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Author: sdlipps Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: TSP or Foolish Four? Date: 7/24/1998 5:56 PM
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Argh! I read a perplexing article today about opponents to investing any portion of Federal CSRS Pension funds in the Thrift Savings Plan, or a similar vehicle. See the Washington Post's article: C-Fund Is So Good, It's Scary, Sunday, July 12, 1998; Page B02.

http://www.washingtonpost.com/wp-srv/WPlate/1998-07/12/175l-071298-idx.html

I've been reading the Fool long enough to appreciate the Chicken Little attitude being asserted in this position. Here are some statements I lifted from the article, which are attributed to the National Association of Retired Federal Employees.

"Investing retirement money in the savings plan introduces an "unacceptable element of risk" to the defined benefits now promised by the federal retirement program."

"There is no benefit to workers and retirees -- but considerable risk -- if even a portion of retirement funds is invested in the stock market."

Why even a portion of the pension funds could not be invested in the TSP, or at least offered as an option to participants is beyond me. I am one of those who has benefitted greatly from the TSP in my short (8yr) tenure with Uncle Sam, although I also recognize it's potential for faltering years. As Fool readers will realize however, Market investing long term is what minimizes risk. After all, the TSP C-fund, which mirrors the S&P 500, had it been around, would have had practically the same return over the past 20 years: 16-17%! And with the TSP, Uncle Sam offers you 5% if you contribute 5%. Hello, this is free, pretax money! Anyway, I recognize the irrational (or rather unread) thinking going on here, but if only these opponents would do a little simple market analysis, perhaps options for nest-egg growth may be offered to pensioners too. Which brings me to a retirement question I have as a TSP participant and fellow Fool. While I'm now content to accept the 16-17% we all average with the TSP C-fund...while getting my free 5% contribution per year, if I should leave Federal Service, should I withdraw and go Foolish Four with my TSP earnings? Can I move this cash to some sort of IRA, Roth or otherwise, that allows my Foolish Four Folly without incurring lots of taxes? Should I care about those taxes? I realize that the Foolish Four strategy will (if history continues to repeat itself) reap some 16-17% AFTER tax returns for me, as outlined by the Fool in a recent column, but are there benefits to continuing TSP participation, such as good loan rates for education or homebuying, or perhaps some sort of financial shelter that make it worth staying with TSP post Federal Service? Thanks you Fools.
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4647 of 75335
Subject: Re: TSP or Foolish Four? Date: 7/25/1998 11:16 PM
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Greetings, Sdlipps, and welcome.

Which brings me to a retirement question I have as a TSP participant and fellow Fool. While I'm now content to accept the 16-17% we all average with the TSP C-fund...while getting my free 5% contribution per year, if I should leave Federal Service, should I withdraw and go Foolish Four with my TSP earnings? Can I move this cash to some sort of IRA, Roth or otherwise, that allows my Foolish Four Folly without incurring lots of taxes? Should I care about those taxes? I realize that the Foolish Four strategy will (if history continues to repeat itself) reap some 16-17% AFTER tax returns for me, as outlined by the Fool in a recent column, but are there benefits to continuing TSP participation, such as good loan rates for education or homebuying, or perhaps some sort of financial shelter that make it worth staying with TSP post Federal Service?

As you point out, the TSP C-fund is basically an index fund. It will essentially reflect market returns. Whether those remain at the 16+% range is highly debatable, and IMHO those returns are unsustainable over the long haul. Like the market in general, you can expect something in the 10+% per year level based on history. Can you do better in the Foolish Four? Close to 30 years of history say you can, but that's no guarantee, either. Yet it's hard to just dismiss a superlative record out of hand. My suspicion is it will continue to be an excellent performer.

What you do when you leave your job is, of course, your decision. Were it me, I would move the money to an IRA where I could have the freedom to invest in a wide range of vehicles. The TSP is a good program, but the choices are rather limited. But that's me, and you are you. If and when the time comes, you must do what you and you alone think is best for your situation.

Regards….Pixy


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Author: sdlipps Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4717 of 75335
Subject: Re: TSP or Foolish Four? Date: 7/28/1998 7:02 PM
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TMF Pixy, Thanks for your reply. Some of it confused me a bit though. TMF's July 13th Foolish Four article: "Fool Four vs. S&P," by TMF Sheard:

http://www.fool.com/DDow/1998/DDow980713.htm

suggested that the S&P has returned 16.65% over the last 20 years, and may very well continue to do so for the next 20. What portends the plunge to around 10%?

My earlier question still stands, or at least part of it does. Since you pretty much set aside the post-employment TSP option as a Foolish suggestion, I'll assume it lends no particular benefits that I should consider over an IRA. Please pardon my ignorance of IRA's, but is that an option that would be better option for my retirement funds than just plain old taxable, FF market trading on my own for the next 20-30 years? Can I get my $$$ into a brokerage account that's also an IRA or ROTH IRA for FF trading.....i.e. can I practice FF foolishness while also enjoying the benefits of an IRA?

If that's not naive enough a question, how about this: If we assume that upon my retirement in 25 years cap gains taxes remain the same, and we are still taxed at 20% on investments held for a year, am I to be taxed again or at another rate on the money I've been Foolishly growing once I'm no longer working?
Thanks, sdlipps

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4731 of 75335
Subject: Re: TSP or Foolish Four? Date: 7/28/1998 10:39 PM
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Sdlipps,

TMF Pixy, Thanks for your reply. Some of it confused me a bit though. TMF's July 13th Foolish Four article: "Fool Four vs. S&P," by TMF Sheard:

http://www.fool.com/DDow/1998/DDow980713.htm

suggested that the S&P has returned 16.65% over the last 20 years, and may very well continue to do so for the next 20. What portends the plunge to around 10%?
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The past 20 years have been extraordinary. While they may indeed continue for the next 20 years, equally true is the possibility of a prolonged period of 8% returns. Historically (i.e., since 1860 or 1926 depending on whose numbers you're looking at) the market averages somewhere between 10% and 11% per year. That's not a "plunge," but simply the "expected" long term average. If you prefer 16+% over the next 20 years based on the past 20 years, I for one think you will be sadly disappointed. It hasn't happened historically and I see nothing to suggest these heady highs will persist indefinitely. OTOH, I see nothing that presages a catastrophic crash, either. Instead, I simply expect a return to historical averages.

My earlier question still stands, or at least part of it does. Since you pretty much set aside the post-employment TSP option as a Foolish suggestion, I'll assume it lends no particular benefits that I should consider over an IRA. Please pardon my ignorance of IRA's, but is that an option that would be better option for my retirement funds than just plain old taxable, FF market trading on my own for the next 20-30 years? Can I get my $$$ into a brokerage account that's also an IRA or ROTH IRA for FF trading.....i.e. can I practice FF foolishness while also enjoying the benefits of an IRA?

When you leave your job, as I understand the TSP you may roll your money to an IRA. Nothing says that can't be a self-directed IRA within which you can do your own trading. Any broker and your plan administrator can guide you through the steps to do that. You can't go directly to a Roth with that money, though. A Roth may accept rollovers only from another Roth or from a traditional IRA. That means you must roll your plan money to a traditional IRA first.

If that's not naive enough a question, how about this: If we assume that upon my retirement in 25 years cap gains taxes remain the same, and we are still taxed at 20% on investments held for a year, am I to be taxed again or at another rate on the money I've been Foolishly growing once I'm no longer working?

If the money stays in the TSP or a traditional IRA until that time, don't sweat capital gains rates as they don't apply. Everything you withdraw that hasn't been taxed before (i.e., all earnings and all your deductible contributions) will be taxed at the ordinary income tax rates in effect at that time. OTOH, if the money is in a Roth, you will already have paid taxes on the money rolled to that Roth when you established it. The earnings through the years were tax deferred. Therefore…..If you are over 59 ½ and if the Roth has been open for five tax-years, anything and everything you take out of it at that time will be totally tax free.

Regards…..Pixy



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Author: sdlipps Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15231 of 75335
Subject: Re: TSP or Foolish Four? Date: 11/9/1999 11:59 AM
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Greetings again,

TMF Pixy, you responded most helpfully to my retirement questions over a year ago, but my query now turns to historical market returns. If I am to try to come up with a "reasonable" average to project for the future, let's say for the S&P 500 (or an S&P index). Where can I find such a number?

Wouldn't a compounded avg. (cagr) with return info from as many previous years as possible give us the truest "average" return be it for the F4 or any approach for that matter?

You mentioned historical market averages of 10-11%, but aren't those for the entire market? I would think that an index of the top companies like those in the DOW or the S&P would come in historically averaging higher than the whole market, no?

We discussed the Market and the after-tax Foolish Four returns over the past 20 years which are frequently cited at the Fool. I wonder why the Fool would look at such a relatively short blip in trading history. (I see numbers frequestly cited only back to about 1961...is there some reason to only go back that far?) As you said in your reply.... if you expect the "16+% over the next 20 years based on the past 20 years,... you will be sadly disappointed. It hasn't happened historically and I see nothing to suggest these heady highs will persist indefinitely." Does that prediction go for the F4's 30+ returns of around 19% too?

You've hit the nail I was pondering squarley. If we can't expect the average(s) of the last 20+ years, what can we expect? Won't looking at a larger section of history give us a more tempered prediction for the future?

Thanks, -sdlipps



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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15254 of 75335
Subject: Re: TSP or Foolish Four? Date: 11/10/1999 10:33 AM
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Sdlipps writes:

<<TMF Pixy, you responded most helpfully to my retirement questions over a year ago, but my query now turns to historical market returns. If I am to try to come up with a "reasonable" average to project for the future, let's say for the S&P 500 (or an S&P index). Where can I find such a number?>>

Good grief! I can barely remember what I said yesterday let alone a year ago. :-) As to where you can find a "reasonable" average for the S&P 500, you'll have to define your concept of reasonable. Personally, I like the data published by Ibbotson Associates in their Stocks, Bonds, Bills and Inflation (SBBI) Yearbook published annually. They usually come out in March of each year and show data from 1926 through December 31 of the most recent year-end. You can get rolling period averages for various periods plus the averages since 1926. Your local library will probably have a copy of that tome.

<<Wouldn't a compounded avg. (cagr) with return info from as many previous years as possible give us the truest "average" return be it for the F4 or any approach for that matter?>>

Many would argue so. Others would say you have to look at the economic anomalies such as the depression and the hyper-inflationary years of the 1970s and decide if they were really aberrations or distinct possibilities that could and would occur again. Still others may maintain that only the post-WWII years count. Take your pick as there's plenty of room for argument. Because I tend to be conservative, I rather like the really long term averages.

<<You mentioned historical market averages of 10-11%, but aren't those for the entire market? I would think that an index of the top companies like those in the DOW or the S&P would come in historically averaging higher than the whole market, no?>>

The long-term averages I cite invariably come from Ibbotson and reflect the most recent S&P 500 Index data back to 1926. That's about the most commonly accepted yardstick for the market as a whole. Whether it's a valid yardstick is another contention that many would argue over. I accept it, and others don't. The problem, though, is there is little else available to measure those long-term averages.

<<We discussed the Market and the after-tax Foolish Four returns over the past 20 years which are frequently cited at the Fool. I wonder why the Fool would look at such a relatively short blip in trading history. (I see numbers frequestly cited only back to about 1961...is there some reason to only go back that far?) As you said in your reply.... if you expect the "16+% over the next 20 years based on the past 20 years,... you will be sadly disappointed. It hasn't happened historically and I see nothing to suggest these heady highs will persist indefinitely." Does that prediction go for the F4's 30+ returns of around 19% too?>>

The research on the DOW strategies including the F4 only goes back to 1961. It's a horrendous effort that no one has been willing to undertake due to the difficulties involved in tracking stock splits, stock dividends, spinoffs, buyouts, dividend payments, etc. Therefore, that's the best data available. While I think the value-oriented approach of these strategies will continue to do well, I hesitate to say they will do so at a 19% to 20% CAGR over the long-term future. BUT -- I also think that on balance, the F4 will do one to three percent better than the S&P over the next 30 years, too, even if the S&P return is closer to the long-term average of 11.2%. No less an authority than Warren Buffet has said he expects stocks to average but 6% over the next 15 years. If I can earn a point or three above market, I'm still happy. Thus, looking forward I'm content to use 10% to 11% for the S&P and 12% to 15% for the F4. Be aware, though, that I don't bet the farm on it, either. I just accept those numbers as "reasonable" for me in making my projections for the long-term returns in stocks.

<<You've hit the nail I was pondering squarley. If we can't expect the average(s) of the last 20+ years, what can we expect? Won't looking at a larger section of history give us a more tempered prediction for the future?>>

As far as I'm concerned, the answer is yes. And if you want to be really conservative, factor in Buffet's projection of 6% for the next 15 years as well.

Regards..Pixy

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15257 of 75335
Subject: Re: TSP or Foolish Four? Date: 11/10/1999 1:51 PM
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sdlipps,

I had posted/quoted an article from The Wall Street Journal of Nov. 9th 1999, which I thought you find helpful in addressing your issues. The Motley Fool has removed it as they apparently have the misguided idea that this was a copyright infringement. So, you might want to go to the library and look it up. It's a good one and you can find it under the title:

Lawyers Seek Class-Action Suit Against Insurers Over Annuities
By DEBORAH LOHSE and BRIDGET O'BRIAN
Staff Reporters of THE WALL STREET JOURNAL


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