Saturday, September 15, 2018

Why Is The TRS Balanced Fund A Bad Investment?

This year TRS shut down the low performing Bond fund and replaced it with a Balanced fund option for risk-adverse investors.  Before investing in the TRS Balanced Fund, please read why I don't believe it's a good investment option.

Most balanced funds usually have between 50% to 70% equities and 30% to 50% bonds and cash equivalents.  Historically, equities average about 7%, after fees and short-term bonds and cash equivalents  usually returns about 3%,  Therefore, the average historical return for a typical balanced fund is approximately 5%.

However, we are probably at the tail end of a bull run in equities and realistically, we should expect single digit returns of about 5%.  Moreover, with slowly rising interest rates, bond funds will struggle to have positive returns and just like this year, one can expect negative returns. The result is that the TRS Balanced Fund expected return will only average about 4% for the near term.

Compare that to the TRS Fixed Income Fund that gives us a guaranteed 7%  return with no fees!  Why would any risk-adverse member take a chance on the Balanced Fund when the TRS Fixed Income Fund gives a better return?

For members willing to take risks, there is always the TRS equity funds and this is a way to fight off the effects of inflation.


Anonymous said...

TRS fixed fund, TDA, and banked sick days are literally the only reason I continue to work in the hellhole that is the DOE.

Anonymous said...

Do you know the correct way to increase our tda for the lump sum payment? TRS had send an email on Aug 29th telling us to log into the system to change it. Now I see on the UFT site that there is a form to use

If I did it already through the trs system do I have to do it again? Will that change stay in affect? I logged into the trs site and do not see my pending change. This is a mess. Typical DOE and UFT not giving members correct information in a timely manner.

kenny said...

The 7% fixed fund is the best deal in town. Nothing out there like it.
Chaz- There are no fees associated with fix fund at all? What are the fees if I was in all equities? Thank you

jeff said...

No fees, just pay taxes upon withdrawal.

TJL said...

I believe the fees are baked into the quoted unit prices. Either way, they're miniscule compared to what is paid in the private sector or even compared to the 529 fees (which are very low as it is if you use the NY 529 plan).

Chaz is right, the whole point of putting a percentage of a portfolio into bonds is to hedge your bets, but it's pointless with the 7% guaranteed TDA.

However for guys out there like me (only about to turn 40) you're missing out if you're not keeping most (I do 85%) in the Equity Fund (used to be Variable A). You've been missing out on double-digit gains the past couple of years and historically the market is going to earn you almost 10% annually. It's no guarantee, but unless you're very close to retirement there's no reason to be so risk-averse and limit your returns to 7%. This is especially true considering we're guaranteed a pension. The TDA is just house money.

kenny said...


If you look at the past 10 year Performance the equities are about equal with the Fixed fund. And thats after some unreal gains over the past few years. Everybody forgets 2008 too quickly. People would line up for hundreds of miles if I offered them a guaranteed 7%

Anonymous said...

Hi should I switch to all equity now? I retire in a 11

Prehistoric pedagogue said...

If you switch to all equity now, you will be buying in
At the highest price ever. If you think the market will go even higher, why not go in for 30 or 40%.
Probably unwise to switch to 100% equity at this point unless you have a real gambler’s heart

Anonymous said...

To 7:03 AM
That form is only if you’re a member of BERS. We are not BERS, we are TRS.
We change our contribution rates for our TDA on the TRS website.

TJL said...

Kenny and PP make good points. It all depends on your time horizon. And, yes, the 7% guarantee is the envy of anyone in the private sector and even teachers I know Upstate.

A nugget to chew on: NO 30 year period of the S&P 500 (closest to Var A), starting in 1926, has earned less than an annualized 7%.

For 20-year periods, according to the following graphic, going back 99 years, 80% of the 20-year periods had an annualized return of at least 7.2%. The worst of the 99 periods had an annualized return of 3.1%, so over the long term no one lost their shirts. Even 1929 was a speed bump, let alone 1987 and 2008.

Now for 11 years, that's different. Here's an article about 10-year periods from 2013.

There are some periods around the Depression and 2008 that had a negative return. You can see most of them, though are above 7%, some significantly so.

Finally, since 2008 was mentioned: If you just put on your seat belt and held on, you've doubled your money since then; that's better than 7%.

It all comes down to what your goals are and what your appetite for risk is. Remember I'm just a lowly high school math teacher on a blog and you should do your own homework. I look at it as, I want out at 59 1/2 with a chance to travel the world and live really, really well. Our pension and a TDA at 7% is more than enough to live comfortably (you will probably make more in retirement than you do now) but it's not travelling the world money.

kenny said...

TJ- That was an incredibelly informative post. Thank you

anonymous said...

I retired in July and stayed with the fixed rate the last few years before my retirement
I do have some regrets not putting some money into the Variable A fund
I think about changing it now and putting like 20% in the Variable A but retired and not sure If I should ? Any thoughts of a little risk after retirement ? The market had done so well

anonymous said...

I agree very informative
When you retire will you convert eveything to fixed 7% in your TDA? Will you put some % in Variable A?