TIAA-CREF: Near Term, Safety First

This entry is primarily for those who have holdings in TIAA-CREF. But perhaps other investors may find it helpful. Let me be explicit: I am not a professional financial adviser–not even an amateur--merely an economist who has had a long interest in trying to figure out where to allocate one’s TIAA-CREF money.
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TIAA-CREF–Near Term: Safety First
First, personal background. After years of following the advice given in the 60's of putting half of one’s money in TIAA Traditional (essentially bonds) and half in the CREF stock fund, I began in the eighties moving out what I had in TIAA Traditional and putting it into the CREF stock funds. [The maximum, then and now, that you can withdraw from Traditional is 10% a year, unless what is in there are supplemental funds–i.e., funds above the designated contributions that you and your school automatically send to TIAA-CREF.

By the mid-1990's I was out of Traditional and had about 95% in stocks, worried of course that the emerging bubble would burst–Greenspan’s "irrational exuberance" statement was made in December, 1996. Once, in a panic, I even withdrew everything from the stock funds I had my holdings in, but within a week or two I put it all back in. I certainly knew there was a bubble, as did almost everyone, except those benighted bubblers so out of touch they thought the Dow’s appropriate level was 36,000, almost triple the existing bubbled price.

The unanswerable question was, of course: how do you know when to get out of a bubbled stock market? Of course, there is no way of knowing, but in actuality I got out in April, 2000, one month after the peak. What helped me is that I saw signs that the robustness of the economy during the last years of the nineties had ended and that signs of sluggishness were appearing. To me, this meant that the days of the bubble wee limited. Get out.

[OPTIONAL PARAGRAPH. Incidentally, many have praised Greenspan’s unwillingness to raise interest rates (the federal funds rate that it controls) during the booming late nineties, since he correctly saw no real signs of inflation (although others blame him for not raising rates to counter the stock market bubble). Still others praise him for lowering rates in January 2001 (by a special telephone vote) and thus acting quickly to counter the incipient recession (which was later determined to have started in March 2001. [He was then criticized for lowering rates too much–to a level of 1%–and this helped spawn the housing bubble.] But very little criticism has been leveled at what was a really terrible and ill-timed increase, the one the Fed made in May of 2000. The economy was already slowing and the Fed helped slow it more by raising rates at this time.]

If I can offer one concrete morsel of investment advice, it is this. During late March and early April, the Dow declined about 7%. And then it regained about half of what it lost. That is when I sold my stocks. Had I waited until I got back all of what I had lost, I would have never been able to get back the peak price and would have lost about a quarter of my retirement fund. Once it’s time to sell, do so, if at all possible, on an upturn, but never hang in there hoping that you will get back the peak price that once existed.

I then did something everyone advises you not to do. I put all of my money into the TIAA Real Estate Fund (hereafter, REF), which specializes in commercial real estate (office buildings, malls, storage facilities, (etc.) and, with minor exceptions, buys these buildings (and a few gated residential facilities) with cash. Unlike REITS, there is no stock market effect. In effect, as people put their money into this fund, it accumulates enough money to buy another building. And that is what it did in the early and mid-eighties during which time the buildings it had previously bought and the ones it newly acquired increased enormously in value. But doing what I did–explaining the first sentence of this paragraph–meant that I put all of my eggs in one basket, a colossal "no-no" in economics (and personal investing), virtually universally condemned and theoretically "proved" by Nobelist James Tobin to be wrong-headed.

But I had noticed that the REF moved glacially and had moved glacially ever since it was formed in the late 1990's. By glacially, I mean it all but never (maybe never–I looked up its entire history, day by day, but forget a bit exactly what I learned) increased or decreased by as much as one half of 1%. Very rarely did it move one way or the other by even 1/10 of one percent. And, as I read more of how it operated, I concluded that it simply won’t collapse, in the way that stocks can and often do. In other words, when the time comes, you can get out without taking a financial bath.

I consulted with an economist friend of mine, one very smart and very distinguished, and half-convinced him that in cases like this, when there is an almost total lack of volatility, the eggs in one basket thesis is less convincing.

In any event, the TIAA REF did the best of all the TIAA-CREF alternatives in the years from 2001 until now. However, as the year unfolded (2008), the rate of growth of this fund was very slow, although at one point the YTD (year-to-date) percentage increase was over 1%. But then it began to slide. When the YTD got to about ½ of 1%, I decided to get out of the fund and get out totally. (I’m not a wishy-washy type of guy!) I believe that the full impact of the recession that is unfolding at a snail’s pace will increasingly hit the commercial real estate market. It is, somewhat, a lagging indicator. Only after leases come due, and this takes place over time, will many commercial tenants vacate or renegotiate lower rents. Anyway, since I got out, the REF has continued to fall and yesterday (9/30/08)–the latest figures--show REF YTD to be greater than minus1%, including, in the last few weeks, some of the largest declines it has ever experienced. I expect a few years of relatively moderate negative losses lie ahead–relative to what can be lost in stocks--(and weaker gains than in the past when the economy finally gets moving again).

So what did I do with the money? First, I put it into the CREF money market fund. Then I began to consider the possibilities. At some point, stocks will hit bottom and perhaps that is happening now–I doubt it--but who knows? Given the weakness of consumer spending, the increase expected in the percentage unemployed, the economic weakness of most of Western Europe and Japan, and finally and perhaps most important, the continuing unfolding of a unique financial crisis, and its negative effect on borrowing, it seems to me that the recession ahead will be long and possibly deep. And this implies a stock market more likely to decline than be on the mend. But even if the bottom has been reached, I discount heavily something I read, but now can’t find, that argued that after big declines, and this appeared the day the Dow fell about 500 points, the increases over the years to come, based on past experience, showed very high rates of stock market growth a year later.

The italicization is used since I think the flaw of economists, all their complex mathematical models notwithstanding, is that in the end they ultimately project the experiences of the past into the future. But if what we are faced with today is significantly different from what preceded us, projections of this kind may be of little value. I believe that even after we get by the current economic chaos, with bailouts (or "rescues" as some feel they should say) approaching one trillion dollars, our economic prospects are not good. The trade deficit is not going to be reduced very easily; nor will the budget deficit be easily reduced. The infrastructure needs repair, math and science education is, by international standards, weak, and a sane medical program will be enormously expensive, even if we eliminate much of the politically-caused waste, relating to the way Medicare works and medical insurance companies exploit us and even if we reduce the excessive costs that inappropriate use of emergency medical facilities causes. The implications for the value of the dollar is–what appropriate, scary word can I employ? How about dire–a "moderate" word for a situation that is one step from being calamitous. In short, I see a long dismal economic future ahead, with no solutions to any of the deep problems which increasingly plague the American economy. The past is in no way a guide to the future.

Thus, rather than expecting a sharp rebound from the stock market lows, whenever they are reached, I see weak recoveries. Keep in mind that the Nikkei is less than one third of its 1990 peak! Nearly 20 years!! If nasty things can happen can happen in Japan, why not here?. Therefore, I don’t want to put my money in any of the CREF stock funds. They are simply too risky. Nor is the real estate fund an answer for the near future, as previously mentioned. The CREF bond fund can at some point be a good place to park one’s money, but not now. Higher interest rates (which will come as the dollar resumes sinking against other currencies or given the fears of lenders, even if it doesn’t sink) will tend to lower the value of this fund, although the bond fund may be a good place to put your money if you can time it–that is, buy into it when interest rates are near their peak.

On the other hand, over a long period, the inflation-linked bond fund is not a bad option. Those issued by the Federal Government pay a small percentage plus the inflation rate. However, what you get when you buy into the CREF linked fund, if I understand this correctly (and I’m not 100% sure of this) is a fund that is affected by speculation. That is, many persons, seeing oil prices rising bought the linked fund, but when oil prices began to sink and the short run prospects for inflation grew dimmer, given the weakness not only of the US economy, but of both Europe and Japan, the linked fund has weakened. At some point, it is a possibility, but perhaps not now.

What that leaves is the TIAA Traditional. This is a bond fund primarily, one in which a certain return is promised for the year and then is adjusted up or down each succeeding year. Right now, for funds you lock in, it is paying about 6%. This, to me, isn’t bad. And so I put 50% of my holdings into TIAA Traditional. The rest I am holding in the CREF money market fund. And I weigh the cost of keeping it in the money market fund, which earns somewhat less than 2% a year, with the flexibility it gives me to put the money into the linked fund (or something else) at some time in the future, but this is currently costing me about 4% a year, if I continue to hold the funds in this low-yielding fund, rather than in the Traditional TIAA.

One of the problems of the Traditional is that you are locked in. That doesn’t bother me so much since I think the potential of stocks and even my beloved Real Estate Fund is limited for years to come. But one might want the option of having available the linked fund (or other alternatives), especially if you are younger. More important, suppose the dollar actually collapses. Let’s say, following the hypothetical model of the future provided us by James Fallows in an Atlantic Monthly magazine of about three years ago, in which one day not far from now, the dollar loses about 30% of its value in a single day, against say the Euro or the Yen.

Could this happen? I believe so. Of course it is not in the interest of anyone holding dollars to have this happen, but those who do hold dollars may believe that others will sell them and therefore try to beat the others to the punch by selling first and the next thing you know the dollar has collapsed. Given not only the fact that we are printing money to buy foreign goods and printing money to pay for Iraq and everything else, we are about to enter, it seems, an era where we will be printing money to pay off the bad debts of financial corporations and maybe others deemed, until now, ultra secure, like General Electric! Who knows where it will all end?

If this happens, the TIAA traditional will not be the place to be in, as inflation rates will exceed the returns the fund offers. But then, what will be the answer? At that point, I will yield to the idiotic goldbugs who have been predicting disaster for decades after decades (and lost vast sums keeping their money in gold).

So, in the end, I am, for now, either keeping one half of my funds in Traditional and one half in the money market fund or I am switching all of my funds to the Traditional and hoping whatever hits the fan does so after I and my wife are long gone. As for my daughter, I simply can’t calculate what I need to do to protect her, other than bequeathing her the Woodstock house we recently bought and own free and clear.