Revisiting The Roth

A few months back, we helped Moderndomestic set up a Roth IRA and pick a mutual fund to start investing for her retirement. We’ve been meaning to check in on that account’s performance, and what better time to do so than after a 900 point rally?

So far, Moderndomestic has contributed $900 and invested it in Fidelity’s Puritan Fund (FPURX), a low-cost fund that invests roughly 60% in stocks and 40% in debt securities. But even with yesterday’s big gains accounted for, Moderndomestic’s account has lost $104.89.

Wonk the Plank is not especially proud of losing more than 1/9th of Moderndomestic’s portfolio, especially when we think back to Moderndomestic’s prescient critique of our investing plan when it first launched: “But aren’t stocks going to go down?”

So we would like take some deep breaths, re-evaluate the situation and see if the course we prescribed back in July is still a sound one.

Here’s the premise we started out with: A diversified portfolio of stocks and bonds is the best long-term way to grow savings. This year’s stock market disaster, ugly as it has been, hasn’t changed our outlook. The stock market hasn’t yet held up its end of the bargain, but decades of research suggest it will eventually outpace alternative investments.

The temptation in this investing climate is to wait for a “better time” when things “settle down” to start again. The trouble is, the only way to identify better times when things have settled down is with hindsight. In fact, most people who try to time the market end up looking very foolish or losing a lot of money, or both.

So we think the best thing to do is grit our teeth and keep plugging along.

Now let’s point out some of the things that have gone right.

Our strategy of dollar cost-averaging through regular $200 purchases has helped her avoid picking a poor time to jump into the stock market. While prices have cratered over the past few months, Moderndomestic has made purchases at high, medium and low prices, which hopefully will pay off down the road.

As poorly as Moderndomestic’s portfolio has performed, it could have been even worse with higher fees or other transaction costs, which our fund choice happily avoids.

We hope to revisit this topic over time and we’re confident that if we stick to our strategy, we’ll eventually be able to report better results.

Greenspan at Gethsemane

 Then Wonk the Plank told them, “This very night you will all fall away on account of me, for it is written:
   ” ‘I will strike the shepherd,
      and the sheep of the flock will be scattered.’ But after I have risen, I will go ahead of you into Recovery.”

 Greenspan replied, “Even if all others fall away on account of you, I never will.”

 ”I tell you the truth,” the Wonk the Plank answered, “this very night, before the rooster crows, you will disown the free market three times.”

 But Greenspan declared, “Even if I have to die, I will never disown the free markets.” And all the other market idealogues said the same.

 The teachers of the law and the elders had assembled at Congress to conduct hearings on oversight. But Greenspan followed at a distance, right up to the courtyard of the high priests. He entered and sat down with the guards to see the outcome.

 The chief priests and the whole Sanhedrin were looking for false evidence against the free market so that they could put it to death and embrace socialism. But they did not find any, though many false witnesses came forward.

 Now Greenspan was sitting out in the courtyard, and a servant girl came to him. “You also were a proponent of free markets,” she said.

 But Greenspan denied it before them all. “I don’t know what you’re talking about,” he said.

 Then he went out to the gateway, where Henry Waxman (D-Calif.) saw him and said to the people there, “This fellow here was another deregulator.”

 He denied it again, with an oath: “I swear I don’t know these subprime loans!”

 After a little while, those standing there went up to Greenspan and said, “Surely you are one of them, for your accent gives you away.”

 Then he began to call down curses on himself and he swore to them, “I tell you again, I don’t know these wretched derivatives!”

 Immediately a rooster crowed. Then Greenspan remembered the words Wonk the Plank had spoken: “Before the rooster crows, you will disown the free markets three times.” And he went outside and wept bitterly.

Fed To Buy Commercial Paper

The Federal Reserve Bank will buy up unwanted commerical paper  to jump start the credit markets, the Fed announced Tuesday.

What is ”commercial paper,” you ask? Commerical paper is a short-term IOU from a company, kind of like a bond but with a much shorter maturity, often less than 270 days. Companies use it to fund their day-to-day operations.

Why is the Fed buying it now? Commercial paper has suddenly become about as popular as subprime mortgages, which has played havoc with the credit needs of businesses and households. The Fed is hoping its intervention will help return investor confidence and stability to the market.

Is this the bailout? No, although that’s an understandable mistake to make. The bailout buys up toxic mortgage securities no one will touch, the Fed new plcan buys up short-term IOU’s no one will touch. Just like the bailout, the Fed is trying to set a “floor” on prices.

What does Wonk the Plank think about all this? As always, Wonk the Plank thinks it’s inappropriate for government to interfere in the operations of the markets.

Mark-To-Market Accounting Is Not The Problem

Do the numbers on your balance sheet not look so hot? Are your financial statements causing you to lose sleep?

If you don’t like what those rows and rows of puny numbers are telling you, just erase them and write down some new figures you do like.

Or so goes the rallying cry to suspend mark-to-market accounting!

Mark-to-market accounting (also known as “fair value” accounting) means companies must value certain assets (such as mortgage-backed securities) at the price those assets could sell for immediately.

Critics say the rule is forcing banks to value assets at fire sale prices instead of their true intrinsic value, since no one will touch mortgage-backed anything right now. Suspending the rules, they say, will allow banks to survive the crunch long enough for prices to return to higher levels.

Nonsense! says Wonk the Plank. Accounting is an often inexact science that attempts to measure financial value. Enronning our yardstick doesn’t do anything to address the root causes of the crisis – it just obfuscates the problems for the least informed.

Changing the rules of the game mid-crisis will only reduce transparency and reliability of balance sheets, the qualities that will ultimately help us get out of the economic lurch. The drumbeat to change the rules, while soothing, should be ignored.

The New York Times dug up this great quote from a couple of JP Morgan analysts: “Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.”

Remember all those short sellers and speculators responsible for our financial problems in the recent past? Just like those bogeymen, mark-to-market accounting is just a politically convenient scapegoat because it abdicates all responsibility for our troubles to something nobody understands.

Check out Representatives Marcy Kaptur (D-OH) and Marilyn Musgrave (R-CO) retreating to their talking points when they get confused by all this Wall Street jargon (Thanks,  DealBreaker!). “The answer is for the President to go and call his SEC chairman today and get him to change those mark-to-market rules.”

Reps. Kaptur and Musgrave search for bipartisan compromise

Thanks, ladies. While you’re at it, tell that SEC emperor his new clothes look just fine.