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TSP versus Vanguard, Which is a Better Choice?Posted by ahc99 on October 22nd, 2008

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I am currently a Federal employee and they provide a 401k plan called the TSP. Now I will definitely contribute into the TSP up to the federal matching rate, which is up to 5%. But my conundrum is whether it is financially savvy to increase my contribution (beyond the matching point) into the TSP or is it better to invest into Vanguard. Right now I am invested in both.

There’s many people that have never heard of a TSP, Thrift Savings Plan. It is a retirement savings plan for people that do/used to work for the Federal Government or the uniformed services. It is a defined contribution plan that is basically the same as any other 401k plan. But why am I comparing TSP to Vanguard? It’s because Vanguard has basically the lowest expense ratios for mutual funds. There’s no point to compare unless it’s to the best.

Now if you read any book about mutual fund investing you’ll know the best and simplest investment strategy is index investing because those have minimum expense ratios. So to compare apples to apples I dug through the TSP and Vanguard sites to chart their funds and compare their expense ratios.

TSP Fund	TSP XP Ratio	Vanguard Fund	Vanguard XP Ratio
G Fund	0.015%	No Equivalent Fund	N/A
F Fund	0.015%	Total Bond Market Index (VBMFX)	0.19%
C Fund	0.015%	S&P 500 Index (VFINX)	0.15%
S Fund	0.015%	Extended Market Index (VEXMX)	0.24%
I Fund	0.015%	Developed Markets Index (VDMIX)	0.22%

Looking at these comparison you can see that TSP expense ratios are dirt cheap compared to Vanguard. In addition to that, the G Fund that TSP offers has no risk but still gives you returns, kind of like a free lunch; however, there is no equivalent fund in the Vanguard.

But another question is whether these TSP funds are comparable to the Vanguard funds. Are they representative of each other? Do they invest in basically the same assets? To compare that I pulled up the yearly returns between the two funds and found this:

Year	F Fund	VBMFX	C Fund	VFINX	S Fund	VEXMX	I Fund	VDMIX
1999	-0.85	-0.8	20.95	21.1	35.49	-	26.72	-
2000	11.67	11.4	-9.14	-9.1	-15.77	-	-14.17	-
2001	8.61	8.4	-11.94	-12.0	-9.04	-9.2	-21.94	-22.0
2002	10.27	8.3	-22.05	-22.2	-18.14	-18.1	-15.98	-15.7
2003	4.11	4.0	28.53	28.5	42.92	43.4	37.94	38.6
2004	4.30	4.2	10.82	10.7	18.03	18.7	20.00	20.3
2005	2.40	2.4	4.96	4.8	10.45	10.3	13.63	13.3
2006	4.40	4.3	15.79	15.6	15.30	14.3	26.32	26.2
2007	7.09	6.9	5.54	5.4	5.49	4.3	11.43	11.0

Looking at the above chart it shows that they are similar, with only a few differences each year. So in the long run, they are comparable to each other.

So overall, when you are saving for retirement, you should come out on top when investing into a TSP since they have the same returns as Vanguard but are much cheaper to own. Thus, it is better to put more money into the TSP than Vanguard. Of course, if you’re not a federal employee then you’re outta luck!

Where’s All That Money You’ve Lost?Posted by ahc99 on October 12th, 2008

Everybody has been losing their shirt and putting off their retirements in light of the current financial crisis that has plunged the Dow from a high of 14,279 to the current 8,451. In just last week, investors lost $2.4 trillion and over the past year, losses total to $8.4 trillion. But where has all that money gone? Associated Press has a good article that helps explain it:

If you’re looking to track down your missing money — figure out who has it now, maybe ask to have it back — you might be disappointed to learn that is was never really money in the first place.

Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a “fallacy.” He says the price of a stock has never been the same thing as money — it’s simply the “best guess” of what the stock is worth.

“It’s in people’s minds,” Shiller explains. “We’re just recording a measure of what people think the stock market is worth. What the people who are willing to trade today — who are very, very few people — are actually trading at. So we’re just extrapolating that and thinking, well, maybe that’s what everyone thinks it’s worth.”

Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000.

“In a sense, $50,000 just disappeared when he said that,” he said. “But it’s all in the mind.”

Though something, of course, is disappearing as markets and real estate values tumble. Even if a share of stock you own isn’t a wad of bills in your wallet, even if the value of your home isn’t something you can redeem at will, surely you can lose potential money — that is, the money that would be yours to spend if you sold your house or emptied out your mutual funds right now.

And if you’re a few months away from retirement, or hoping to sell your house and buy a smaller one to help pay for your kid’s college tuition, this “potential money” is something you’re counting on to get by. For people who need cash and need it now, this is as real as money gets, whether or not it meets the technical definition of the word.

Still, you run into trouble when you think of that potential money as being the same thing as the cash in your purse or your checking account.

“That’s a big mistake,” says Dale Jorgenson, an economics professor at Harvard.

There’s a key distinction here: While the money in your pocket is unlikely to just vanish into thin air, the money you could have had, if only you’d sold your house or drained your stock-heavy mutual funds a year ago, most certainly can.

So that money was never yours to being with. It was all psychological. People mistakenly believed what was shown in their retirement account balance and house appraisal as actual money that they own. However, that money was never locked in to being with, it was just the best guess estimate of how much the collective society believes it to be worth. And like all other estimates, it can vary depending on the consumer confidence. I found this part of the article to be the most interesting:

“You can’t enjoy the benefits of your 401(k) if it’s disappeared,” Jorgenson explains. “If you had it all in financial stocks and they’ve all gone down by 80 percent — sorry! That is a permanent loss because those folks aren’t coming back. We’re gonna have a huge shrinkage in the financial sector.”

If you choose, you can pour most of your money into stocks and track their value in real time on a computer screen, confident that you’ll get good money for them when you decide to sell. And you won’t be alone — staring at millions of computer screens are other investors who share your confidence that the value of their portfolios will hold up.

But that collective confidence, Jorgenson says, is gone. And when confidence is drained out of a financial system, a lot of investors will decide to sell at any price, and a big chunk of that money you thought your investments were worth simply goes away.

If you once thought your investment portfolio was as good as a suitcase full of twenties, you might suddenly suspect that it’s not.

In the process, of course, you’re losing wealth. But does that mean someone else must be gaining it? Does the world have some fixed amount of wealth that shifts between people, nations and institutions with the ebb and flow of the economy?

Jorgenson says no — the amount of wealth in the world “simply decreases in a situation like this.” And he cautions against assuming that your investment losses mean a gain for someone else — like wealthy stock speculators who try to make money by betting that the market will drop.

“Those folks in general have been losing their shirts at a prodigious rate,” he said. “They took a big risk and now they’re suffering from the consequences.”

If anybody believes that the US stock market and global economy is just going to bounce back like before and be stronger than before then they are delusional. Huge international companies such as AIG and Lehman Brothers have basically bit the dust and aren’t going to make a comeback anytime soon. This will have severe repercussions for the US economy and like the article states, we are going to have a huge shrinkage in the financial sector.

And since they have really been wiped out, how can we reach the Dow high of 14,279 that we saw just a year ago? The simple answer is that we can’t. The economy is going to need to slowly rebuild itself, it is definitely not going to just bounce back as quickly as before. Most likely we are either going to see a U or L shaped recession and not the V shaped one we saw in the dot-com crash. This is of course based on the assumption that not more banks and institutions will be failing in the near future (which truthfully, I think some more major ones will be gone before this financial meltdown is through). Overall, the global net wealth has just decreased and it has not transferred from one person to another. It is just gone into the ether. It was never really there to being with since it was just our best guess estimate.

Signs We Are Not Near a BottomPosted by ahc99 on October 10th, 2008

The last few days I have been staying away from posting about the stock market. Reason is I am torn between the conventional mode of thinking and the reality that faces us now.

Historically we believe that the stock market moves in cycles. There will be bears and there will be bulls. The Dow crashes but then it will rise up higher than before. Stay true to the buy-and-hold method. When there is blood on the streets, we have hit capitulation or essentially the market bottom. When the VIX is at the highest, we are in buy territory.

Looking at all the news swirling around us, right now should be the perfect buy in opportunity. There are buy signals everywhere. From Cramer’s infamous “sell everything right now” to the Dow hitting levels that haven’t been seen since the last bear (the high 7000s), there is no wonder that based on contrarian investing there is no better time to buy.

Yet, have we really hit market bottom? Can we really use the conventional mode of thinking to determine when we should start buying index funds again? Truthfully I don’t believe so. The things that are going on right now is not like a normal stock market cycle in so many ways. The normal market timing signals and charts are no longer functional. I truly believe we have not seen anything like this since the Great Depression. Yes, I used the scary D word. But in this case it really does apply.

Why do I say we are not near a bottom even though all the conventional signs are pointing towards it? It is because there are so many problems that have not been fixed that until they are, consumer confidence will stay low and panic will continue to wash over Wall Street.

1. The global credit markets are frozen. The interest rate for bank-to-bank lending is high, showing that banks are unwilling to lend to other banks. Why? Because they fear they won’t get their loan back. There are mines buried beneath numerous banks that can explode any second and wipe out the loan. Adding in is the fact that the banks themselves don’t know if they have hidden time-bombs in their own balance sheets so they need to hoard cash in order to stay solvant and not get down-graded.
2. Small businesses have no access to credit. With banks themselves strapped for cash, there is no way they will be handing out loans as readily as before. As a result, small businesses without stable long-term prospects or good credit will probably be denied any source for additional funding. Without credit they cannot expand their businesses or make new investments. Most likely the number of small businesses will decline, with many going out of business.
3. Big companies unable to get credit. This will hit large companies too. Companies such a Sears, GE, GM, etc… have already had their credit lines cut in half or just outright denied. This will shrink their future prospects. But this will have a much greater impact on society than the small businesses. Most likely we will be seeing huge layoffs. Unemployment will run rampant as the companies need to close down plants and stores in order to keep afloat.
4. Home defaults and foreclosures are going to rise. Foreclosures have already been sweeping our nation but I don’t believe we have seen anything yet. Many of the ARMs are set to reset in 2009 and many economists are predicting it to hit the hardest in February of that year. With another wave of foreclosures wiping out neighborhoods, the price of surrounding neighborhoods will also plummet.
5. Falling sales in America. With unemployment and foreclosures on the rise while the stock market plummets wiping out investments and 401Ks, the average consumer will tighten their belt and start saving money rather than swiping that credit card. We have already been seeing that with credit card usage declining for the first time in ten years. This in turn will cause both third and fourth quarter earnings to drop and make businesses need to cut back spending. Which would then likely result in another wave of job losses.

 

Scary prospects? Yes I know. But this is the stark reality that we are facing right now. The global credit markets are frozen and nothing the government is doing, from injecting capital to slashing interest rates, is making any difference. These problems were causing by unfettered lending of debts and will not go away by throwing more debts at the public. Until these problems are solved, I don’t believe we will be seeing a bottom any time soon. The current actions by the government is like slapping a band-aid on a shotgun wound.

The fundamentals of our once great country are broken and now we need to rebuild it all based on trust and real measurable wealth production. Otherwise, there will be no consumer confidence. This is a process that will take years and once it happens then the market will find itself again in stable footing.

Retirement Fund Limits Investment: Washington Mutual In Danger?Posted by ahc99 on September 19th, 2008

A friend of mine recently got a letter from her Retirement Plan Administrative Committee about a policy change towards Washington Mutual investments. A reprint of the letter is shown below:

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September 1, 2008

WASHINGTON MUTUAL BANK FUND POLICY CHANGE

Dear Participant:

As you may be aware, there have been recent news headlines regarding the financial stability of banking institutions due to the continuing deterioration of the housing market. The Horizons Plan Administrative Committee (PAC) has been monitoring this situation and has adopted a new policy that limits individual participant investment in the Washington Mutual bank fund to $250,000, which is the maximum amount insured by the Federal Deposit Insurance Corporation (FDIC).

Bank Fund Investment Capped at the FDIC Retirement Account Limit

The PAC provides a bank fund as a conservative investment option whose principal feature is the insurance provided by the FDIC. The FDIC insurance coverage for all retirement deposits (e.g., 401(k), 457, IRA and/or Keogh accounts) at the same bank is a total of $250,000. This is significant because your deposits, dollar for dollar, including principal and any accrued interest, will be made available to you up to $250,000 in the event of a bank failure. However, any amounts exceeding the insurance coverage limit are subject to loss.

Effective August 29, 2008, investments in the Washington Mutual bank fund are limited to $250,000. Any transfers, contributions or interest earnings that exceed the $250,000 limit will be transferred to the [redacted] County Stable Income Fund. You will retain the discretion to allocate your assets, including any amounts transferred to the Stable Income Fund, among the available investment options, but you will only be able to invest up to the $250,000 limit in the Washington Mutual bank fund. This policy maintains the objective of the bank fund, which is to provide a reasonable rate of return with FDIC insurance coverage. No action is required by you.

The PAC adopted this policy because of concerns about Washington Mutual’s exposure to underperforming mortgages, or mortgage backed securities which has negatively affected its financial position. You may continue investing up to the $250,000 cap in the Washington Mutual fund, which the PAC will continue monitoring. In addition, the PAC will be conducting a search for additional FDIC-insured or U.S. Treasury products so you can have the opportunity to invest additional assets in the bank fund in the future.

Information regarding the Washington Mutual bank fund and other investment options in Horizons is available on the Plan’s Web site at [redacted]. In addition, participants may contact the Participant Service Center. Representatives can be reached at [redacted] and are available Monday through Friday between the hours of 7:00 a.m. and 5:00 p.m. Pacific Time.

Sincerely,

[redacted]

Chair, Horizons Plan Administrative Committee

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I find this to be very interesting. Apparently even retirement funds are now limiting their investments in Washington Mutual out of fear that they will indeed go bankrupt and not be able to pay up. They are only allowing investments up to the insured FDIC amount of $250,000. Thus, any amount that has exceeded $250,000 will be transferred to another fund, lessening the the total amount of retirement investments in Washington Mutual. This should have large ramifications for Washington Mutual because they are already in desperate need of short-term market funding. This is only going to pour salt on the wound and exacerbate the already precarious situation they have found themselves in.

SEC Takes Drastic Action: Bans Short SellingPosted by ahc99 on September 19th, 2008

Now you know things are serious. The Securities and Exchange Commission (SEC) is planning to place a temporary ban on short selling. Currently the ban is only on the short selling of 799 financial stocks and until October 2, 2008, but with the way the financial stocks are doing, the ban is likely to be extended until future notice. I don’t recall the SEC ever doing this before; the consequences of this ban will be epic.

Just to give some background, short selling is when an investor sells a stock expecting it to fall in the near future, after which the investor will then buy the stock again at the lowered price and turn a profit. A more extended explanation of short selling can be found at Investopedia.

But why has the SEC suddenly decided to ban short selling and why now? It’s because a lot of the public has been blaming the short sellers for the current instability of the financial sector. They believe that the short sellers have maliciously targeted many of the distressed banks (such as Lehman Brothers and Morgan Stanley) and drove their stock prices into the ground, causing them to be worthless just so they could buy in again and turn a profit later on when their prices go up. Incidentally, speculators can go both ways, as seen by the rise and fall of oil.

Personally, I believe that these short sellers have definitely contributed to the credit crisis we are seeing right now. Of course they are not the only reason, selling subprime mortgages to unfit owners also comes to mind, but their effects cannot be discounted. Why you say? Because many of the troubled banks right now need short-term market funding, such as Morgan Stanley, but they have not been able to get any with all these speculators anticipating them to collapse, causing their stock prices to plummet and their credit ratings to be downgraded. Take away these short-sellers and poof! part of the problem is gone.

This might seem very simple and you might be wondering if part of the problem could have been this easily solved, why hasn’t the SEC done this sooner? Well it is probably because they realize this will be followed by a ginormous backlash with all sorts of market players and hedge fund managers and owners hopping mad. Yes, they will definitely try to fight it and we’ll see whether the SEC can hold its ground and not budge. I doubt anyone will argue in the short sellers favor though, with the way the stock market has been acting recently. And this will undoubtedly provide at least some type of short term relief to the banks, which need all they can get right now.

Sure is an interesting time on Wall Street eh? I wonder what catastrophe will hit tomorrow. If stock prices continue to fall then that means I can buy more into my 401(k) at a discount.