Monthly Archive for April, 2009

Switching to this newsletter

April 22, 2009

Question: I just signed up for your TSP newsletter, and am willing to give it a shot.  But not with my money that’s sitting in the stock funds (C, S, I, and Lifecycle 2040). I need those funds to fully rebound before I move out of them.  What should I do? Also, how should I handle future contribution allocations?

Response: I want to clarify that I am not a registered investment advisor. I cannot and do not give personalized financial advice.

I do get these questions fairly often. Here is the answer that I give.

1. As an investor, you should figure out for yourself which are the investment strategy or strategies that make sense to you and that you want to follow. It’s important that your personal past gains or losses do not enter into this decision. Imagine that you were just starting out, and that you have neither made nor lost any of your own money. Which strategies would you like?

I have information about my strategy on the website. You might also want to read a few newsletters to see for yourself how my strategy performs “in real time”.

2. If you find a single strategy that makes sense to you, follow it. If you find more than one strategy, the best thing to do, in my opinion, is to split your money between them. For example, you could invest 50% of your money using strategy A and the other 50% using strategy B. Personally, I just follow the Balanced allocation from my newsletter.

3. I do recommend treating the money that you already have in the TSP and the money that you will be investing into the TSP the same. In other words, I recommend assigning the same percentages to interfund transfers and to contribution allocations.

4. In my opinion, whatever losses you have personally incurred in the past (or gains that you have made) should not influence your decision about which strategy you like. More to the point, many people decide that because they have already lost a lot of money by holding stocks for the long term, they should continue holding stocks for the long term. They are hoping that stocks will “come back”. They might or they might not. I don’t know. But if you find a better strategy than holding stocks for the long term, why not follow it? Why stick with a strategy if you know there is a better one?

I think the correct approach is to ask yourself what you would do if you were just coming into the TSP. If you decide that holding stocks for the long term is a good strategy, then do that. But don’t do it just because you are already doing it and because you’ve already lost money in it.

I understand that this is emotionally a difficult decision. I cut my stock losses last year (outside of the TSP), and it was an emotionally difficult decision for me as well. But I do think that it’s the right decision.

5. Also see the following articles:

Hope this helps.

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Still not time for stocks

April 16, 2009

We pick the mix of investments that maximizes the expected returns while not exceeding a fixed maximum risk. In the past month, we have, once again, made a little money in bonds and the money market.

In the last newsletter, I said that the increase in the price of stocks was not a true rally, at least not yet. Stocks have gone up a lot in the last month. But my conclusion remains the same — it is not yet a true rally. Though stocks have made a lot of money recently, they remain too risky at this point.

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“Seeing a big difference in performance.”

April 1, 2009

I appreciate your explanation as to why the PG method does not have us back in stocks yet. I liked one point that was made on the last day of the quarter — even with the gains in March, the quarter still showed a loss*. That let me know that jumping in and out doesn’t work, and I’ve already seen a big difference in performance since I started following the PG model.  I may not be gaining as much as I would like, but by my calculations, I avoided about another 15 – 20% loss, while making a small gain. While the gain looks small, it is effectively much larger since the loss was avoided. Thanks!

-T.A.

* In March 2009, the C Fund (“S&P 500″) gained 8.8%. However, in the first quarter of 2009, the fund actually lost 10.9%.

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Bonds strengthen, stock “rally” not proven

April 1, 2009

We pick the mix of investments that maximizes the expected returns while not exceeding a fixed maximum risk. In the past month, we have, once again, made a little bit of money in low-risk investments.

We have stayed out of stocks, and are continuing to stay out of them. This is despite the much publicized upward movement in stock prices. This move in stocks has been so hyped by the media, that I have even been receiving emails from some concerned subscribers, asking what we were still doing out of stocks. Let me explain.

It’s true — the C Fund (“S&P 500″) has gone up by 18% since March 9. But the relevant question is not whether a fund has gone up, but whether it was possible to make money from it using a method that is consistently profitable. I don’t think that it was. The way I see it, there were only two ways to attempt to make money in stocks. And neither one of them worked.

The first way was to be in stocks for the long term. However, people who were in stocks for the long term actually lost a lot of money. In the past year alone, the C Fund has lost 38%. The I Fund (“Europe Pacific”) has lost a whopping 46%! In just one year. All this, after the recent “rally” is taken into account. In other words, for the people who were in stocks for the long term, the upward move in stocks has not made any money at all — it just slightly reduced their loss.

The other way to attempt to make money from the recent up move was to try to buy stocks at the bottom. Attempting to “pick the bottom” is market timing, which, while it might look good in retrospect, does not actually work. Those people who correctly picked this bottom might have made some money. They would likely not make the 18%, since that would have required buying exactly on March 9. But they would likely make around 5% – 10%. However, the people who attempted to pick this bottom would presumably have tried to pick all the other recent bottoms as well. Looking at a price chart, we see what looked like potential bottoms in January, December, October, September, and so on. All of these formations turned out not to be true bottoms. People who bought stocks at those times lost money. Thus, the bottom picking strategy, while it could have made money this month, would have lost money over the last few months.

The fact remains that the risk of the three stock funds remains unacceptably high. That is why we are still out of them. On the other hand, bonds have strengthened. Thus, we are once again investing some of our money in the money market and some in bonds.

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