TSP Funds Up (Along With Gas and Gold) While the Dollar Declines

By on May 4, 2011 in Current Events with 2 Comments

The Thrift Savings Plan (TSP) funds for April all provided a positive return for investors. The I fund had the best monthly return with a gain of 6.03% and the C fund came in second with a return of 2.96%. 

For the year to date, the C, S and I funds have all had excellent returns so far as well. Here is how the underlying TSP funds have done so far in 2011:

  • S Fund: 11.17%
  • I Fund: 9.69%
  • C Fund: 9.05%
  • F Fund: 1.75%
  • G Fund: 0.97%

Despite the “wall of worry” that has been building on stocks throughout the year, the stock market has continued to move up. April marks the eighth straight month of positive stock returns when looking at the major stock market indices. That is very unusual.

The Declining Dollar and The Value of Stocks 

The American dollar is in a state of decline as the purchasing power of the dollar goes down. A good part of the reason for the decline is that the Federal Reserve is printing new money to finance our debt. We are not on a gold standard (and have not been on a gold standard for decades). That gives the government the option of using its printing presses to distribute more money–even though there is no new wealth creation underlying the large amount of money being distributed. This situation creates inflation and the real value of our currency declines.

No doubt, that is part of the “wall of worry” that has some investors concerned. A dollar with lower purchasing power has led to our very low interest rates which hurts people who have saved money because their purchasing power is declining and the cost of commodities that we import are going up. Businesses that export goods benefit from more business as our products are cheaper for those who are paying in currencies like the Yen, Euro or Canadian dollar. The falling dollar value has helped international stocks and, therefore, the I fund has done well. Here is a chart showing how the U.S. dollar has performed in the past year.

 

But, as Americans have noticed, the cost of gas is also going up. How much has it gone up? Here is a chart that displays the cost of gas. The chart is a few days old so the top price is certainly higher now and above $4.00 in some areas. Gas has gone up about 70% since September.

 

At the same time, the value of gold has skyrocketed to more than $1500 per ounce. So, as the value of the dollar has declined, the value of gold has gone up. In fact, to put this into perspective, the cost of a gallon of gas is now less than it was in 2006 if it were paid for in gold instead of in dollars. The reason, of course, is that the value of the dollar in buying goods and services is going down–particularly when we are paying for products that are imported.

Seeking Safety 

This complex situation makes it difficult to predict how stocks will perform over the coming months. Those who are seeking the ultimate safety of the G fund know that they will not lose money when looking at the value of their G fund account in dollars. But, when taking inflation into account, stocks often turn out to be a better investment in the long run.  You can see from the year-to-date figures showing the return of the TSP stock funds compared to the year-to-date return of the G fund that stock investments have been a better hedge against inflation.

Moreover, as many retirees know, the rate of inflation as measured by the government is designed to create a lower inflation figure and does not take into account the cost of products such as food and gas in some of the major inflation indices. In effect, the actual rate of inflation as felt by most of us is higher than the official inflation figures (and higher than your COLA payment if you are retired). 

Here is one description of our official inflation figures:

“[T]he reason the CPI is losing credibility is that, as economist John Williams tirelessly points out, it’s a bogus index. The way inflation is calculated by the Bureau of Labor Statistics has been “improved” 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent. Yes, folks, double-digit inflation is back. Pretty soon you’ll be able to figure out the real inflation rate just by moving the decimal point in the core CPI one place to the right.”

How Are TSP Participants Reacting?

TSP investors are also showing some concern about their future retirement investments. TSP participants moved more than $1 billion from the underlying TSP stock funds in the G and F funds in March. Obviously, this move to safety ended up costing these investors some money as the I, C and S funds all did very well in April.

In March, investors moved more than $691 million out of the C fund, $30 million out of the S fund and $570 million out of the I fund. Where did they put their money?

More than $1.3 billion went into the G fund. $151 million went into the F fund and $65 million went into the L funds.  

TSP Investor Actions in 2010

How did TSP investors react to events in 2010 with their TSP money?

During 2010, here is what TSP investors did with their interfund transfers:

  • Moved more than $2.2 billion out of the C fund,
  • Moved almost $2.4 billion out of the S fund
  • Moved more than $2.7 billion out of the I fund.
  • More than $1.8 billion into the L funds. 

So, in summary, the stock market has been very good to TSP investors in the past few months. International turmoil, concern about the actions of the Federal Reserve, fear of inflation, concerns about national and global debt levels have made investors more cautious. Those that took the risk and left or put more of their money into stocks in the past few months have been rewarded for their risk. Those that moved into more secure investments have, perhaps, been able to sleep better at night but have missed out on the favorable returns. 

Probably, as is often the case, the caution displayed by many investors actually helped the bull market. When investors stampede into one asset, such as stocks, there can be a rapid rise in value followed by a very rapid decline. With more investors exercising caution, it may have helped move up the value of equities.

But, as is always the case, each person has to make personal decisions about investing. With the older federal workforce, and many TSP investors in or getting closer to retirement, cautious investing in a wise move since the future performance of stocks is probably for volatility and uncertainty–a recipe for potential disaster for a person depending on TSP investments to live on during retirement. 

 

 

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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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 onĀ federal human resources.

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