on April 17, 2007 with

Way back on February 27, 2007, the international stock fund for the Thrift Savings Plan (the I fund) dropped in value. It went down 74 cents in that one day. It dropped another 12 cents the following day. That is about 3.5 percent of the value of one share of the stock fund that disappeared in two days.

On February 27, 2007, the C fund dropped 55 cents in one day. That was about 3.5 percent of the value of the C fund.

How did you handle the stress of seeing your retirement funds drop in value?

Some people ignored the loss. They shrugged, if they even knew about the loss, and figured the stock market goes up and down and it will all come out okay in the end.

Some people started selling their stock funds–immediately. TSP investors moved about \$2 billion out of the I fund in the first four days of March. Most of the money went into conservative securities and bonds such as the G fund.

So what did the stock market do? For the month of March, the I fund went up 2.57%. The C fund went up 1.09%. As of April 16, the I fund is valued at \$24.10. The C fund is valued at \$16.33. In other words, if you sold your I fund shares on February 28th, you sold shares valued at the end of that day at \$22.55. If you sold your C fund shares on February 28th, you sold at about \$15.62.

As the funds started to go back up in value, investors started putting money back into these funds.

If you buy back shares of the I fund at the price of shares as of April 16, you will pay \$1.55 per share more than you got for those same shares a few weeks earlier. For example, if you sold 500 shares of the I fund on February 28, you received \$11275.00. If you bought 500 shares at yesterday’s price, you paid \$12050.00.

Here is a hypothetical example of what some investors have done to their retirement funds: You locked in the loss of 3.5 percent that you suffered at the end of February when selling shares of the I fund or the C fund. Now that the market has been going back up, you are buying shares you used to own at a higher price. In effect, when the market drops again (and it will drop again), you have further magnified your loss.

If this scenario applies to you, you are not alone. It is human nature to take flight at the first significant sign of danger. Investors in the TSP funds did the same thing when the stock market dropped a few years ago. In July 2002, TSP investors pulled \$50 billion out of the TSP stock funds according to the Wall Street Journal. Their timing was perfect in that this was the lowest point of the stock market drop. Once the market started back up, investors started putting their money back into the stock funds.

In other words, they locked in the loss at the lowest possible point and then bought new shares at higher prices a short time later. The financial gurus at the TSP know that the same thing will happen again in the future and it worries them. What will happen when there is a significant event that results in a dramatic stock market drop? Can the TSP system handle the crush of sell orders? Perhaps not and the TSP management is looking into how to handle such an event when it occurs.

The I fund has made a lot of money for TSP investors. (See Are You Still Afraid of the I Fund?) The I fund should be part of your investment portfolio because global stocks are important in our economy and other countries are growing faster than the United States. But, if you panic and sell your stocks when the stock market heads down fast, you will usually end up losing money–perhaps a lot of money.

The safest and most secure way to invest for your future retirement is to develop a plan outlining how much you need to put into each TSP fund and periodically adjust that percentage. Don’t adjust your percentage just after a big drop in the value of a fund. Keep in mind that investors everywhere are panicking. They always do. Many will dump stocks right away at any price for fear of lower prices in the future. (See It’s a Good Time of Year to Tend Your Garden)

Every investor needs to evaluate his own temperment. If you think you will be unable to resist selling stocks when the next market drop occurs, put your money into the appropriate lifecycle fund. These funds offer a diversified portfolio and the computer does the thinking for you. It doesn’t panic. It will not rush out to buy new shares because the market just jumped up in one or two days. It won’t rush to sell shares because the market has dropped dramatically in one or two days.

Take a look at these stock market charts that show how the stock market performed over a period of about 100 years. Over time, the stock market makes money for investors. Of course, if you are getting close to retirement, you will not be putting your money in stocks for another 100 years so a much larger percentage of your investments will be in more conservative funds.

Many readers have commented that retirement planning was much easier under CSRS than it is under FERS. That is true. It also locked in working for the government for an entire career for many people. And, whether we like it or not, there are very few retirement plans that still operate like the CSRS operates–in part because it can bankrupt a company that offers such a benefit.

The reality is that younger readers are under the FERS system and will have to work within that system. Many readers under the CSRS system still have money in the TSP system (if they are smart in planning for their retirement they do have money in the TSP program) and the returns received in the TSP accounts will impact how good–or how poor–your financial situation will be during a retirement that may well span two or more decades.

If you sold considerable shares of your C and I funds as the market dropped, you are not alone. Your retirement funds were affected and you lost money. But consider how you will react in the future and plan accordingly. It’s your retirement and planning for it is in your hands. Good luck and happy investing!

Tags:

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters onĀ federal human resources.

Top