Reality Check: Can You Handle The Truth?!

Thrift Savings Plan investors are in for a reality check.

Later this year, probably in April, the Thrift Savings Plan will limit you to two trades (electronic transfers of money from one fund to another) a month.

The TSP’s managers say that the frequent traders (between 2,000 and 3,000 of the TSP’s 3.9 million accounts) would drive up costs for all investors.

Especially if more people start doing it.

Advocates of unlimited trading — they have been dubbed ‘frequent traders’ — argue that they can do better if left to their own devices. They say they can, and have, outperformed people who stay put in the TSP’s index funds.

Several frequent traders have sent in spread sheets showing either how well they did, or how well they could have done, if they had followed their instincts (and research) to dodge market lows and latch on to market highs.

They may be right, or they may be suffering from the Beardstown Ladies syndrome. They were a group of elderly Illinois ladies who formed an investment club and — based on the success of their investments — were the toast of TV talk shows and wrote best sellers. Except that when somebody checked, turned out they had misstated their earnings. They said they were making 23 percent a year but turns out, when the fees were figured, in they were making only 9 percent which was less, then, than the Dow was returning.

More information in an excellent Wall Street Journal article by Mark Gongloff.

Most 401(k) plans limit the amount of transfers participants can make each month or year. Some are much tougher than the TSP’s twice-a-month proposal.

Later this month the TSP will advise each account holder how well, or not, they did in calendar 2007. Information is now on the TSP website.

The statement will be mailed to your home (if you get paper statements) or at the TSP website, if that’s how you do business. The annual statement will show your account activity, including how your investment mix did. It could be an eye-opener for a lot of people. One is reminded of the exchange in the movie A Few Good Men in which Tom Cruise asked Jack Nicholson for the truth. To which Jack replied, “You can’t handle the truth, son!”

The question is, will you be able to handle the truth?

Last time we discussed the subject of corralling frequent traders many responded. They object to what they see is government interference in their efforts to invest for the future. Some even said it was part of a government plan to limit how much they will have to spend in retirement.

But not everybody objects to limiting trades.

For example:

  • Chris Colton says, “remind us again why frequent traders (in the TSP) can’t pay their own way? If they did get charged for each trade, like a regular brokers charge (anywhere from $7 to $10), no one would have a legitimate complaint.
  • Joanne Noel comments, “In the most free of free societies, we still place limits on human behavior. The underlying premise is that we are free to do as we wish as long as we don’t infringe upon other peoples rights. We don’t let people “express themselves” by shooting other people, or otherwise injuring them. So, why should our TSP program be any different? Why should the few engage in behavior that negatively impacts the many without any consequences or restraints?”
  • And George Counihan notes, “Mike — I am not one of the day traders, so no ax to grind here — but I say this: the TSP is crying that they are driving up costs, so do like any other financial institution and figure out the cost and pass it on to them! If it is going to cost you a hundred bucks or a half a percent or whatever to make a move, you might think about it. Then again, if you are moving tens of thousands of dollars you might not care.”

    Note: Internet Editor Dorothy Ramienski here. Due to the absence of Senior Internet Editor Suzanne Kubota, I have been asked to come up with a ‘nearly useless fact’. I am going to change things up (I’m young, that’s what we do) and ask a question, instead. Email Mike with the answer.

    Nearly Useless Factoid
    What does the “ZIP” in ZIP Code stand for?

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