Friday, September 22, 2017

Chasing Yield - Why The TRS Fixed Income Fund Is Unbeatable.





























We have been in a low interest rate environment since 1990 and the average inflation rate since 1990 is only 2.51% (Historically, since 1914, the average inflation rate is 3.34%).  Just ask your parents and grandparents how painful it is for them as they only get between 1% to 1.5% on a multi-year CD.  Money Market and short-term Bond funds are no better,  paying a meager 1% and 1.2% on an annual basis.  What does the risk adverse do to gain extra yield without taking a risk on the violable equity market?

For some people, they chase yield by buying international debt.  The problem is that the stable western countries like Europe, Japan, South Korea, Israel, and Canada pay yields of between 0.5% and 1.5%, not a good substitute to U.S. based instruments.  That means that investors who want more yields have to stick their toes into the Emerging Market debt market.  There you can find yields of between 4% and 26% and most funds average about 6%.  The problem is that the higher the yield, the more unstable the country is and a greater chance of default.

For example, Venezuela bonds gives the investor 26% yield but has had trouble paying the interest and most experts expect them to default.  If that happens, most Emerging Market debt funds will drop significantly as the country's bonds make up 4% of the market.  Moreover the 26% yield is almost 25% of the total yield of the Emerging Market debt funds.  Therefore, the funds total yield of around 6% would drop to 4.5%!

Listed below are some of the bond yields for Emerging Market debt countries included in Mutual Funds and ETFs.s.

Country.....................................Bond Yield

Venezuela....................................26.13%
Iran............................................20.00%
Nigeria.........................................16.17%
Kenya..........................................13.10%
Brazil..........................................9.62%
South Africa..................................8.48%
Pakistani.......................................8.20%
Mexico.........................................6.78%
India...........................................6.66%
Russia.........................................7.57%
Columbia.......................................6.57%
Indonesia......................................6.45%
Argentina......................................5.76%
Greece.........................................5.55%
Vietnam........................................5.05%
Philippines.....................................4.65%
Chile............................................4.69%
China..........................................3.69%

The four countries in boldface are known as the BRIC countries and averages a yield of 6.9% and can make up the major portion of some of the Emerging Market debt funds. Most funds do not have Iranian bonds due to U.S. sanctions.

As one can see the more politically unstable the country is, the higher the yield as there is real risk of the country defaulting.  In fact, its not uncommon for the Emerging Market debt funds to drop significantly as one or more countries fail to pay their debt and default. Furthermore, the fees range from almost 1% to 2% annually.

By contrast our TRS fixed income fund gives up a guaranteed 7% interest with no risk and no fees. For non-UFT members its 8.25%.  Now that the TRS is eliminating their Bond fund, a real dog, please transfer the money into the fixed income fund rather than the balanced fund that offers no real advantage in a low interest rate environment and contains risk that defeats the purpose of the risk adverse investor..

17 comments:

Anonymous said...

When I first started out the vets told me to invest in Variable A which is now called Diversified Equity. This is the place to be if you can take the ups and downs of the market and plan to be in for the long term. It is volatile but in the long term has the highest return.

As you get closer to retirement it is advised to go into the Fixed.

For the new teachers invest as much and as soon as you can!

Anonymous said...

These days with the uncertainty of ratings, it's best to do fixed rate.

Anonymous said...

I'm rollin at everybody's two cents advice here. Who knows how long a teacher will remain a teacher anymore? Fixed no matter what. If you are new and you go with stocks and it goes down you may be gone to recoup anything.

Anonymous said...

6:39PM and 8:53PM have the same advise. Same here. Go fixed.

DOEvet said...

I would have to say the fixed is the way to go for now. If the rate of inflation rises 7% won't look as good, but for now it is a great deal.

A major problem with our TDA is that it takes a long time to move money from one fund to another. To move it all takes I believe 3 months. That is several eternities in today's markets. A person could lose a tremendous amount and non of it is insured in any way.

In NJ, you can move it all in one quick transaction. Our plan does not give this flexibility. So, fixed is safer by far. We can't quickly move the money to play the market with TDA.

The Diversified Fund is at a very high valuation - if there is a market correction it will drop at least 10%.

The time to buy in is after a major drop. Still not a great idea, but it could lead to a 20% gain or so if and when the market comes back after the drop. This worked after 2008 but hard to time it, we are so restricted on moving funds. For most teachers, the fixed is the only smart way.

Our union took our money off the table by reducing the fixed from 8.25 to 7, I hope they don't ever lower it again.

Anonymous said...

NYState could lower it during a C.Convention, I believe...

Anonymous said...

I believe u now can move your money up to a month before the deadline. So u could have moved your money at very end of August in time for Oct. 1 deadline.

Anonymous said...

DOE VET-
Let's make sure the readers know:
our fixed dropped to 7% because teachers did not want to return to work for two days before Labor Day. So we had to give back 1.25% in order to get those two days off. Looking back , I wonder if that was a mistake. 1.25% may not sound like a lot but when it is compounded over 15 to 20 years, it certainly adds up. CSA members lucked out and got to keep their fixed at 8.25%

Chaz said...

Anon 2:01

Besides the 1.25%, Tier IV for teachers who were hired after December 2010 were subject to a 15 year retiree health benefits and a 27/55 program instead of a 25/55.

The union should have never given up the two days before Labor Day in the first place.

Anonymous said...

Chaz I apologize for going off topic :
I understand that Tier 6 is for those who were hired April 2012 and on. Question -- if someone taught at a charter school for 8 years and then began teaching for the DOE in April 2012 are they subject to tier 6? Or do the charter school years count, therefore making that person eligible for a lower tier?

Anonymous said...

I started in 1998. Always had fixed rate. Started off with 10 percent. I went on to 15 percent then to max. I'm on 20 years now and I'v accumulated 300,000. With another ten plus years to go with compound interest, I should easily have a million. If you are reading this and have your TDA contribution at a low number, please thing again.

Anonymous said...

Variable A (now diversified) has underperformed fixed if you look at the 10-15 year average return. I expect volatility but if a fund can't outperform fixed over 10-15 years, it's a dud.

Anonymous said...

Charter years don't count for squat as far as I know. That is why they are charter schools.

Anonymous said...

...but I would have made a bundle in V.A. if u got in when the DOW went down to 6,000 in '08...it's over 20,000 now.

Anonymous said...

After age 50 the max increases by 3,000 to 27,000.
Also, just to let people really know the advantage of 7% on large amounts of money, you get over $1700 in interest per month on $300,000.

Chaz said...

Anon 2:21

True, but the problem is when to get into equities and when to get out. Market timing is a fool's game.

Anonymous said...

I have two savings
1)TDA at fix
2)city 457 in stock market

When the stock market is low my salary can buy
anything I want. I can take money out of my TDA.
When the stock market is high my salary is not worth
a lot and buy fewer things.I can take money out of my
city 457 because I sell less shares for more money.
I am in balance.