TIAA-CREF

(Thoughts for those who have their investments in TIAA-CREF. This fund is mainly for college teachers and also for persons who work for non-profit organizations. As far as I know, others cannot be part of the TIAA-CREF “family.”)

I am not a financial adviser. I have no professional expertise. Please understand this and do not hold me responsible for suggestions that lead to losses. I do state that I have done well over-the-years, but I do things that people, like my cousin, an accountant and lawyer, think is absolutely indefensible, like putting almost all my money in a single basket. More on this, shortly.

At the moment, I am most unsure about the stock funds. That is, I think that, barring a double dip, which is less talked about, but nonetheless possible, stocks are more likely to go up over the next 6 months or a year, but not likely enormously so. (And certainly, as I write, there is, increasingly, evidence of fear about QE2, which is driving stocks downward, somewhat dramatically.) And even if there is no double dip, the recovery may simply fizzle and any upside will be limited. My bet, though, is that it (the Dow) will approach 12,000, during the next 6 months or a year, but not reach it, or just reach it, before there is a significant decline. If you’re brave, and time it right, maybe you can pull off 8 % for a year.

The bond and linked bond funds are going nowhere and although QE2 could push up bond prices, for a while, and for that reason one might stay in the bond fund if you are already there, be prepared to get out. If and when interest rates rise, the bond fund will go down, at least until the higher rates on newly required bonds offset the decline in prices of bonds still being held. I think the linked fund is probably so-so, or at least not bad, if you stay in it for 5 years or so. But even then its goodness will reflect the fact that there is inflation and one’s after-inflation return will not be especially high. The time to get out of the linked fund is after it has risen in expectation of inflation. By the time inflation actually hits, or hits its peak, it’s probably time to get out. If real estate is location, location, location, investment is timing, timing, timing. I have no idea when future inflation will peak. Core inflation is about 3/4 of 1%, down from its last peak of just under 3 %, in 2006, and if Paul Krugman is to be believed, we are in for a relatively long period of deflation, barring an unexpected stimulus or unexpected pick-up of investment. Deflation will hurt the linked fund although fears of inflation will help it.

But basically, I’d keep away from the bond funds and the stock funds.

But the TIAA Real Estate Fund is another kettle of fish. Before it swooped downward, it hit a high of about 310. Then it fell to about 180. It is now, as I write, about 212. Of recent, it has been going up at about 15 % a year. Why has it been going up while nothing I read about commercial real estate indicates that things are going well. A good question, which I wish I had a better answer for.

About 80 % or more of its holdings are in commercial real estate. Or specifically, they are in specific buildings. It is not a REIT–a real estate investment trust. REIT’s are traded on markets. The TIAA real estate fund is not. In this sense, speculation doesn’t directly affect the value of the TIAA fund. It therefore is a unique fund. [Indirectly, speculation may have an effect. The evaluators of the fund–and they make daily evaluations–may be affected by the value of comparable buildings, to upgrade or downgrade a building’s worth, and speculation may therefore affect the values they assign to the buildings they own.] Keep in mind, there is geographical diversity involved as well.

Leave to one side that a sophisticated financial adviser I know thinks it is a good place to put your money in and leave to the same side the fact that the brother-in-law of a friend of mine knows those who run the fund and thinks highly of them.

Information about the fund is a little secretive. They tell you about all the 150 or so buildings they own. Elsewhere, they tell you, day by day, from its inception what happened every day of its existence (or they used to do this). But they don’t exactly tell you how they evaluate all their buildings and they do so every day. I can understand a lost rental or a new tenant or a new rental price but nonetheless it is hard to understand how they figure it all out each and every day.

Recently, they put out a statement that as of February (or was it March?) of next year they are limiting the amount of money you can put into this fund. I think they are doing this because a lot of people did what I did. They saw the fund heading South–for me, the year to date gain in early 2008 went from about +1.2 % to +0.5 % and out I went–and people took their money out (in my case I immediately put it in the money market fund, which paid next to nothing then and even less now!). What I think this may have caused–and thus the reason for the new rules–was a forced sale of buildings. And this contributed to the enormous decline the fund had–about 40 %, if I divided correctly. However, I think what remained were buildings of worth, which were undervalued. That is, I am assuming they sold the buildings with the poorest prospects and got low prices.

Maybe this is all a misunderstanding. But the decline was enormous and the recovery from this decline, so far, has been minimal. We are a long way from the level that once existed (and keep in mind that commercial real estate did not have the bubble that ordinary housing had). Since I bought in, in August, the fund has gone up about 9 days out of 10 and it has been increasing at about a 15 % a year clip. This ain’t hay.

But the true magic for this fund–the one that more or less refutes the argument about all your eggs in one basket–is that the fund is, with occasional exceptions, incredibly non-volatile. A very big day is an increase or decrease of 1/4 of 1%, and this is rare. Once in a blue moon there might be a movement of 1 /2 of one percent. And a few years ago, I went over its entire history since the late 1990's and my memory is that it never came close to having a movement of 1% in a day. (In the down period, of 2008-2010, I did notice an occasional decline of greater magnitude–actually, one day it declined 2 %. So, there can be volatility during a major decline.)

Fiddle around and you can check it out for yourselves (or you used to be able to do this–I’m not sure now). What this lack of volatility means, duly noting the exception, is that you can get out without a big loss. Or to put it positively, you can make good gains, as I did between 2001 and 2008, and then get out without losing more than 1 or 2 %. (Or a super worst case is 3 or 4 %, which isn’t bad, if you’ve had a 10 % gain, not to speak of 15 % gain.) Of course, you have to be able to face up to the fact that the worm some day will turn. And most important, when you do get out, while it is always good to sell on an up-tick, don’t look for an up-tick that gets you back to a recent high point. Accept that you will lose a little.

Without using real numbers, I had about 95 % of my holdings in stock in the bubble of the nineties and 2000, having bought in at 500. When it reached 1000 and then dropped to 940, I decided the bubble was over–and I should get out–and when an up-tick took it to 960, out I went. If I had waited for 1000, I would have lost most of my gains from 500 up. To me, that’s one of the most important lessons in investing. Don’t try to recover the peak price, when you feel the trend is down.

Of course, the real problem is knowing when to get out. For the real estate fund, I would think that if it fell as much as 2 %, OUT. My personal hope is that it will rise to the neighborhood of 250, at which time I’ll keep my eyes open even wider than they already are.

Should you switch to the real estate fund? It’s up to you, of course, but I can’t believe it is less safe than the stock and bond funds, though (of course) I could be wrong. And the Traditional (clearly safest) does not exactly pay the highest, although what you get may depend on when you put the money in. If you form an IRA and put the money in Traditional, you get 3 %, although you are not locked in, as you more or less are in the non-IRA Traditional, having put your money in years ago–in the sense you can only take out 10 % a year. (And of course, the money market fund is almost a sad joke, safe, but paying zilch.)