by William E. Donoghue
As a thirty-year advocate of objective, patient and profitable proactive fund investing, I would like to add some alternative perspectives to consider in your discussions of frequent trading.
1. Buy-and-Hold is Not Good Enough.
As a long-term benchmark, the S&P 500 has averaged 1.8% this Century (since the end of 1999). While others have chosen other time periods, this eight year period recognizes the full bear and bull cycle to date. The mutual fund public relations machine has convinced many journalists who don’t manage money and load fund advisors to focus on costs and not on the funds unwillingness to add value by addressing down market opportunities.
Investors Should Make Their Own Choice. Passive investors have their beliefs, mostly promoted by Vanguard’s John Bogle; the rare experienced proactive advisors who do manage separate accounts know that some objective trading is more than appropriate.
2. We Have Enough Investment Extremists; We Don’t Need More.
Both Day Traders (so-called "market timers") and Passive Investing have troubling costs.
Too frequent daily trading tends to be unfair to fellow investors and to take advantage of unintended accounting anomalies; passive investing without a net is just as frightening without an inverse stock alternative to profit in the face of a probable two-three year downturn. The 2000-2002 bear market cost retirement savers as much as $6 trillion. Cash is just not a good enough alternative to build retirement assets and even encourage savers to "stay the course." It was a long wait from 2000 to 2007 before investors finally broke even. If they retired in the interim, the likelihood that their savings will last their remaining life is lowered.
3. Remember It’s Your Money and Your Peers’ Money.
With all due respect, TSP’s Board should be proud to have taken a bold and rare initiative empowering investors to trade among TSP’s funds. The "independent" mutual fund directors have not been so sensitive to shareholder needs.
The TSP is A Revolutionary Plan; But, It’s Still Incomplete. TSP is an excellent traditional retirement program with some unique portfolios; you should be proud to have access to it. However, it needs an inverse fund alternative.
Two trades a month is probably a "good enough" middle ground; however in exchange for accepting this restriction, TSP should take the leadership and offer you a bear market stock alternative (inverse fund) to profit during a bear market.
Rydex and ProFunds, the rare experienced fund families offering such funds and ETFs and are both conveniently located in the DC area. You don’t have to use the alternative but you should want it available.
4. Get Thee To A Roth IRA.
A convenient path to a Roth IRA conversion to at least allow you to shelter your future profits should be offered. If you get laid off and/or have a low-income tax rate year, that year might be a good time to convert your IRA to a Roth IRA. The income and age test that restrict these conversions should be waived ASAP. I suspect the Treasury could do that on their own or modify rules to facilitate conversions.
5. Three Things To Keep Clearly In Mind: (1) Your principal and profit, if any, will eventually be taxed as ordinary income when you retire – no tax-preferred long-term capital gains rates or dividend exclusion rules; hence, the Roth IRA conversion recommendation, Tax-deferred is not tax-free and (2) You should demand an inverse stock fund alternative (in the event we face an extended bear market) and (3) this generation, the best-educated generation in human history, should not be treated as investment illiterates and empowered to manage their money as professionals.
6. A Taxable Fund Might Be A Better After-Tax Alternative.
ETFs make proactive management economical and their ability to "trade like a stock" makes them viable as trading vehicles. Taxable ETF portfolio might produce superior after-tax returns.
My best New Year wishes,
William E. Donoghue