Many FedSmith readers are wondering about their financial security when they retire. With the large market drop in 2008, and the numerous news items about the miserable stock market returns for the S&P 500 (think of your C fund in the Thrift Savings Plan which is based on the S&P 500), readers who are concerned about their financial future in retirement should be described as cautious, not paranoid.
Frequent questions we get from readers are along these lines: "What will the stock market do this year? Should I continue to put my money into stocks in 2010 even though the stock market was up substantially in 2009?"
These are good questions. To find out what professional investors think about the stock market for the coming year, I attended "The Money Show" in Orlando, Florida recently. If you like to invest, or feel the necessity of investing for your financial future, an event such as this makes for an interesting week. Some 8000 investors with 242 experts from seven countries descend on a large hotel in Orlando to discuss investing for fun and, hopefully, for future profit.
For those who think attending four days of sessions on earnings predictions, the rate of return on Treasury bonds, and the future of the dollar compared to the Swiss Franc is the equivalent of purgatory or a descent straight into hell, the hotel also offers golf courses, a spa and numerous restaurants with Disneyland being about 10 minutes away to take your mind off of stocks, bonds and investing in gold or other precious metals.
The reality, of course, is that no one can predict the future with certainty. But, with a number of experts who have spent their careers watching and investing in stocks and bonds, one approach is to look for a common theme or consensus from these analysts.
Sunny or Gloomy in 2010?
Many people are afraid to invest in stocks after the C fund was up almost 27% in 2009. (Here are the historical annual returns for all TSP funds.)
But here is a ray of optimism that may give some a better perspective. Sam Stovall is the Chief Investment Strategist for Standard and Poor’s and writes frequently on investing and market history. His perspective is broad and extensive.
He notes that in the first year of a bull market, stocks initially go up about 30%. The market then generally drops about 7% before heading back up. In the second year of a bull market, there is historically a 15% total return in stocks and as much as a 36% rise in earnings for S&P 500 companies in 2010.
2010 is the second year of what may prove to be a bull market after the dramatic fall in stocks in 2008. While the average 15% gain in stocks for 2010 may be high, there seems to be a consensus among many professional investors that an increase of 10% – 11% for 2010 is reasonable—with considerable volatility throughout the year.
Several speakers at the event predict that the first part of the year will be the best for the stock market and that the market will pull back in the latter part of 2010.
Market sectors also often provide different returns. In the first year of a bull market, small company stocks often go up more than larger companies. And, in fact, last year the TSP’s S fund went up almost 35% while the C fund went up about 27%. In the second year, the larger companies tend to perform better than the smaller companies.
Importance of Diversification
Most Thrift Savings Plan investors are not planning on trying to frequently move their assets from one fund to another to try and anticipate the next major move in the market.
The TSP offers a range of funds to enable you to diversify your investments so that while you may not get as big a return when the stock market moves up quickly, you also do not lose all of your money when the stock market drops.
Stovall points out that a 60% – 40% diversification between stocks and bonds can make a huge difference in your overall return. He notes that an investor with 60% invested in the S&P 500 and 40% in long-term U.S Treasury bills experienced a 13.1% decline in 2008. That is actually a smaller decline than investors experienced in several serious market declines.
And, while no one wants to see your investments drop by 13% in a single year, that cushion offered by the Treasury bills (think of the G fund) prevented a much bigger loss if all of your money was in one of the stock funds offered by the TSP.
Putting all of your money into a safe investment such as the G fund will preserve your money. It will also mean that all of your money in a safe investment will lower your long term return on your investment. The 60% – 40% split described by Mr. Stovall was used for illustrative purposes and a person who is retiring this year may conclude that 60% in the TSP stock funds is too high.
The advantage of the Thrift Savings Plan is that you can invest to suit your personal situation and personality with the gains (or losses) that result from your decisions.
I will follow up with other observations from professional investors at the Orlando Money Show in the next few days in hopes it will help you make the right investment decisions.