A Response from My TRS Letter and Research on the Markets

I last posted to this blog on Sunday, October 19, and since that time I have been busy researching various items on the stock market, responding to e-mails from educators, and when possible... actually working.

A Response from My TRS Letter

On Monday, October 27, I received the following e-mail from State Senator Bill Heath, Chairman of the Senate Committee on Retirement:

Thank you for your correspondence concerning the proposal dealing with COLAs before the Board of Trustees of the Teachers Retirement System of Georgia (TRS). Time does not permit me to write an individualized response to each of you. I do understand this is an important issue to you. I hope this will help you understand what is taking place. This matter is not before the General Assembly and therefore I do not have a vote in this matter.

The Board of Trustees consists of ten trustees whose responsibilities include administration of the fund and to manage the fund so as to ensure the continued fiscal soundness for the current retirees as well as for the current and future members. To date the fund has been well managed and I commend the board for their actions. They have an increasingly challenging job as the make up of the members, their expectations and financial universe evolve. I trust the Board to continue to make wise decisions as they fulfill their responsibilities.

The Board consists of the ten trustees. The law requires a majority (six) to be active or retired members of TRS. One trustee is selected by the other nine and shall be a citizen of Georgia who is not a member of TRS but with experience in the investment of moneys. The other three trustees include the State Auditor, the director of the Office of Treasury and Fiscal Services and one trustee appointed by the Governor without restrictions.

At the September 24, 2008 meeting of the Board of Trustees, a proposal was made to consider changing the administrative rule that deals with the method by which the Board grants and funds the semi-annual cost-of-living adjustments (COLAs). The current policy, which was adopted in 1969, states that the Board will grant a 1.5% COLA on July 1st and January 1st provided there is an increase in the Consumer Price Index. The proposed amendment states that the Board will determine at its annual meeting each year the amount of COLA up to a maximum of 1.5% that may be granted for the following July 1st and January 1st.

It is possible that the Board will take up this proposal at its November 19, 2008 meeting if the Trustees feel they have had the necessary time to evaluate the proposal. If you would like to voice your concerns or ideas to the Board of Trustees before this is taken up you may do so by sending an email to Executive.Director@TRSGA.com.

I thank you for you interest in this matter. As Chairman of the Senate Committee on Retirement, I spend a great deal of time and energy working to ensure that the pensions of our employees are safe. It is the intent of the legislature to provide an environment that will allow the experts in finance and pension management to maximize the benefits available to those who have served our citizens so faithfully.

Well, at least I have received one response. Nothing much said, but it is a response.

Research on the Markets

I find it interesting that in the "dire" predicament the stock market is in that few people actually do any research on past markets, trends, and outcomes. This market is quite a bit different than many previous problems we have had before due to the issues of credit and globalization.

I read an article about Anna Schwartz who co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression. She is obviously a brilliant woman that has looked throughout history, but many believe that she may be missing the globalization of the market.

She says the issue is confidence and not liquidity (The Great Depression was caused by liquidity). This is true, but she does not feel the U.S. Treasury and Federal Reserve are handling the confidence issue. I think history will eventually show that the Treasury and Federal Reserve are working to resolve every single issue both before and after something becomes an issue.

When liquidity was a problem... they injected it. When money market confidence was an issue... they guaranteed it. When we needed worldwide coordination... they orchestrated it.

I think looking 2, 3, 5, 10 years out, we will look back and be amazed from where we have been. The markets are powerful machines that are like a cruise ship to turn... they do not turn on a dime.

Finally, anyone that started to believe the U.S. was now not the center of the financial universe simply needs to see where everyone looked and returned to for guarantees and leadership. We may not all agree on politics or policies, but it cannot be said that the U.S. Treasury and Federal Reserve have not stepped in to help Americans and foreign companies and nations alike.

The trip ahead will be bumpy, but the end should be good for those along for the ride. Just remember - your TRS pension is guaranteed by law, and your 403(b) account is not used on any single day. It is a retirement fund.

As always, let me know if you have any questions.

Is It Time to Buy?

Frequently investors wonder if now is the time to buy. Most investors want to make sure that they buy when the market is going up. Interestingly though, most great investors think about 2, 5, and 10 years down the line.

In Friday's The New York Times, Warren Buffett, arguably one of the greatest investors in the history of the stock market, wrote an Op-Ed piece titled "Buy American. I Am." Below is the article for you to enjoy.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Source: The New York Times

What Now? 403(b) and Pension Comments

Last week I received numerous e-mails about 403(b) accounts and pensions. "How safe is my 403(b)?"; "Will it just go away?"; "If I take it all out what happens?"; "Is the TRS pension guaranteed?"

403(b) Safety

A 403(b) is much like any other type of retirement account - 401(k), IRA, Roth, SEP-IRA - when it comes to investing. Within most 403(b) accounts you have a fixed annuity option, a cash/money market option, and then various mutual funds that you can own.

• Fixed Annuity - This option allows you to put your money in a "fixed annuity" that generates a return somewhat along the lines of a CD. The exception here is that most fixed annuity investments only let you take 10-25% out of the investment at a time. This is usually not a good investment due to the constraints of taking the funds from the account - even when you are trying to get them out in retirement. While this does not lose money, it also generally only keeps up just above the rate of inflation.
• Cash/Money Market - This option allows you to park uninvested cash in a place that earns a rate of return that is along normal money market rates. It will not have the return that the Fixed Annuity has, but you can withdraw, reinvest, or hold it without fearing that you cannot touch it (unlike a Fixed Annuity). This is a good place to hold cash for future investments or distributions.
• Mutual Funds - This option is the one where you will buy shares of a "mutual fund" that owns usually 25-100 stocks. A mutual fund can make or lose money. It is an investment that can go up or down based on the underlying investments in the companies of the fund. Depending on the fund, you may invest in bonds, big, small, or even international companies. Some of the funds will correlate more with the Dow, S&P 500, or Nasdaq, etc. The custodian (AIG-VALIC, Fidelity, Lincoln National, etc.) is not to blame or get credit for the performance of the funds. The funds are run by fund managers that use your money to invest in companies.
  
  
  • For example - if you own the "Janus High Yield Fund," the fund is run by a manager from the Janus fund company that will use your money to invest in high yield bonds from various companies.

What I would like to stress here is that your 403(b) investments should depend on your age, risk tolerance, and goals. In coordination with your TRS pension, your 403(b) is a powerful tool when used correctly, and it can help you realize some of your dreams after you retire from education. There is a huge difference though between making sure you do not want to lose any money and making wise investments. Know your risk tolerance and expectations.

Also, rolling over your 403(b) to an IRA is fine (if you can), but taking all of your money from the 403(b) as a distribution creates a taxable event that can have huge tax implications. Do not take a distribution without first talking to an accountant or financial advisor. It could cost you 35-45% in taxes!

TRS Pension

There are many things to consider when you start thinking about your TRS pension benefits, but one of them is not if the fund will be there. As of June 2007, the pension fund was worth $53.3 billion, and it paid out about $2.2 billion with about $1.7 billion in contributions. Thus, only about $0.5 billion was taken from the fund in FY 2007.

The fund, as of June 2007, was "balanced" with about 62% in equities and 38% in cash and bonds. TRS has not yet released the June 2008 figures, but even with the declines in the stock market, the fund is viable and continues to be reevaluated every year by auditors and actuaries. In June 2009, the employee and employer rates of contribution will rise slightly due to past stock market performance. This increase is to insure the benefits that have been guaranteed to educators.

One important thing to remember is that the TRS benefit is guaranteed by Georgia law. It is not just a guideline but a law.

One additional item on your pension benefits - TRS is proposing a change to the Cost of Living Adjustment (COLA). It is absolutely imperative for all educators - current and retired - to write a letter to TRS asking them to NOT change the wording as the proposal requests. The wording that would change could and most likely would ultimately change your pension benefit. GAE and PAGE are both against this action, and I cannot imagine an educator that is for the change. My post, TRS Board of Trustees to Vote on Cost of Living Adjustment (COLA) Change, on the proposed change includes a my comments and a copy of the letter that I sent to Jeffrey Ezell, Executive Director of TRS, last week.

I hope your school year is going well, and please e-mail me if you have any questions.

Are We Hitting the Bottom?

There have been several questions e-mailed to me over the past couple of weeks, and one that continues to be asked is "Are we hitting the 'bottom'"? There is one thing that I have learned from reading history books, economic books and articles, and listening to people... the bottom is never "the bottom" until a few months later.

In October 2002, the market hit "the bottom", but no one knew it until 3-6 months later. The reason is pretty simple to understand but hard to see.

We have all heard the expression "he can't see the forest for the trees", and this is the perfect time for it. It is relevant here because all of us see only what is in front of us. We cannot tell if the market's last drop will be the last one or if we should head for the door.

History

If we look to history, it will tell us some about "bear" markets:

• March 2000 to October 2002 (somewhat long) - Decline of 49%
• August 1987 to December 1987 - Decline of 34%
• January 1973 to October 1974 - Decline of 48%
• November 1968 to May 1970 - Decline of 36%

Our current bear market from October 2007 to present leaves us down about 42% from the high. Thus while we may not be at the ultimate bottom, we are somewhere near it.

Future

The next few months could be choppy in the markets, or there could be the "V" bottom that sometimes happens. The main thing to do is keep your emotions in check and have your allocations at what you feel comfortable with. If you sold some assets (hopefully not all) to cash because you are worried, look to keep it, and slowly put it back in. Going all in may be brilliant or it may not, so the diversification and long term aspect is something to remember when markets start to act crazy in the future.

Let me know if you have any questions.