The stock market took a tumble in November. As the Wall Street Journal observed: "This bull market is getting ornery."
In fact, the stock market had its first textbook correction since 2002 as the Dow Jones Industrial Average dropped 10% in late November from its previous high water market that was achieved about two months ago.
The drop in the stock prices is reflected in the TSP fund prices as well. All of the TSP stock funds dropped in value in November. The S fund took the biggest hit with a drop of 5.65% for the month. The C fund was a close second in the race to be the biggest loser in November with a drop of 4.20%. Even the international stock fund (the I fund) took a beating despite its stellar performance over the past several years with a monthly drop of 3.72%. The I fund is still head and shoulders above all others though with a 17.54% return for investors over the past twelve months.
Here is a snapshot of how the Thrift Savings Plan funds fared in November.
And here is a summary of how the Lifecycle funds fared in November:
The gyrations in the stock market are not that unusual in a long-running bull market. A quick glance at the annual returns for the TSP shows that the stock funds have been up substantially every year since 2002. The stock market is often an indicator of future economic trends. It is certainly possible that the American economy will be slowing and profits for companies will diminish and growth prospects will be headed down.
Some TSP participants may look at the percentage of funds they have in stocks and realize that the amount they have in stocks has grown dramatically in recent years. Keep in mind that, while no one can predict the future, a diversified portfolio is one way to maintain your overall financial health if the stock market should take a tumble.
With a number of federal employees planning to retire in the next several years, you may want to ask yourself one question if you are one of these hopeful retirees: How will your finances look if you take a steep loss in your TSP funds? A correction in the stock market means that stock prices have fallen between 10% and 19.9%. A bear market means stock prices have fallen 20% or more.
While the overall market trend may continue up, it is not uncommon for stocks to experience a correction–even for a short time. Since 1950, there have been 18 corrections to stock market prices during a bull market. There have been 10 instances of a bear market since 1950.
We are not in a bear market and may not be for some time. But it is a possibility. If that should occur, it usually takes about three years for the market to go back to its previous highs. When there is a correction, it takes the stock market an average of six months to recover.
For long term investors, these time limits are not a long term problem. But, if you are planning on retiring in the next year or two, take these figures into account in your financial planning. Can you stand the financial loss, even if it is temporary, just before you retire?
Many CSRS employees can easily stand the financial drop. Those in FERS may want to take a harder look.
Movements such as this are normal in the stock market. But, while you may not have noticed these movements in the 1980’s when you are perhaps in the middle of your federal career, "normal" may look like "devastation" to someone planning to retire.
Here is advice often given by financial planners and it is especially true for those in the FERS system because you probably will be relying more heavily on your TSP investments. Don’t check stock market prices every day. You can’t reliably predict the future of the stock market. If you watch the daily stock prices, you are more likely to sell your stock funds in an emotional panic. That always happens and investors always lose money when they do it.
Instead, structure your TSP portfolio so that it is diversified between the various funds in the TSP. If there is a drop in prices, your money in the bond funds will provide a cushion. If there is a quick rise in stock prices, you will benefit by having some of your money in the TSP stock funds.
If you do not want to take the time or make the effort to diversify your portfolio and to rebalance it every few months, you can use the lifecycle fund appropriate for your time remaining until retirement.
The good news for your TSP investments: All the funds have a healthy return over the past several years. It would have been hard to lose money in your TSP in the last several years. Keep that in mind when you look at the returns for the last month–it may make you feel better!