Many of our readers are already retired. Many others are planning or hoping to retire in the next few years. How bright is your financial future? Will your Thrift Savings Plan enable you to retire comfortably or will you be forced to work longer, perhaps much longer, than you had planned because the value of your TSP has fallen dramatically?
More people are delaying retirement as a result of falling stock prices, housing prices, and investments in general. As millions of Americans are out of work, with the numbers likely to go up before leveling off, a job with the federal government is one that many current federal employees are likely to hold on to knowing that finding a job after retirement will be difficult and probably not have the same pay or benefits.
You may have noticed that the stock market is now down to about where it was 10 years ago. The money you have invested in the C fund, depending on how much invested and when you invested it, has not increased your total assets. Chances are, it has gone down.
So what does the future hold? America has been through recessions before over the past two centuries. We have only had one recession that turned into a major depression, commonly referred to as "The Great Depression." 70 years later, there is still debate on the role of government in that era as some have concluded that attempts by the government to revive the economy turned a recession into a depression. Others think the government spending programs were positive in their economic effects.
Unless you were investing in stocks in the 1930’s (yes, I know the TSP did not exist then but stocks were still available), you probably feel as though you are in uncharted territory. The market has dropped about 50% since hitting a high in the fall of 2007. By most measures, we are a long way from a depression. We are in a severe recession. But, as Ronald Reagan quipped: "A recession is when your neighbor loses his job. A depression is when you lose yours."
What changes should you make, if any, in how you invest in the Thrift Savings Plan? With the current economic uncertainty, and politicians creating screaming headlines for their own political purposes, knowing how to invest and plan for the future may seem more uncertain than ever.
To find out what a variety of experts are saying about investments in our current economic climate, I attended "The World Money Show" in Orlando recently. The show had about 10,000 registrants and featured a variety of speakers with expertise in stocks, bonds, and other investments.
Federal agencies operate in a political environment. Many of our readers perceive and analyze events through their own political perspective. Most of those speaking in this arena have a different perspective. Their goal is to help their clients preserve their assets, make a profit, and collect a fee. Politics plays a role but from a policy perspective. I did not hear any speakers make a purely political speech but many did express their ideas about policy initiatives and the possible implications of these initiatives for investors. Most speakers were hoping the government’s plans to revive the economy were successful but most were pessimistic based on their evaluation of past efforts by governments to try and correct economic problems with massive spending–although none of these were as large as the attempt by the United States today.
Here is a brief summary of the opinions from investment experts. With a large number of speakers, and a wide variety of experience in different aspects of the investment world, there was a surprising amount of consensus although the rationale for reaching the conclusions sometimes differed substantially. Here is a summary of the analysis from this session. How you use this in deciding how to invest your funds, especially in the Thrift Savings Plan, is up to you. There is a summary at the end of the article that may be helpful in how the TSP funds may be impacted by the current events in our economy.
The Great Recession and the Post Capitalism Era
One speaker referred to the current situation as "the great recession." We are not in a depression but we are in a severe recession. The concern among some is that government attempts to save companies and jobs and spend money may prevent a recovery from occurring and send us into a depression instead of weeding out inefficient industries or companies and moving on into the future.
A 7% unemployment gain is typical during a recession. The stock market has not priced in unemployment of 10% or 11%. The government has not been projecting an unemployment rate as high as 10%.
But seven of nine sectors of our economy are in a depression (a decline of more than 10%). The exceptions: health care and government. In effect, this means that the stock market may fall further than it already has, perhaps much further than it already has. It also means that government employment is going to grow, probably substantially, and that government will gain an even greater share of America’s gross domestic product. An unemployment rate of 10% is a possibility. In fact, within a few days after the conference ended, a new projected unemployment rate of more than 8% has been released.
Another factor that will influence investments: Government debt is rising at all levels. The debt of a central government usually rises 85% during the first three years after a banking crisis.
The economic crisis is not over and the government debt levels are going to go much higher than normally happens during a recession, even though elected officials may not acknowledge the total extent of the problem. There is a collapse of tax revenue that will hit starting this year. As people lose jobs, spending declines, unemployment rises, stocks decline in value, investments go down in value and tax revenue nosedives. This will have a dramatic impact on government debt levels in addition to borrowing the trillions for various bailouts and economic stimulus programs.
In short, the government will be absorbing huge amounts of capital and taking on unprecedented levels of debt–most of which will be funded through the issuance of Treasury securities.
Stock Market Distortion and Inflation
A panel of speakers each briefly addressed the current economic climate and captured the ideas that were expounded in individual sessions by a variety of speakers.
The general consensus: The American stock market is distorted and will remain so for some time because of unprecedented government debt and spending. The result is that bonds are going to be a better investment than stocks. Some stocks that will do well (and which will not be available to TSP investors as the TSP uses index funds) are those that are "green, unionized, and employ lower paid workers" as the government takes over more control of the economy and we have a populist president who will likely favor these segments of the workforce.
The current concern of government planners has been focused on deflation. A longer term concern is rapid inflation. Several speakers referred to the "rapidly rising" or "hideous" inflation that they see occurring in another year or so as a result of massive government spending. This means that the interest rate that will be paid for financing government debt will rise. On the other hand, a dollar that is worth much less than it is today will make it easier for the government to pay back some of the money that is currently being borrowed at relatively low interest rates. Some investment professionals think the government is planning on higher inflation, perhaps much higher inflation, as a way of making it easier to repay debt.
Advantage of Foreign Stocks
Several speakers referred to the fact that the United States is moving toward a more welfare oriented society while many other countries are moving more toward capitalism. China, for example, is focusing more on the role and value of business investment and less on government planning. Europe is also beginning to move away from as much government planning and strict regulation and more toward free market capitalism. As a result, some advisers are planning on putting more into foreign stocks than American stocks which are likely to recover later than foreign stocks as the federal government absorbs more resources from the private sector.
Bonds vs. Stocks
Bonds are likely to fare better than stocks for some of the reasons mentioned above. Some energy stocks are likely to do well and stocks that invest in new sources of energy may do well but the overall stock market (such as the C fund in the TSP) will be hurt.
Generally, speakers were pessimistic about the real return of stocks through the remainder of 2009. With rising interest rates, high quality bonds may be a better value.
Fear of the Unknown
Investors prefer a stable environment. America’s Treasury Bonds have done well in large part because our economy is the largest in the world and we have a stable political environment.
But no one knows what will result from government attempts to revive the economy. There was a large amount of fear expressed by investment experts over the unintended consequences of unparalleled government spending and debt. The most common refrain from those speakers I heard was that the stock market is uncertain and likely to plunge as a result of the stimulus plan and various bailout plans. Investors are concerned that the real goal of the stimulus package is political and not economic. As one speaker observed, "there is no stimulus plan–it is a lie" because the real rationale is to implement spending programs to pay off political allies by using scare tactics about the economy as a cover for passing the new programs.
What Does This Mean for You?
One investment adviser magazine has noted that the stock market had fallen about 40% since Obama sewed up the Democratic nomination. The market also fell dramatically after a plan to deal with "toxic assets" was described by Treasury Secretary Timothy Geithner. One announcer on a station devoted to interests of stocks and investors has called for a "Chicago tea party" in expressing outrage over the recent decisions by the government to revive the economy.
As of this writing, the stock market is at its lowest point in a number of years. Several speakers predicted it could fall dramatically from its current point–one speaker referred to the stock market average going as low as 3800–about 50% lower than its current value.
Uncertainty creates volatility. If you are retired, or close to retirement, the possibility of a dramatic rise in interest rates should be part of your planning. If you are planning on using the TSP as a major part of your retirement income, consider the possibility of your stock assets dropping significantly from where they are today and how that would impact your financial future.
The current economic situation will not be resolved for some time. There may be a stock market rally, where stocks rise as much as 15 – 20% only to fall back to new lows during the current bear market. A number of people foresee a bubble bursting in Treasury securities. But, as a TSP investor, you have an advantage with the G fund. This fund has relatively low volatility and the investments are in government securities that are issued especially for this fund. High inflation may hurt your return but your initial investment should be safe.
The F fund invests in government, corporate and mortgage-backed bonds. The risk in the F fund is greater than the G fund and it can also be impacted by inflation. It is less volatile than the stock funds, interest is paid and included in the price of the F fund shares. The fund does not have the potential for the same increase (or decrease) as the stock funds.
No one can predict the outcome of the current economic situation or even future government decisions that will be made that will impact the economy. You will have to reach your own conclusions about the wisdom of the various bailout and stimulus plans now being pursued by the federal government and how it will impact your investments based on your individual circumstances. You may decide that the consensus of investors in driving the stock market dramatically lower in recent months is wrong and that stocks are going to go up dramatically in anticipation of a dramatic recovery. Perhaps you would be right and the investment professionals are unnecessarily pessimistic.
Everyone should take into account the possibility of much higher inflation and the possibility of stocks falling further than they are now before recovering and starting to go up instead of down.
I will not try and advise anyone on how to invest your retirement assets. Stocks are lower than they have been in years and, for someone with a long career ahead, it may be the investment opportunity of a lifetime. But, in every case, you should consider the possible scenarios that could befall your investments and then invest in the manner most appropriate for you.