Has Your TSP Hit Bottom Yet?
By Ralph Smith
Monday, October 27, 2008
A number of readers have been posing questions about their Thrift Savings Plan. Many of them focus on the basic question of whether the stock market has reached a bottom and will start to go back up. Another version of the questions, which amounts to the same thing, is whether the market has reached the point of capitulation--meaning that we have reached the bottom point of the selling that has been decimating stock values.
The real answer is that no one can accurately tell if the market has reached a bottom. The current uncertainty in financial markets is unprecedented in some ways. Moreover, a market bottom cannot be identified until after it has occurred and the market has gone back up.
Many of us remember October 19, 1987 when the stock market dropped dramatically. The Dow Jones Industrial Average lost more than 500 points in one day. That is fewer points that the market dropped in recent days but remember than the average bottomed at 1739--rather than the 8400 where it is sitting today. With the dramatic one-day drop, some investors bailed out thinking that the worst was yet to come. In fact, the market came back up and closed at 1939 on December 31, 1987.
But there are fewer investors who are currently in the Thrift Savings Plan who were investing in stocks back in 1974. On December 6, 1974, the market closed at 577. That was down 45% from its high in January 1973. Trading was slow. The stock market did not have a dramatic crash; it slowly went down and, after investors had largely given up and cashed in their shares of stock or just quit looking at their portfolio value, the market started back up. It didn't happen overnight but by 1976, the market was up more than 50%.
In effect, the market does not always follow the same pattern which makes it even harder to know when a bottom has been reached.
I could offer an opinion about whether this is the low point for the stock market but it would not do you any good. Based on the history of the stock market, no one really knows and, if you take the time to read opinions from a variety of analysts, you will get a wide variety of optimism and pessimism and you still will not have a definitive answer.
We do know that TSP investors are transferring money into the G fund from their stock funds in large amounts. And that activity is not confined to TSP investors as many investors throughout the world are stashing money in money market funds and other investments that are relatively safe compared to the daily fluctuations in the stock market.
If you are thinking of moving money back into the TSP stock funds, it may be a good time to do it. The stock market may or may not be at its lowest point. It may fall much further before we eventually learn the absolute bottom of the current bear market. We do know that stocks are much less expensive than they were a short time ago and a reasonable person could conclude that stocks are currently being offered at a sale price. They may go lower still; they may also start going back up and those that are not invested will miss the rebound.
Any investor should consider your own ability to accept risk for the possible reward of having more money in your TSP portfolio. How much can you afford to lose if the market continues to go down? How much would you regret not having more money invested in stocks if they turn and head back up?
Keep in mind though that trying to time your investments to coincide with the absolute bottom of the market and buying stocks at that point will be futile for most investors. That, at least, is the opinion of most who have studied attempts of investors to successfully buy and sell investments to coincide with future market moves. Here is one example of how some react to a market timing approach to investing.
In the final analysis, it's your money, your retirement future, and your decision to make.
© 2009 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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