Will TSP Investors Panic and Sell?

By on February 1, 2016 in Current Events with 16 Comments

January was a rough month for the stock market. In fact, it was among the worst in the history of the S&P 500 index—the index on which the TSP’s C fund is based. For January, the Dow Jones Industrial Average declined 5.5%, while the S&P 500 index lost 5.1%. But, while the market picked up quite a bit at the end of the month, the S&P 500 entered correction territory, defined as a drop of 10% or more from a recent high in the market, during the month of January.

In the final analysis, the S&P 500 ended up down more than 5%. The C fund did a little better than that with a negative return of -4.96%. The result is that when TSP investors check their account balances, they will likely see that their TSP balance is down from what was there at the end of December. January was the biggest drop for the C fund since August 2015 when the C fund was down a little more than 6%.

Here are the results for all of the TSP funds for January 2016 as well as the results of each TSP fund over the past 12 months.

G Fund F Fund C Fund S Fund I Fund
Month 0.19% 1.49% -4.96% -8.72% -5.62%
12 Month 2.06% 0.28% -0.59% -9.72% -7.21%

 

L Income L 2020 L 2030 L 2040 L 2050
Month -0.91% -2.55% -3.58% -4.21% -4.86%
12 Month 1.01% -0.66% -1.76% -2.52% -3.29%

No one, of course, likes to lose money they have invested. People react differently to seeing a short term loss in the value of their stock investments. Some will panic, sell the funds that are down (locking in their losses) and put the money into other funds such as the G fund—which always has at least a small positive return in each month. Others will see the stock market decline as a chance to invest more money into stock funds while the prices are lower.

There are no guarantees, of course, that stock prices will go up. But, some research results may make those seeing recent losses in their stock fund value feel somewhat better, at least for those who are long term investors who are not inclined to start selling when the market drops.

The reality is that the stock market goes down on a regular basis. According to research published on the Motley Fool, an investor should expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during a lifetime. All stock market investors will experience losses at some point. In some cases, investors finally give up and sell just as, with the benefit of hindsight, the stock market was hitting a low point.

For example, from June through October 2002, when stocks were at their lowest levels during a market cycle, TSP participants pulled $3.8 billion out of the C fund and put their money into bond funds. The timing of these investors was as bad as it could have been. They sold their stock funds at the lowest levels just before the C fund jumped up 29% in 2003 (the I fund went up 38% and the S fund went up 43% in 2003).

The stock market also tanked in 2008. The C fund went down about 37% in 2008. The S fund was down more than 38% and the I fund was down more than 42%. Some TSP investors became discouraged and fearful of losing what was left of their money and sold all or a large portion of their stock funds.

Some of these TSP investors never put money back into the C fund after they sold. In 2006, for example, 35% of CSRS employees’ investments and 36% of FERS employees’ investments were in the C fund. At the end of January 2012, only 23% of CSRS employees’ investments and 24% of FERS employees’ investments were in the C fund.

The good news is that markets have always come back. Since 1871, the market has fallen 10 percent about six times every 11 years. And, when the market comes back and does recover, it comes back higher. During that 145 year span, the market has also fallen about 20 percent about every 48 months. About once every decade the market declines over 30 percent.

Based on research by Morgan Housel and published on the Motley Fool, and as clearly outlined by financial columnist Mal Berko, the S&P 500 has gone up an average of 47 percent every five years since 1871 when adjusted for dividends and inflation. When the S&P index has gone down 20 percent, the next 5-year returns averaged a positive return of 61 percent. After a drop of 30 percent, the average return over the following 5 years was 78 percent. After a 40 percent drop, the positive market returns 5 years later averaged 102 percent.

In other words, the longer an investor holds on to stocks, the greater the chance of success. Anyone who invests and sells within the first year of the investment may lose money as accurately predicting the short term direction of the market is difficult at best.

Of course, some investors are not long term investors. For those who are retired or are about to retire and are relying on their TSP investments for income, putting a higher percentage of investments into bond funds as a cushion against stock losses may be a good idea. Those who are forced to sell their stock funds when they are down significantly will have lost the opportunity to make up those losses when the market goes back up at some point in the future.

Readers are invited to check out the daily, monthly, or yearly TSP fund returns at TSPDataCenter.com.

© 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 on federal human resources.

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