The rapid fall in the value of stocks has upset many people. No one likes watching their future retirement funds (or current retirement funds) draining away on a daily basis. Apparently some who are retired spend much of their day sitting in front of a television set watching the latest stock market returns and calculating how much their retirement funds have dwindled away in the last 24 hours or so.
Current federal employees do not have the option of sitting in front of a TV set all day but there is little doubt that many of them are following the market closely. Some are planning to delay their retirement, some are dumping all of their stock funds, and some are just in a state of panic and can’t decide what to do. Some of the more effusive readers are patting themselves on the back for having learned how to successfully time the market so that they can sell stocks when prices are near a peak and buy more TSP funds when the market is near a bottom.
The most recent bear market is a reminder that investing in stocks involves risk. Some readers do not like this idea and express a combination of fear, resentment and hostility over having their future retirement income tied up in financial investments that can–and sometime do–lose money. Some readers have been commenting on the unfairness of the FERS retirement system when they would have had much more money available to them under the CSRS fund because they would have had a guaranteed annuity with an annual COLA payment. In other words, they prefer a safe, secure retirement without participating in the capitalist economic system that has made the United States one of the wealthiest countries in the world because that always involves risk. In fact, the risk premium that investors receive from stocks is what makes the stock market a more successful investment in the long term.
All of us look at the recent past and focus on that more than the long term. For investors, that is usually a mistake.
There are years when TSP stock funds do not provide a better return than the much safer G fund. In fact, losses in the stock market during a given year a fairly common. The C fund is based on the S&P 500 stock market index. This index has lost money 23 of the 82 years from 1926 through 2007. Obviously, the C fund has not existed that long but a long term perspective is useful when deciding how to invest your future retirement funds and surviving the emotional turmoil of a bear market.
Take a look at the C fund returns since 1988. There are four years in which the C fund has lost money during this time: 1990, 2000, 2001 and 2002. In twenty years, the C fund has lost money in four of those years.
During this same time frame, the G fund has made money every single year. It has never gone down.
So why would anyone invest in stock funds knowing they may go down while the G fund will not? The answer is because, based on long-term market history, you will probably have a lot more money by investing in stocks over the long term. In fact, even after you retire, you will probably live two or three more decades depending on your age and your health. You may need (or at least would like to have) more money when you retire so keeping some of your money in stocks after retirement makes sense.
To put this into perspective, assume you put $50,000 into the G fund in 1988 and never made another contribution and never withdrew any of your money through 2007. At the end of this 20 year period, the value of your G fund will have gone up substantially. During this 20 year period, the G fund had an average return of just over 6%. With an average return of 6% a year, at the end of 20 years, your retirement fund would have an approximate value of about $160,346.
But what if, during this same time period, you had put your money into the C fund? Using the same scenario of putting $50,000 into the C fund in 1988, the fund has had an average return of just under 13%. With an average return of 13%, and without adding any more money to y our account during that 20 years, your TSP account would have a value of about $576,154.
Here is a graphic display of the differential using this hypothetical example with the actual returns from the TSP funds mentioned: