Politics, Stocks and Your Thrift Savings Plan

When it comes to investing our money, most people put short-term political views aside. When spending their money, they focus on the future of business and the prospects for future growth. If they are confident, stock prices go up. If they are pessimistic, stock prices go down. TSP stock funds dropped dramatically again in February with one fund, the G fund, the only TSP fund with a positive return for the month and for the year.

The dramatic losses in the Thrift Savings Plan continued through February–and that was prior to the dramatic sell-off of stocks on March 2nd.

For the second month in a row, the only fund with a positive return was the G fund which was up 0.21% for the month and is up 0.39% for the year. All of the other funds, including the lifecycle funds, were down in February and are in negative territory for the year as well. For the past twelve months, there are two funds with positive returns: The G fund with a return of 3.57% and the F fund with a return of 2.17%.

The biggest loser is the I fund which, at the end of February was down 20.94%. If you want to see a more dramatic drop, add in the results through March 2nd and the I fund is down more than 25% for the year. And, if that is not bad enough, the I fund fell more than 42% for 2008.

The stock market is in a free fall. After the widely followed Dow Jones Industrial Index fell by almost 300 points in one day, following its dramatic fall throughout the first two months of the year, some investors will conclude that the market has to go up and they are now putting money back into stocks.

They may be right and that may turn out to be a profitable move for those willing to take the risk but it is not a sure bet. As analysts from Deutsche Bank noted in a Wall Street Journal article after stocks fell to their lowest level in 11 years: “We can finally make a case for equities being ‘cheap’ for not only the first time in this crisis but for the first time in at least 14 years. But, they added, that doesn’t mean a stock market rebound is in store.

We live in an a society that seems to be more polarized based on political ideology after each major election. The stock market is apolitical in the sense that it does not necessarily go up or down depending on which party is in power. People vote with their money. If they have confidence in the future of business, they are willing to buy stocks and invest more of their money. And, regardless of what politicians or political pundits may say or preach, stocks go up or down based on the overall belief of investors in the future prospects for companies. There is now a very large glut of dollars sitting on the sidelines and that are not being invested because of lack of confidence in the market.

An obvious example is the performance of the stock market under President Clinton. He was impeached–a dramatic political event that has rarely happened in American history. The stock market ebbed and flowed during this event and throughout his entire eight years in office. Many Republicans had strong negative opinions about his personal character.

Despite the political posturing and political turmoil, the market rose steadily. The reason is that much of the arm waving and political theater was an event primarily of interest to the political class and the political observers and writers who make a living writing about politics. The market was not much concerned about Clinton’s personal relationships or personal behavior. Instead, it focused on the future prospects of companies and their stock prices. Government employment decreased, welfare reform cut down the cost of some entitlement programs, global trade expanded with the passage of NAFTA and the markets had confidence about the performance and predictability of government actions.

Individual investors, who may have voted for Republicans or who may have harbored negative beliefs about the moral character of the man in the White House, were not investing based on their personal political preferences. At the end of 2000, the market was above 11000 having gone up steadily during President Clinton’s term of office despite the dramatic headlines and the political hoopla.

Jim Cramer is a well-known investor and market prognosticator as a result of his books, articles, fund manager and his TV show. He is not known for political activism but is well-known as an investor who, for what it is worth,  has stated he is generally a Democratic voter.

In an article published after the stock market closed yesterday, Cramer observed that “What’s good for stocks is not always good for America. But for now, it sure is.” He notes that the markets like stability and that stability has vanished and, if President Obama continues his assault on the markets, it could go as low as 4000 (it closed yesterday at 6763).

His view is that the stock market cannot afford the Obama agenda. According to the article,  “[F]or a new president, changing the world might seem irresistible, but he said simply that Obama needs to put his whole agenda on hold, for now, until things can stabilize. He said it’s not just the banks that are getting pushed down by Obama’s policies, now the oil stocks, along with health care, are also in free fall.”

So, for the moment, there is instability and fear in the stock market. That could change quickly if and when the government decides how to deal with bail-outs, instability in the banking industry,  and how to finance and start to repay the national debt that is now such a large figure that it is difficult to comprehend. Until that occurs, and stock market investors conclude the plans are realistic and not just short sound bites for public consumption, there is likelly to be a downward tend in the stock market–with an occasional upward blip during the overall declining value of stock prices.

From reading comments responding to a recent article on Thrift Savings Plan investments, a number of readers noted they were early in their careers and were putting money into the TSP stock funds. Their theory is that they have another two or three decades for the market to recover and stock prices are not relatively cheap. For TSP investors in this position, that is a rational approach and is it likely they are making the right decision for a person in that position.

On the other hand, if you are retired, or are close to retirement, how you invest your retirement funds will depend on your situation. For those in the CSRS system, the TSP may not be a major part of your retirement income and these folks may decide to take some risk in the hope of gaining substantial future gains, particularly because they may not be drawing from their TSP funds for a few more years.

For anyone who is depending largely on the TSP for retirement income, and who is close to retirement or already retired, the risks may be considerably greater than the potential rewards. If you are drawing money out of your TSP each month, and you will have to withdraw money even if the market should fall considerably from current levels, you may face a reduction in your future income if the market continues to fall. In that case, the more conservative  G and F funds (where most of the TSP money is actually invested now) will be a safer alternative.

No doubt, all of us are hoping that the stimulus plan for recovery will help our nation emerge quickly from the current economic slump. At the same time, we are also hoping that the massive spending plan does not prolong the slump and create a huge debt that will be extraordinarily difficult to repay as much of the debt is held in foreign lands with their own aspirations and agendas.

While all Americans are in this together and going along for the ride being charted by Congress and President Obama, your personal financial future will be influenced or determined by the decisions you make with regard to your personal finances.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47