The Wall Street Journal this week featured an article entitled "Betting Against the Rally to Protect Your Portfolio." The thrust of the article is that the recent rally in the stock market has been joyful to investors who have money in the stock market but, just in case, some defensive action may be in order because there are plenty of reasons to think that the market could turn down again. It doesn’t predict the market will again drop dramatically–it just warns investors not to get too confident.
Many investors sold stocks when the market was down. On January 2, 2008 the price for one share of the C fund was about $16.32. On January 2, 2009, the price for one share of the C fund was down to $10.77. By March 5, 2009, a share of the C fund had dropped to $7.93.
No doubt, many readers who had been thinking of retirement were watching the value of the Thrift Savings Plan portfolio. While they may have been thinking of leaving the employment and security of working for Uncle Sam and taking a spouse to walk barefoot on the sand in a Caribbean paradise, their thoughts would understandably have changed to wondering whether retirement would even be an option because of the dramatic drop in value of their TSP.
How have investors reacted to the drop in value of their Thrift Savings Plan funds?
Not surprisingly, they have been cashing out the stock funds and putting their money into the safety and security of the G fund. Every single month in 2008, TSP investors moved money out of the C fund as billions of dollars were hurled through the electronic ether into the G fund shares.
Back in January 2008, TSP investors moved 4.4 billion dollars were moved into the G fund while moving billions out of the C, S and I funds. The only month in 2008 where more money was transferred out of the G fund then went into it was in May 2008. That is probably because the C fund went up almost 5% in April 2008 and up another 1.27% in May 2008 before heading down again.
Coincidentally, the Wall Street Journal featured another article this week about stock investors who decided to sell their stocks in March, just as the market was hitting its low point. Many of these investors are retired or want to retire in the near future. The Dow Jones Industrial Average hit a bottom at 6547.05 on March 9, a 12-year low and less than half its October 2007 level.
There are always news articles such as this that appear around the time that the stock market has reached a bottom.
Did federal employees do any better? In other words, did many people anticipate the rapid rise in the value of their Thrift Savings Plan and move money into the C fund or other TSP stock funds in March and April?
It would appear that TSP investors react just about like other investors. In March 2009, TSP investors moved almost $1.5 billion into the G fund and they continued to move money out of the C fund ($565 million); the S fund ($110 million); and the I fund ($218 million).
In the month of April 2009, $602 million left the G fund while the C, S and I funds all took in hundreds of millions of dollars.
The inference from this is that investors tend to react to what is currently happening in the stock market. If stocks have gone up significantly in the previous month, and they think it will continue to go up, they will put more money into stock funds. If it has recently gone down, they are inclined to transfer money into the safety of the G fund and to accept a guaranteed positive return, even if it is low, rather than risk a possible loss.
For some investors, this may turn out well. For others, they are likely to find that they are chasing the latest moves in the market and will do better with a regular asset allocation program and paying more attention to how much is invested in stocks and how much in bonds rather than trying to predict future moves based on recent past performance.
The good news in this: TSP investors usually react the same as other investors and have the option to make their own decisions with their retirement funds.
We with the best of luck to all of our readers in making the right investment decisions.