a lot of investors out there rethinking a lot of decisions. I think it’s great you’re taking the initiative to ask a few questions about your financial security, especially in times like these. That being said, right now in the year 2012, there are some rationales suggesting we are better positioned financially than most tend to believe. In an article by Matt Ridley, former financier and current author, he highlights many points that can be interpreted as an indicator of national economic improvement, or he calls them, “reasons to be cheerful.”

1. We’re better off now

Compared with 50 years ago, the average human now earns nearly three times as much money (corrected for inflation), eats one third more calories, buries two thirds fewer children, and can expect to live one third longer. In fact, it’s hard to find any region of the world that’s worse off now than it was then, even though the global population has more than doubled over that period.

2. Poverty is nose-diving

The rich get richer, but the poor actually do better as well. Between 1980 and 2000, the poor doubled their consumption. The Chinese are ten times richer and live about 25 years longer than they did 50 years ago. Nigerians are twice as rich and live nine more years. The percentage of the world’s people living in absolute poverty has dropped by over half. The United Nations estimates that poverty was reduced more in the past 50 years than in the previous 500.

3. The important stuff costs less

One reason we are richer, healthier, taller, cleverer, longer-lived, and freer than ever before is that the four most basic human needs-food, clothing, fuel, and shelter-have grown markedly cheaper. Take one example: In 1800, a candle providing one hour’s light cost six hours’ work. In the 1880s, the same light from a kerosene lamp took 15 minutes’ work to pay for. In 1950, it was eight seconds. Today, it’s half a second. In these terms, we are 43,200 times better off than in 1800.

4. Population growth is not a threat

Although the world population is growing, the rate of increase has been falling for 50 years. Across the globe, national birth rates are lower now than in 1960, and in the less developed world, the birth rate has approximately halved. This is happening despite people living longer and infant-mortality rates dropping. According to an estimate from the United Nations, population will start falling once it peaks at 9.2 billion in 2075-so there is every prospect of feeding the world forever.

5. Oil is not running out

In 1970, there were 550 billion barrels of oil reserves in the world, and in the 20 years that followed, the world used 600 billion.

So by 1990, reserves should have been overdrawn by 50 billion barrels. Instead, they amounted to 900 billion-not counting tar sands and oil shale that, between them, contain about 20 times the proven reserves of Saudi Arabia. Oil, coal, and gas are finite, but they will last for decades, perhaps centuries, and people will find alternatives long before they run out.

6. We are the luckiest generation

This generation has experienced more peace, freedom, leisure time, education, medicine, and travel than any in history. Yet it laps up gloom at every opportunity. Consumers do not celebrate their wonderful field of choice and, according to psychologists, say they are “overwhelmed.” When I go to my local superstore, I do not see people driven to misery by the impossibility of choice. I see people choosing.

7. Great ideas keep coming

The more we prosper, the more we can prosper. The more we invent, the more inventions become possible. The world of things is often subject to diminishing returns. The world of ideas is not: The ever-increasing exchange of ideas causes the ever-increasing rate of innovation in the modern world. There isn’t even a theoretical possibility of exhausting our supply of ideas, discoveries, and inventions.

8. This depression is not depressing

The Great Depression of the 1930s was just a dip in the upward slope of human living standards. By 1939, even the worst-affected countries, America and Germany, were richer than they’d been in 1930. All sorts of new products and industries were born during the Depression. So growth will resume unless prevented by wrong policies.

9. Optimists are right

For 200 years, pessimists have had all the headlines-even though optimists have far more often been right. There is immense vested interest in pessimism. No charity ever raised money by saying things are getting better. No journalist ever got the front page writing a story about how disaster was now less likely. Pressure groups and their customers in the media search even the most cheerful statistics for glimmers of doom.

So there you have it, Josh. Nine positives most of which I believe in myself, especially the last one. Mr. Sensible is nothing if not a glass-is-half-full-kind-of-guy. Good luck. And do your best to stay positive. I’m Mr. Sensible with Sensible Portfolios, where we take the mystery out of making money.

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Bob, thank you for your question.

There is plenty of research to show that expense ratios (the operating costs of the fund) are an excellent predictor of a fund’s future performance while past performance isn’t as useful. The one exception being that those funds that have performed poorly in the past typically continue to perform very poorly in the future.

I wrote a blog on this topic a few years back when Morningstar released the results of its study on how useful expense ratios and its five-star rating system were in predicting future performance. Two of the findings were:

1. “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested. Low-cost funds beat high-cost funds.”

The study found that low expense ratios were better at predicting future performance than Morning star’s star ratings.

1. “Investors should make expense ratios a primary test in fund selection. They are stil the most dependable predictor of performance.”

In November of 2011, Standards and Poors reported that very few funds retain its top-quartile ranking over two consecutive five-year periods. For large-cap funds it was 12%, for mid-cap funds it was 3%, and 20% for small-funds for the ten year period ended September 2011.

Bob, if you avoid mutual fund investments that have high expense ratios, I believe you greatly improve your chances of success.

SensiblePortfolios is close to releasing its new SensibleExpress investing platform that will continue to lower the cost of investing for our clients.

I’m Mr. Sensible and I’m out to take the mystery out of making money.

Mr. Sensible

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