Investments and the smell test

Some people go outside the TSP because they want to have a wider choice of investment options. Would you do the same? asks Senior Correspondent Mike Causey.

Do you have, or would you like to have, a retirement nest egg outside of your in-house federal 401(k) plan? Maybe one that takes a little more risk with the potential for a lot more rewards? Well …

In addition to their Thrift Savings Plan accounts, many federal and postal workers also have outside investments.

Some people go outside the TSP because they want to have a wider choice of investment options. The TSP offers index funds that track the U.S. stock markets (the C and S funds), an international fund (I fund), funds invested in the bond market (F fund) and special U.S. Treasury securities, the G fund. There are also self-adjusting target date funds that include a mix of the C,S,I, F and G funds.

While most federal investors seem content with the TSP’s oversight and low fees, others want more. They want to be able to invest in targeted funds — like an emerging market, precious metals, real estate or “green” operations. Unless and until the TSP brings more funds into the federal plan, or provides a window for investors to put some TSP money in outside funds, people have to do it on their own.

In a recent study by the TSP’s Board, it turns out that 45 percent of the investors who left government in 2012 due to retirement or other jobs took their money with them within a year of leaving. Their reasons varied (from bills to other investments) but it made a lot of people think about other options.

On yesterday’s Your Turn radio show, Allan Roth, columnist for AARP, talked about the TSP and other investment options. You can listen to the show anytime by clicking here.

In his most recent piece for AARP’s magazine, he outlined the five cues or “tells” that will let you know whether a potential investment is worth pursuing, or whether you should run, not walk, away. He says:

  • “There is no such thing as high returns with little or no risk. The best opportunities typically go to institutional investors. It’s much easier to raise money from a few big fish than to solicit thousands of small fry.”
  • Keep it simple. “Perhaps the offer comes with hundreds of pages of technical and legal disclosure, and you’re required to sign a document saying you read and understood it all. Good investments are easy to grasp. My rule is never buy anything I couldn’t explain to an 8-year old.”
  • Don’t be rushed. “If you hear that this investment opportunity is available only for a short time, it’s the reddest of flags. The salesperson doesn’t want you to think it over or ask others for their opinion.”
  • Beware deals with “words such as ‘structured,’ ‘managed,’ ‘deferred,’ ‘derivative,’ ‘collateralized’ and even ‘guaranteed,'” he writes. An FDIC guarantee on a CD is fine. “But leaving cash at a bank or brokerage firm is a bad investment if you are earning 0.1 percent or less. You’re losing ground to inflation. A higher-paying CD is a better option.”
  • Finally, Roth warns, remember the no-such-thing-as-a-free lunch rule. In this case an “educational seminar” along with lunch or dinner. “I have yet to meet someone unknown to me who truly wanted to make me rich.”

NEARLY USELESS FACTOID:

By Michael O’Connell

The phrase “There ain’t no such thing as free lunch,” can be traced back to a punchline in a June 27, 1938, article in the El Paso Herald-Post entitled “Economics in Eight Words.”

Source: Freakonomics.


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