When you stand around the coffee pot or the smoking area outside your building, you probably aren’t discussing your rate of return in your Thrift Savings Plan account-at least if you have invested in the common stock ("C") fund of the TSP.
As you may have noticed, it’s down again by another 7.70% in July alone. To make matters worse, the C fund is down for six of the past seven months and is off 23.63% for the past 12 months.
At that rate, your retirement may be looking as realistic as an old Elvis Presley movie. Whatever happened to those return rates of 20% and 30% a year we were enjoying back in the ’90’s?
The quick answer, according to some economists, is that we experienced an investment bubble. Stock prices went way beyond what was justified by the earnings and future prospects for company earnings. Or, as some have said, everyone got greedy and forgot to look at the fundamentals behind a good investment. And, as we now know, some of the earnings figures were bogus anyway as company executives tried to keep the ever-increasing stock ascent alive by using phony or misleading figures.
History is full of investment bubbles and we are living through one that comes along one in every generation or once in a century. Stocks have now gone down for more than two years and well on our way to a third straight year of falling stock averages. Most of us weren’t alive or can’t remember the last time that happened (the late 1940’s if you are wondering). Your C fund investment lost 9.14% in 2000. It went down 11.94% in 2001. And it is down another 20% or so in 2002.
So what should you do? Is there a future for you in stocks? Do stocks even belong in your investment plans?
Keep in mind, investments in stocks, especially those in your retirement fund, should be made for the long term. While it doesn’t seem like it right now, stocks have historically been the best investment you can make if you can keep your money invested for long periods. And, if you are planning on retiring, you may need to be in stocks in order to capture the gains when the stock market advances. Gains in the stock market can and usually do happen quickly and no one can predict the gains or losses with any reliability-especially short-term gains or losses.
Here is some good news that puts recent losses into perspective. If you invested money in the C fund beginning in 1992, you still have a 10-year compounded rate of return of more than 12%.
In plain English, this means that even with the recent dramatic losses for the past 2-3 years, a long-term investor has a better rate of return than any other investment in the government’s Thrift Savings Plan. It is likely that investments you make now will turn out in years ahead to have worked harder for you than money you invested earlier. Or, in other words, stocks are cheaper now than they have been in some time so it is possible that you will make more money for each dollar you now invest in stocks. Conversely, taking money out of the C fund now may mean you have locked in your losses since you may have purchased shares of the fund several years ago when the stock market was at a higher level.
"Long term" may mean years though before you get your money back when there has been a big dip in stock value. Here’s a case in point: Early in 1966, the Dow-Jones average was about 1000. In 1982, it was at 800. Your local credit union would have been a much better bet for that 16-year period. Then, from 1982 through the end of the ’90’s, the market soared like an eagle (up to 11000) and your paltry savings account or certificate of deposit would have wilted by comparison.
So there are no guarantees. If you are likely to need your investment money in the near future, you should consider less volatile investments. Even though the market is down, your financial advisor may tell you to take at least some of that and put it into the "F" or "G" funds to preserve your capital. And, if you miss a big run-up of the market shortly after you withdraw your money, just tell yourself (and your buddy at the coffee pot) that at least you can sleep at night.
Saving for retirement was easier for Federal employees under the Civil Service Retirement System (CSRS). You didn’t have to think or at least didn’t worry about retirement. Stock market dips were only for the rich or the private sector dwellers. No rational person left the Federal government for a private sector job unless it meant a big raise. A Federal employee working for Uncle Sam from 1966 through 1982 didn’t worry about the stock market, at least as far as his retirement annuity was concerned because your annuity would be safe as long as the government stayed in business.
At a minimum, this is a good time to review your investments, including your TSP investments, with your financial advisor. You may need to change your allocation of investments to prepare for the future and to sleep better at night. Keep in mind that while prices have fallen, that doesn’t mean your investment will return to its high point in the near future. It also doesn’t mean it can’t fall a lot more so plan accordingly.
This isn’t your father’s (or your mother’s) government retirement system anymore. With the TSP fund mimicking the private sector’s 401(k) system of funding retirement, you need to make decisions yourself and then act on those decisions. Failing to review your investments and take action after the review may mean you will be working for Uncle Sam because you have to in order to pay expenses instead of sitting on the beach looking at a sunset.