The stock market is poised to take a significant drop today.
Perhaps you are thinking that the market has already taken a step drop and you might be asking yourself: "How can it drop any further?"
It is understandable why readers would be thinking that it cannot drop any further. Before the market has opened this morning, the C fund is down 9.66%; the I fund is down 8.97% and the S fund is down 11.72%. The lifecycle funds are also down with a range of -1.72% for the income fund to -8.06% for the L2040 fund.
But these figures do not mean the market cannot fall further. In fact, it is likely to take a big dip. There has been panic selling in overseas markets while the federal government and the stock market was closed on Monday. The market futures show the possibility of another drop of 4% (500 points) or so.
In answer to the question on the minds of many readers, keep in mind this point of reference: The stock market dropped 500 points in one day on October 19, 1987. The leadiing Dow Jones index at that time was about 2300. A 500 point decline equaled a drop of more than 22% in one day. Check out the charts that depict the wild ride. Also keep in mind that after the dramatic drop, the stock market started going up and, even with the recent drops, it is still above 12,000 at the time of this writing.
Most of the participants in the Thrift Savings Plan have a considerable part of their investments in the G and F funds. These funds are not as likely to be damaged in a sudden drop of the market. As you can see from our TSP charts at the top of many pages on our site, these funds are up as of this morning while the other funds are all down.
One other point to keep in mind: Many stock market investors panic when the markets take a big dip as is likely to happen today. Panic selling is not limited to federal employees or to TSP investors. It happens in all free markets and it has happened with TSP participants as well.
The most recent example is when similar stock market volatility occurred from 1999 – 2002. TSP investors sold their G fund at the peak of the bull market and put the money into the C fund. They sold the C fund at the bottom of the market and put the money back into the C fund. In other words, they maximized their losses by buying at the highest prices and selling stocks at the lowest prices. When investors buy or sell based on a short-term panic, it often makes a bad situation worse. Check out this article for a description.
One reader sent in a question that read: "My retirements funds are disappearing as the market drops. Isn’t the government supposed to guarantee that we won’t lose our retirement funds invested in the TSP?"
Unfortunately, the only sure things are death and taxes. Uncle Sam does not guarantee your stock market returns whether your money is in the TSP funds or individual stocks purchased through your broker or a mutual fund. The gains or the losses are yours to keep. Action by the Federal Reserve today may stem the stock market losses or perhaps it won’t have a significant impact.
Each TSP participant will make choices when the market action is going on today and there will be some panic selling (and some who will be buying stocks) in the overall stock market. Anybody who tells you what the market will be at the end of the day or the end of the week is making a guess but you are ultimately responsible for your own decisions. Whatever you decide to do, try to put your investments in perspective and consider how your investments have performed over the past 10 years or so before making a split-second decision.