As we noted in an article a couple of weeks ago, the funds in the Thrift Savings Plan (TSP) did pretty well in August. (See Volatility Can Be Good: TSP Funds Generally Up in August) But, despite the performance of the funds for the month, there was considerable volatility with swings in the triple digits becoming almost routine.
So, while TSP investors continued to do well, what actions did they take with regard to their TSP funds? Did they leave the money in the funds or start moving it around–perhaps out of concern that the future direction of the market would be heading south?
Here is a quick summary of what actions participants took in the TSP funds during August:
- Participants transferred $2.9 billion from the equity funds to the more conservative F and G Funds.
- For the first time since they were started, participants started selling more shares of the lifecycle funds (the L funds).
- Despite the redemptions of the lifecycle funds, all L Fund balances continued to grow because of new money coming in from regular paycheck allotments.
The transfer of funds from stock funds (the C, S and I funds) into more conservative funds is not a big surprise. That usually happens when there is market volatility. As we have noted in previous articles, many of the TSP investors who try to time the market in this way often lose money in the long run but, human nature being what it is, leaving money in the funds is hard when there are big fluctuations in the market. ((See, for example, “Your TSP Stocks Dropped in February: Did You Learn Anything?“)
But the number of participants who moved money out of the lifecycle funds is something of a surprise. The concept of these funds is that investors can put their money into one of the funds and let it ride. The funds are balanced between stocks and bonds with the more conservative funds, for those getting closer to retirement, having a larger percentage of their money in bonds. The more aggressive funds, for those investors further from retirement, have a larger percentage of investment dollars in stocks and less in bonds.
But, in an apparent attempt to time the market, TSP investors pulled money from the L funds and transferred these funds into the G and F funds. In effect, they are betting they can do a better job by guessing when the market will go up or down than they could do by leaving their investment funds in the appropriate lifecycle fund when the market is moving up or down quickly.
Whether jumping out of the lifecycle funds is a good idea remains to be seen. Trying to predict the future of the stock market is a risky business and very few people are able to time the market successfully on a regular basis. As we noted in a recent article about the financial results for mutual funds(not just TSP funds), the actions of most investors who attempt to buy and sell their funds usually results in a financial loss. “The average mutual fund had a 20-year average return of 10.7 percent. The average investor had a return in the same period of 3.7 percent.”
The reason for the drastic difference between the fund performance and the performance of individual investors: emotion. Individual investors tend to panic during market slumps and sell their funds. When the market recovers, their outlook improves and they buy more stocks. The result is that these investors “buy high and sell low” which hurts their overall financial return.
Chances are, those TSP investors who bailed in August will eventually show lower financial results in the long term than those investors who buy and hold for the long term. But, while that has been the historical result, these investors obviously have different ideas. And, if they can sleep better at night after selling their C, S or I funds during a volatile month, perhaps they have made the right decision.
During the past few days, there has been considerable discussion on the FedSmith site about trading costs. In other words, how much does it cost when TSP investors start trading their funds in an attempt to avoid a major change in market performance.
The trading costs are higher for the international stock fund (the I fund). Costs in the I Fund remain the highest of all of the TSP funds. Markets in Australia and Asia close before an order for that day is received so the trades are executed the following morning. When the stock market is moving up or down rapidly, this execution lag can result in significant trading costs.
August was a volatile month as noted above. The I fund had the most activity among the TSP funds. The total dollar amount traded in the I fund in August: $3,222,551,793. For those who are used to dealing with the small amounts in our personal checking and savings accounts, this is just over three billion dollars for the month. Total trading costs for the month of August for the I fund: approximately $10.5 million.
For comparison purposes, the total dollar amount traded in August for the C fund: about $1.5 billion. Total trading costs for the C fund during August: $928,344.