February Returns

Index	Month	Year
Dow	3.4%	0.5%
Nasdaq	0.1%	-5.1%
S&P 500	2.5%	0%
Russell 2000	2.2%	-2.2%
Wilshire 5000	2.5%	0.3%

Social Security and the Thrift Savings Plan

Federal employees already have a retirement plan that has performed very well over the last 15 years. This plan is called the Thrift Savings Plan (TSP). President Bush stated the "Personal retirement accounts should be familiar to federal employees, because you already have something similar, which lets workers deposit a portion of their paychecks into any of five different broadly based investment funds."

Federal Employees are currently offered the choice of five funds. These funds include: a government securities investment fund, fixed income index investment fund, Common Stock Index Investment Fund, Small Capitalization Stock Index Investment Fund, and the International Stock Index Investment Fund.

The 10-year compounded returns for these funds range from around 5.5% for the international and government securities fund, to almost 12% for the common stock fund and the small cap stock fund.

For the past 10 years the average funds expense ratios have been 0.1% or less. This is an extremely good expense ratio for a mutual fund. Mutual funds with lower fees take less of their investors profits. Fees can significantly reduce the return gained from mutual funds over the holding period of many years.

All of your representatives and senators that oppose the investing of your social security taxes are most likely investing in the very funds that you would be investing in.

Social Security - Return on Investment

I don't think that we should have the ability to pick the funds that our social security accounts are invested in. I do think that at least part of our Social Security taxes should be invested in the stock market. This will offer much better returns than what our Social Security taxes get currently.

The Cato Institute figured (in 1994) the rate of return on our Social Security taxes ranges from a negative return up to 6.3%, depending on gender, marital status, and class. In 1995, the Treasury Department did a study which found that rates of return on our Social Security taxes for males ranged from 5.04% to 6.17%. In June 2001, Social Security economists and actuaries found that a "two-earner couple" in 1955 would have a return between 1.49% and 3.2%.

It would probably be better if we didn't have the ability to decide where our Social Security taxes are invested. Currently many people who have retirement accounts don't pay enough attention to them. They leave them invested in money market accounts which don't even earn them the rate of inflation, thus they are losing their retirment money.

There are several retirement funds, such as the Vanguard Target Retirement Funds, which change asset allocation based on the age of the investor. I think this would be an ideal way to invest our Social Security taxes. These funds would be almost fully invested in stocks when the tax-payer is in their 20s. The fund would then slowly invest more of the money in bonds as the tax-payer approaches retirement. Finally by the time the tax-payer reaches retirement age the fund would be almost completely in bonds. These funds have very low expenses, less than 0.3% of the asset-value.

A quick note on the Social Security "returns" quoted in these studies. They are not true returns in the sense the money in invested. The returns quoted are based on the money paid in as Social Security taxes, and the money paid out as benefits. The money is actually "borrowed" by agencies in the government, then, in theory, paid back, without interest (I assume). The money that is paid to retirees as benefits is actually taken from taxes collected currently, not from a bank of money that has been building up over the years.

If this money were invested in the stock and bond market, we would get real returns, and based on historical stock market returns of 10.7%, that would be much better than the returns found by the quoted studies.

Social Security - My View

A quick post about my views on what should be done with Social Security. I think that the taxes that we pay to Social Security should be invested in the stock market, rather than borrowed by the government. Given the choice of privatization vs. keeping Social Security the way it is now, I would choose privatization.

I think it would be best if the money were just invested in the stock market, and the money paid out would be a portion of the return. A small percentage of the return would be kept in the fund as insurance to cover losses in a down market.

As a libertarian, I am generally opposed to government funded social programs. My feeling about charity is that people in general are caring, and if they have money they will contribute towards the betterment of society. I prefer lower taxes, so I can get rich faster, then I will be able to volunteer and contribute to charities to help out people who haven't been able to do as well in society.

When it comes to Social Security, I think we should keep it around. People have been contributing to Social Security for years, and even though the government has done a poor job of managing that money, they deserve to get their taxes back as benefits. Changes should be made to Social Security so the government can't use our money to pay for government programs, it should only be used to support the tax payers.

I will have several posts about different aspects of the possible changes to Social Security in the near future.

Cable Companies

Wired has an article discussing IPTV and how many think that it is the future of television. In five years television will be broadcast on demand using the coaxial cable that runs to 95% of our homes. Verizon is in the process of upgrading it's customers connections to direct fiber connections.

The article discusses how the satellite companies have been able to steal customers from cable companies for several years. Now though, cable companies are able to offer VOIP (voice over internet) which can take customers from the telecom companies. They also offer high speed internet connections which the satellite companies are unable to do. (Satellite companies offer internet connections, but they are far slower because there is not a direct connection.)

In theory the cable companies upgraded digital network to all our homes could provide us with 5Gbits/second of data. The satellite companies won't be able to come close to providing that kind of data rate, and phone companies will have to increase their already heavy debt load to stay competitive.

You may want to keep track of the cable companies in case they end up being the only data pipe into your house.

Beginning of Tax Season

By now most of you should have your tax documents. If you prepare your own taxes, don't plan on asking the IRS for help. They are quite prone to err, as this article points out. Last year the error rate of the people employed by the IRS to answer tax questions was 30%. This is in part due to the complexity of the tax code.

If you do indeed ask an IRS representative for advice, keep track of who you contacted and when. If the IRS comes back and tells you that you owe them money and a penalty for not paying that money, you can tell them that you got advice from one of their employees. They should then only ask for the money they feel you owe, and not assess the penalty.

January Returns

Dow	-2.7%
Nasdaq	-5.2%
Russell 2000	-4.2%
S&P 500	-2.5%
Wilshire 5000	-2.7%

Many people will refer to the "January Effect" which is the pattern that how January performs sets the tone for how the whole year will perform. So when the market has fallen in January, then the market has tended to have a negative return for that year.

I think this year is different. I think the events in Iraq have caused investors to keep their money out of the market until the Iraqi elections. Immediately following the Iraqi elections the market started an upward trend. And I suspect we will have a positive return this year.