In several recent articles on the Thrift Savings Plan (TSP), we have pointed out that the returns for the L Income fund have been considerably higher than the G fund. (See our articles on the TSP in the TSP Corner.) The G fund is a very safe investment and unique to the federal government. But there is also a price that investors are paying for this safety net. You pay this price in the form of lower returns.
In other words, anyone with money in the G fund knows that the money they have in the fund is very safe. But it is also not going to grow very much. During a bear market, preservation of capital is highly desirable because your fund balance does not go down. But, over time, G fund investors have historically had a significantly lower return over what they would have made by having money in TSP’s stock funds such as the C fund.
Don’t take my word for it. Check out the annual returns of the funds in the TSP Corner and you can see for yourself the difference in the annual return rate.
Many TSP participants are very afraid of losing money. That is understandable, especially as a person gets closer to retirement and wants to know the money invested will be there when it is needed because that is a major source of retirement income. That is probably the rationale for most people to put a considerable amount of their money into the G fund.
With the introduction of the lifecycle funds, or the L funds, conservative investors have other options. The L Income fund is the most conservative of the lifecycle funds. Take a look at the monthly returns of the L Income fund vs. the G fund for 2007. One item you may want to note: Most of the time the L Income fund has a higher return than the G fund. For 2006, the first year of existence for the L funds, the L Income fund had a return of 7.93%. The G fund had a return of 4.93%.
With this in mind, here is an observation about how TSP participants are investing their money. FERS employees have 4% of their L fund balance in the L Income fund. They have 32% of their account balance in the G fund and 5% in the F fund. CSRS employees have 10% of their L fund balance in the L Income fund and 38% of their account balance in the G fund with another 5% in the F fund.
The math gets tricky but there is little doubt that investors have "lost" a great deal of money over the past couple of years by not taking advantage of the higher returns in the L Income fund for the most conservative allocation of their TSP balance.
The reality is the TSP investors are catching on though. The number of people investing in the L funds is growing every month. And, according to the folks at the TSP, L fund investment balances grew by 5.4% just during the month of September 2007.
The stock market funds have done very well during 2007. But, as most readers have noticed, there are days when their stock funds went down as the market went up or down by triple digits according to the leading stock market indicator. TSP participants who did not get excited and left their money in the stock funds have done very well. The reality is that billions of dollars have been exiting the C fund. About $1.1 billion was transferred from the C fund in August and another $391 million left in September (Another billion left the I fund during August as well.). Despite the fluctuation, the C fund went up 1.54% in August and another 3.76% in September. The money that went into the G fund went up 0.33% and 0.41% for the same two months.
Sometimes percentages do not seem as vivid as putting an example into real dollars. Many readers (including the author) may not be a whiz at math. But most of understand how a difference in actual dollars can impact our lifestyle or spending habits. Here is an approximation of the difference you can have in your TSP account.
If you had $100,000 in the G fund, at the end of August, you would have $100,330 if you did not add any more to your account. At the end of September, you would have $100,741 with the additional interest for that month.
But, if you had $100,000 in the C fund on August 1st, you would have $101,540 at the end of the month. And, by the end of September, your account would have grown to $105,357. All figures assume no additional money was added to your account during that time.
The total difference in your account between having invested in the C fund and the G fund during this two month period: $4616. Part of the difference is because of the "compound interest" factor. Over the time you are working in your federal career, this factor can make a significant difference in the amount of money you will have for your retirement years. Remember this is a hypothetical approximation and not a real return but it is based on the actual posted returns for the TSP funds for August and September.
The bottom line: If you make investment decisions based on your emotional reaction to what the market has done in a short time, you are likely to make a bad investment decision. TSP investors who reacted to the short-term market drops in August by putting more money into the C or I funds would have made a substantial profit. But, with more than two billion exiting those funds in that money, most investors reacted to a short-term market drop and lost money.
If you are uncomfortable watching the daily market returns, and cannot control your reaction to the fluctuation, consider putting your money in a lifecycle fund. You are likely to be better off than putting all of your assets into the G fund which, at best, will keep your money safe and secure and come close to matching the rate of inflation. Your assets are not likely to grow and you may need that money that growth would have provided in your later retirement years.