Thrift Savings Plan (TSP) Has Taken a Beating Like the Rest of the Stock Market

October 25, 2008

Because the mutual funds that comprise the federal government’s version of a 401-k, the Thrift Savings Plan (TSP), are essentially index funds that mirror large indices like the S&P 500, Wilshire 5000, and others.  The TSP has been in lock step with the current stock market downturn and many members of the federal government and the military have seen their retirement portfolios significantly decline like most civilians. 

C Fund.  The common stock investment fund, or C Fund, closely follows the S&P 500 index.  The fund has lost 21.9% over the past twelve months.

S Fund.  The small capitalization fund, or S Fund, is designed to closely follow the Wilshire 4500 completion index.  The Wilshire is a broad index that tries to capture the shares of smaller companies that are not included in the Standard & Poor’s 500 index.  The fund has lost 18.9% over the past twelve months.

I Fund.  The I Fund, TSP’s international mutual fund, was established to follow and benchmark the Morgan Stanley Capital International EAFE (Europe, Australia, Asia, & Far East) Index.  The fund has lost 29.0% over the past twelve months.

G & F Funds. The TSP’s G & F Funds invest in government bonds and cash equivalent funds and are the safest and lowest interest earning funds in the group that are offered to investors.  These funds have been the only ray of light during the market upheaval returning 4.05% and 3.89% respectively over the past twelve months.  That is no surprise since they are ultra-safe, boring, and can barely keep up with inflation.  The F Fund is for fixed investments such as high grade bonds.  The G Fund is full of short-term government treasuries.

So, what should you do with your TSP balance and contributions?  Keep investing!

  1. Now is the perfect time to pour money into the retirement program.  The stocks that make up the indices that are followed have never been cheaper.
  2. Use your January pay raise to boost your contributions.  I’m actually raising my contribution level right now by 1% to take advantage of the low share prices.  I figure that I was going to do it any way in January, and I will barely notice an extra 1% missing from my paycheck.
  3. Keep the right asset allocation.  The end of the year is the perfect time to rebalance your funds inside your TSP.  In order to be diversified, you should consider investing in a mix of the funds that are offered depending on your age and risk tolerance.  I am a huge fan of having a solid mix between the C, S, and I Funds in TSP.

Try not to panic about the recent downturns of the market and the federal Thrift Savings Plan.  They will both bounce back over the long term.  Keep investing!

*** All percentages were calculated through October 1st, 2008.

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People Who View Investing as a Gamble Will Never Get Ahead

October 18, 2008

Investing in stocks, bonds, mutual funds, and other financial instruments is not akin to spinning the roulette wheel in Las Vegas.  People who are stuck in the mind frame that investing is the same as gambling with their money do themselves and their financial futures a disservice. 

The difference between investing and gambling is research.  Investors must conduct due diligence in order to mitigate the risks of investing their money.

Before you invest in any stock or mutual fund, investigate the company by…

Understand the Company.  You should try and know the company inside and out before you purchase shares in them.  What do they make?  Who do they sell to?  Does their competition do it better and why?  Why do you think that this company is going to increase its revenue, profits, and or stock price?  The same questions hold true for mutual funds as well.  What is their investing style and what are they trying to accomplish?  Are they sticking to their investing strategies during these current rocking financial times?

Read as Much as Possible.  Read all of the latest news articles about the firm that you are researching.  Look at their stock chart.  Was there a particular day that the stock price took a nose dive?  What happened on that day?  Look for a news article on that day to help explain any drastic changes in share price.  Google Finance is the best for this with their graphs that have corresponding letters where top news stories have taken place (see graph below).  You should also be reading all the financial reports that the company is required to produce and file with the Securities and Exchange Commission (SEC).  You can find them on the Edgar Database


Listen to a Conference Call.  Every quarter most public companies hold conference calls for their institutional investors such as pension funds, mutual funds, and their analysts that follow the stock.  These calls are simulcast over the internet, and you can even listen to past calls stored on financial websites like Yahoo Finance.  These calls provide an incredible wealth of knowledge and a behind the scenes look at how company executives view the company. 

Warren Buffet, the most famous investor in the world, does not invest in anything that he does not understand.  He did not have very many technology companies in his portfolio when the tech bubble burst in 2000 because he did not understand how companies like Amazon could command such a high stock price even tough they had never produced a profit.  This is a great piece of advice that you should keep in mind.  Do not invest in any company, product, or mutual fund that you do not understand.  Investing is not a gamble when you do your research and mitigate your risks.  Of course there are always risks of losing your money in the stock market which has become vividly apparent in today’s economy, but carefully choosing your investments can help you pick winning stocks and mutual funds that will grow over the long term.

Blog Carnivals from the past few weeks:
1. Carnival of Personal Finance #174
2. Carnival of Money Stories #80
3. Finance Fiesta Carnival

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How Long Will It Take the Stock Market To Rebound?

October 17, 2008

When the U.S. stock market crashed in 1929, it took until 1954 before the Dow Jones Industrial Avereage regained all of its losses.  The Dow broke 10,000 (for the first time) on March 19th, 1999.  It peaked at 14,164 at the market’s close on October 9th, 2007.  When do you think the Dow will return to 14,164?  Will it ever get that high again?  I’m interested in seeing what you think.

Using a Stock Screener to Find the Perfect Individual Stock to Buy

October 7, 2008

There are a lot of stocks out there to buy, over 6,000 actually.  There are 3,190 companies’ common stocks that are traded on the New York Stock Exchange.  And, another 3,000 stocks are traded on the Nasdaq and American Stock Exchange.  So, how do you go about finding those diamonds in the rough?  How do you separate the wheat from the chaff? 

Stock Screeners.  I like to find new stocks to consider buying through an online stock screener.  I personally use the Yahoo Finance and Google Finance stock screeners.  Yahoo Finance lets you input several key attributes that you are looking for in a stock in to the online computer program.  You can reduce the number of companies by looking for specific ranges of share price, market capitalization, dividend yield, beta, revenue, industry, profit, earnings growth, and a host of other metrics.  The stock screener program on the websites then whittles the universe of 6,000 stocks down to a manageable list of ten to twenty that will enable you to conduct more in-depth research.

The Google stock screener lets you use sliding bar graphs to trim the number of stocks you are looking for based on the criteria.  I especially like that Google Finance’s stock screener lets you compare companies that have been recently beaten up in the market.  I routinely look for companies that are off of their 52-week high price in the hopes that they will once again return to those highs of their stock price.

Example.  I used these inputs to drawdown the list of stocks and find some good companies to invest in.  In Google Finance, I entered: market capitalization between five million and 300 billion, P/E ratio between 8 and 15, dividend yield between 2 and 5%, a 30% drop from their 52-week high, earnings per share (EPS) of between $2 and $5, and earnings per share growth rate of between 10% and 100% for the past year. 

Results.  I ended up with 49 stocks to choose from.  As I look through the names of the companies, I am personally biased and quickly eliminate all financial stocks, automobile makers, and airlines from the list.  I am left with several companies that I have heard of such as Barnes and Noble Bookstores (Stock Symbol: BKS), Northrop Grumman Corp (NOC), Raytheon (RTN), SCANA (SCG), Snap-On (SNA), and Sherwin-Williams Company (SHW).  And, the list also contains a few new companies that I am not very familiar with such as Herbalife (HLF), Alexander and Baldwin, Inc (AXB), and Brady Corporation (BRC).  That is the entire point of this exercise after all.  It is often very hard to find new stocks to research before buying.  Stock screeners like this are a great tool to help you narrow your choices and focus your limited research time before investing.

Disclaimer: I do not own any of the stocks listed above, and everyone should conduct their own research before investing anything in a stock.

If you are looking for some good guidelines on stock attributes, I think that you might like the six part series I recently wrote on what to look for in a good individual stock to buy.

Characteristics to spot a stock that’s ready to rise:
Key Metrics like P/E Ratio
Charts, Graphs, & Averages
Dividends & Dividend Growth
Analysts’ Recommendations
Insider Trading
SEC Filing and Reports

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What Should You Do with Certificates of Deposit That Are Maturing? CD Ladder.

October 4, 2008

A friend of mine recently e-mailed me to ask what she should do with a five year certificate of deposit (CD) that recently matured.  And, my advice to her and anyone who is looking to reinvest the money is to think short term.  Interest rates in America will be raising sooner rather than later as the Federal Reserve turns its attention to battle inflation.  Of course right now, the Fed has its hands full dealing with the current bailout plan and shepherd the bill through Congress.  But, right before the financial market turmoil began, the Federal Reserve was looking hard at inflation in America, and they will be looking at it again once the current crisis has abated. 

Fed Funds Rate.  Eventually the Federal Reserve will turn its attention to interest rates and inflation.  With the cost of milk, bananas, gas, and most other consumer staples rising, there will eventually be talks of battling inflation, maybe not now during this presidency but soon thereafter.  A quick lesson on the Federal Reserve. . .a lot of media attention surrounds the Fed Chairman, who is currently Ben Bernanke, and interest rates.  In reality, the Fed does not control the rates that you and I earn on CDs or pay for car loans, etc.  The Fed controls what is called the Federal Funds rate which is the interest rate that banks and the Federal government charges each other overnight.  The Federal Reserve regulates the flow of money through the American economy by adjusting this rate every so often, and it is this adjustment that garners so much attention in the news when the rates move.  Raising the Federal funds rate will dissuade banks from taking out inter-bank loans between each other and the Fed.  Doing so makes cash that much harder to procure for banks, they raise their rates on CDs and savings accounts in order to draw in more money for operations, and then they pass those rate increases onto the loan customers buying new cars, etc. So, the Federal Reserve’s actions have a trickle down effect on the consumer.

Keeping Money In CDs.  So, if you have money maturing in a CD, what do you do with it?  You do not want to lock in a fairly low 5-year CD interest rate when rates will be climbing in a few months.  A CD ladder is a great way to hedge your best against rising interest rates.  A CD ladder is a version of stocks’ dollar cost averaging for certificates of deposit. 

For example:

If you have $10,000 to invest, you could build a CD ladder like the one listed below where you would invest the money in CDs with staggered maturation dates:

$2,000 in a one-year CD
$2,000 in a two-year CD
$2,000 in a three-year CD
$2,000 in a four-year CD
$2,000 in a five-year CD

As each one-year CD matures, you immediately invest your money into a five-year CD.  This keeps one year separating all of your CDs, hence the name CD ladder.

Here is a great website that has a CD Ladder Calculator that you can play around with and get a feel for how much money you would make from this strategy.  While you will not squeeze out every last dime of profit that you possibly could using this plan, you will earn a nice return while setting yourself up to take advantage of increasing interest rates when the Fed raises them.  Another great example of the earnings differences between CD laddering versus investing solely in one-year CDs can by found this great article on

Investing In Stocks.  If you wanted something better than a CD, most great blue chip stocks (good, big companies) have never been cheaper….same thing with some great mutual funds.  Everything has been beaten up these past few months even great stocks that didn’t deserve it.  Those stocks have just ridden the wave down with the rest of the market, but I have a feeling that they will be back up very soon.

If you enjoyed this posting, you might also like these:
1. Should Bonds Be a Part of Your Investment Portfolio
2. What the Best Way to Fight a Bear? Invest More!
3. Certificates of Deposit (CDs) Are a Waste of Time!

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What Is the Best Way to Fight a Bear? Invest More!

October 1, 2008

Now is not the time to panic. Now is not the time to pull money out of the market. Now is not the time to stop investing. Like real estate, it is a buyer’s market for stock investors. I am buying and so should you. I have been looking for any extra money to invest. I have been selling extra stuff on eBay and pinching my pennies in order to find extra money to invest in the markets.

This is the best time for beginning investors to start investing money in the stock market and in mutual funds. Good stocks and mutual funds are still fundamentally valuable, but the bear market that we are currently in and the nervousness of recent losses have driving their prices down considerably without merit in many cases. This is great news if you are just beginning starting to invest.

If you have been investing for a while now, the best thing that you can do for your future and retirement is to continue investing. Capturing dollar cost averaging or averaging down on great stocks and mutual funds is an effective and profitable strategy in the long run to lower your cost basis and capture gains when the markets rebound. And, they will rebound. There has never been a rolling 10 year period of the stock market that did not produce a positive return. In other words, the stock market is volatile and over the short term has lost money like this year. But, over a ten year period, any ten year period, the stock market as a whole has never lost money. The key is to be disciplined. Investors must be in the market for the long haul. Investing every month will ensure that you do not miss the next rebound whenever it will be. You will have perfect timing if you are constantly investing.

It has been years since stocks have been this cheap. Check out these high quality blue chip stocks that have been beat up by the market despite continuing to be leaders in their industries:

American Express (Stock Symbol: APX) – Financial services giant is down 39% in the past 18 months.

Google (GOOG) – Google is 42% off of its 52 week high.

Wendy’s International (WEN) – Hamburger leader who was recently taken over by Triarc is down over $12 since its 52 week high or 34% of its value.

3M (MMM) – The diverse conglomerate that brought us such innovative products such as Post-It Notes is down $28 or 30% over the past year.

Disclaimer: I own shares in Wendy’s International through a DRIP.

If you enjoyed this posting, you might also like these:
1. USAA Reassures Investors and Banking Customers of Safety, Strength, and Liquidity
2. How to Pick a Good Individual Stock to Buy? – Part 1
3. Lump Sum or Dollar Cost Averaging?

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Investing 101: Defining Bear and Bull Markets and Recession

September 23, 2008

A lot of Servicemembers and even regular civilians are not as well versed in some of the concepts, terms, financial products, and options used throughout the investing world. But, everyone should have a basic understanding of the financial markets because they affect all of us. Like freshman year of college, everyone should have an introductory level of knowledge and understanding about the stock market, investments, mutual funds, insurance, etc….an “Investing 101” level of knowledge.

Long and Short. Many investors use the terms long and short to define what kind of investor they are or where they believe a stock or the market is headed. Being “Long” is when you are investing in the hope that the stock market will rise in price. This is what most investors are. Being “Short”, like a short seller, is the opposite and invests thinking that a stock price will decline.

Bull and Bear Markets. For centuries, stock markets around the world have been called bull and bear markets. Bulls or bullish investors that think stock prices will rise and that things in the market will get better. This is a lot like being long in the market as well. The upward market is called a bull because bulls swing their horns upward to strike. Bears or a bearish investors have a negative outlook on a specific stock, industry, or the entire stock market. The financial situation that the U.S. economy is currently in is a classic bear market. A bear market is technically defined as a broad market index such as the S&P 500 index declining by 20%. There have been recent bear markets in 1987, 1990, and 2000. An investor can be bullish on the total stock market while still being a bear on certain industries. I am personally bullish on the stock market improving over the long term, but I am bearish on any airline stock and the entire automobile industry for example. I think that they both have horrible unions that are strangling companies in those industries. A down market is called a bear market because bears strike things down with their claws in a downward motion.

Recession. There is always a great debate as to whether the U.S. economy is actually in a recession or headed towards a recession. There is so much negative connotation surrounding the term that many politicians, economists, and other professionals are leery of even saying the word out loud. But, what is a recession? It all depends on how you look at it and define the term. With the financial markets’ currently turmoil, you might say that it is a “no brainer”. But, not so fast! Technically, a recession is defined as two consecutives quarters of declining Gross Domestic Product (GDP), which is the market value of all goods and services produced by a country. We have not actually had that yet. The GDP of the United States has actually increased 0.9% in the first quarter and 1.9% in the second quarter of this year. To make matters worse, the data provided by government economists lags the economy which is why we do not have more current figures. So, we actually won’t official know if we are in a recession until it is halfway over. But, this is just semantics. Many scholars and practitioners think that the definition is outdated. Many believe that a recession in the United States really started in about November 2007, and most ordinary citizens agree when their wallets are chronically lighter like they have been these past few months.

Over the coming weeks, I’ll continue to talk about classic finance terms and concepts. Next week, I’ll delve into risk versus reward and your risk tolerance. Do you have any investing or money terms that you would like to see discussed here? Let me know by going to the contact page and send me an e-mail.

If you enjoyed this posting, you might also like these:
1. An Army Second Lieutenant (2LT) Will Earn Over $100,000 in 2032
2. How to Pick a Good Individual Stock to Buy? – Part 1
3. Lump Sum or Dollar Cost Averaging?

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