May 7, 2008

Pay Check: Ruining your TSP...a follow-up

In yesterday’s post, I told you about a proposal by Connecticut Sen. Joe Lieberman that would wind up filleting your TSP account. I got a call back from a spokesperson on the Senate Homeland Security and Governmental Affairs Committee who offered to take my questions. When I called her back, her voice-mail message included her e-mail address. 

Here is the list of questions I sent her:

1)  What are the principal ideas in the bill?

2)  Will the TSP Board have to come up with new indexes?

3)  The indexes TSP uses now can't have individual companies stripped out. Will they have to be eliminated?

4)  How will the legislation help keep the extremely low costs of TSP as they are rather than driving them up?

5)  Why is it not sufficient that if an investor wants to invest in this way, he or she can pull out of TSP and open an IRA that invests in a way they choose?

6)  What are the criteria for determining which companies can stay or go?

7)  Is the senator worried that this might open TSP to politicization of the plan by whoever is chairman of the committee in the future?

When I get responses to any or all of these questions, I’ll post them here. In the meantime, please feel free to comment on the senator's legislation or post any other questions you have about the plan that would wreck your TSP.

Francis Rose
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May 6, 2008

Pay Check: Meet the Senator that wants to ruin your TSP

Senator Joe Lieberman, I-CT has an idea that he’s turning into a bill.  And the bill, if it becomes law, will turn your Thrift Savings Plan into a mess.

Over the years there have been proposals to add various funds to the TSP: a real estate fund, a gold fund, a dot-com fund…all of them, in hindsight, both bad investments and contrary to the point of the TSP.  It’s supposed to follow the KISS principle—Keep It Simple, Stupid.

None of those proposals went anywhere, for good reason.  By the time they could have been added to the TSP, the ride was over—the bubbles had burst.

The latest proposal to meddle with the TSP is potentially the worst, because it indicates a dangerous ignorance about the basics of how the plan works.

Lieberman’s idea is to “give all TSP participants the option to disinvest in companies that do business in or with countries labeled by the U.S. as state sponsors of terrorism,” according to Time Magazine.  How you’ll be able to do that in your account is still open to discussion, apparently; Lieberman didn’t tell Time, and no one in Lieberman’s office or the office of the Senate Governmental Affairs Committee, which Lieberman chairs, could answer my specific questions about how he proposes to do this without dismantling the funds inside the TSP.

A quick recap of the TSP: there are three stock funds, which could potentially invest in the companies Lieberman is worried about.  The C fund tracks the S&P 500; the S fund tracks the small-cap Dow Jones Wilshire 4500; and the I fund tracks the entire international stock market.

So in order to meet Senator Lieberman’s requirements, the Thrift Board would have to:

1)      make a list of the companies that didn’t meet the Senator’s terrorism requirements; and

2)      figure out how to strip those companies from the indexes built by Barclays Global Investors;

The most likely scenario is that Barclays will have to come up with a special “morally acceptable” index to add to the TSP portfolio.  Of course, that will drive up the exceptionally low costs TSP participants enjoy, and defeat the purpose of the plan.

This isn’t the first time that a do-gooder (or a bunch of them) wanted to use the TSP to make a political statement.  And the sentiment behind the idea isn’t necessarily a bad one.  But the execution is all wrong.  Lieberman is currently an Independent, but he’s a committee chair thanks to the grace of a Democratic leadership.  What happens when another Chairman, with another pet idea, wants to add his or her pet fund to the TSP?  What if it had been when Republicans were passing their “freedom fries” foolishness?  Would we now have a French-free fund?  It wouldn’t take long to make the TSP look silly in its pettiness.

The best thing Senator Lieberman could do is leave your TSP alone.  If you agree, send him a message and tell him so.  Because if he gets his way, your TSP as you know it today will be ruined before you know it.  And you don’t deserve that.

Francis Rose
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May 2, 2008

Pay Check: Economic gloom and doom? Not in the TSP

It’s been a good week, overall, for the economy.  The Dow is up about 150 points and the S&P 500 is up about 15 points (about a full percentage point) this week, the Labor Department’s jobless numbers were far better than anyone expected, and news articles are starting to pop up about the economy maybe not being as bad off as people have been thinking. (here, here, and here, among others).

So it’s not surprising to see some decent numbers from the Thrift Savings Plan for the month of April.  The C, S, and I funds are all up about five per cent for the month.  The lifecycle funds all gained too. 

What does that mean?  That means if you got scared last month and sold C, S, and I shares in your TSP account, they will now cost you about five percent more to buy back.  You sold low, and now you have to buy high.  That’s the exact opposite of how you’re supposed to do it.

That’s also compounded by the fact that the G fund tied February’s .24% gain (that’s a quarter of a percentage point) for lowest increase in at least a year.  Not only did you lose money by selling the stock funds low, you didn’t make much on the money that you took from selling low and stashing it in the G fund.  You’ve lost a whole month’s potential growth.

The unexpected economic news, especially the unemployment numbers, also reminds us that you don’t know what’s going to happen in the market, such that you can then take that knowledge and time the market (or in this case the TSP).

Liz Pulliam Weston, our guest on Your Turn this week, told us that she loves the buy-and-hold philosophy the TSP is intended for.  She only had one gripe about the TSP: “I can’t get in it!”

If the days of economic gloom and doom are indeed numbered, you should check your TSP account and make sure you’re buying into what you want to buy into.  If the market heads up again, five years from now your share prices from 2008 will look like bargains, no matter what you paid.

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April 29, 2008

Pay Check: Financial expert alert!

One of the coolest things about my job as co-host of Your Turn with Mike Causey is that Mike and I get to meet and talk to experts in a variety of different areas of the financial world.  Talking to people like John Bogle, Paul Farrell, Walter Updegrave, and all the others, we have learned an incredible amount about how make ourselves more financially fit.

I’m excited to add another name to that list tomorrow.  Mike and I are pleased to welcome the most-read financial columnist on the Internet, Liz Pulliam Weston of MSN Money.  Liz has a new book out called “Easy Money: How to Simplify Your Finances and Get What You Want out of Life.”  It’s right up our alley because instead of just encouraging you to make your financial life as easy as possible, Liz explains how to do it in ways anyone can understand.

An extra bonus is that Liz will be in Washington, so she’s coming to the studio to talk to Mike and me in person.  It’s great to have excellent guests on the phone, but having them in studio is even better.

I’ve quoted Liz’s columns before, and I read her stuff pretty regularly.  She will answer your questions with common sense and simplicity.  E-mail your questions and we’ll get to as many as we can!

Francis Rose
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April 28, 2008

Pay Check: How'd you get to be smarter than John Bogle?

Thursday is the day that about 600 Federal employees who invest in the Thrift Savings Plan hoped would never come.  Starting May 1^st, each TSP account holder will be allowed two interfund transfers per month.  After those two trades each month, you’ll only be able to move money INTO the G fund.

This change has been talked about for months, and comes after the TSP Board looked into how other retirement investment plans handle frequent trading.  The comments the Board received ranged from consternation to outrage, with some going so far as to question the competency of the Chief Investment Officer Tracey Ray.

Which makes me wonder: why get yourself all in an uproar?  Why lob incompetence charges at TSP employees who have been universally praised in the financial management world?  What makes you smarter than John Bogle anyway?

John Bogle invented the index fund and founded Vanguard, universally regarded as the pioneers of low-cost investing.  Bogle told Mike Causey and me on Your Turn last year that the Thrift Savings Plan is the best-run, lowest-cost investment plan out there.  One would think he knows a thing or two about investing.  (By the way, Warren Buffett has said he thinks market timing is crazy too—but he’s never said it on Your Turn.)

The list of financial experts who go on and on about the TSP and its management would fill the server this blog is hosted on.  Meanwhile, a couple hundred dead-enders who aren’t yet good enough at “day trading” to quit their government jobs fuss about their TSP accounts being limited to two interfund trades a month.  The main argument they make is, “it’s MY money, I should be able to trade it however I want.”

You’re right.  You CAN trade your money however you want.  There's no law that says you have to have it in the TSP in the first place.  So here’s an idea.  Take all your money out of the TSP, put it into a brokerage account, and trade your fingers off.  If you’re smarter than the TSP, what do you need them for anyway?

And by all means, show all of us less-financially-gifted folks your money prowess.  Prove to us how much smarter you are than the rest of us.  E-mail me your numbers that prove how much greater you’re doing because of frequent trading than the let-it-ride investors.  I’ll post them here, and we can all recognize you for the expert that you are.

But do us all a favor.  Leave the TSP for people who want to use it for what it was intended for—for what Congress says it’s supposed to be for—Federal employees who want a long-term investment vehicle, run well at low cost.  After all, it’s THEIR money.

Francis Rose
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