Gloom, Doom, Bear Markets and Your Future Retirement
By Ralph Smith
Tuesday, December 16, 2008
With the stock market in turmoil and investors still wondering when the next show will drop on government bailouts, ponzi schemes or just continuing negative economic news, it is not surprising that TSP investors are still moving money into the G fund.
For the month of November, another $937 million went into the government's G fund.
TSP investors are not the only ones looking for safety and security.
Here is a quote from the Wall Street Journal published on December 10th: "The Treasury sold four-week notes at a 0% yield for the first time, with investors in effect giving their cash to the government for safe-keeping until 2009. This rush to safety occurred last year, too, when investors wanted only to own the very safest, most liquid investments when they closed their books at the end of the year."
In fact, some investors turned their money over to the federal government knowing they would get a negative return. As the Journal noted: "[I]nvestors were willing to pay $100, knowing they would get $99.99 in return, in the belief that a small but guaranteed loss was preferable to investing in stocks, corporate bonds or other securities. Treasurys have been flirting with 0% yields since the Lehman Brothers bankruptcy nearly three months ago."
In other words, some investors are willing to pay the government to take their money knowing they will get back less than they invested.
That seems extreme but, if the markets have taught us anything in the past few months, it seems as though one cannot be too cautious.
Federal employees, by comparison, are getting a great deal. The G fund has securities only available to the TSP. The rate of return for the past month wasn't negative and it wasn't the 0.02% that the 3-month Treasury bill has been paying. So far in 2008, the G fund has returned 3.50%.
The number of interfund transfers declined sharply in November, perhaps because some investors are now of the mind that the market is at or close to a bottom and may provide good returns in 2009.
On the other hand, the monthly TSP contributions dropped substantially in November. The total monthly contributions to the TSP in November was under 1.6 billion, down from 2.1 billion in November.
The current bear market has been grinding down all investors, Between its peak on October 9, 2007, and its low on November 20, 2008, the Standard & Poor's 500-stock index (which is the index on which the TSP's C fund is based) has dropped 52%. That makes this bear market the worst since the Great Depression (through December 15, the S&P was 44% below its high).
Many investors see continuing economic problems throughout 2009. There is little doubt there will be plenty of bad news to come and some of the news is likely to be as bad as any news that has already come out with increasing unemployment figures, increasing jobless rate, and more company failures.
TSP investors are reacting rationally to a continuing dramatic drop in the value of their TSP funds. If you have withdrawn all or a substantial portion of your money from the stock funds, when will you reinvest it? Most of us have trouble making a decision to buy stocks when the financial news all around is gloomy.
But keep in mind that there is risk in not making a decision as well. If the stock market does go up 30% or so in the next year, you will have missed a significant gain in the value of your portfolio. While you are guaranteed not to lose money in the G fund, some readers have been shifting money out of their stock funds and into the G fund and taking a substantial loss in the process. While that has proven to be a good move in the past 13 months, anyone planning on using the TSP as a substantial source of retirement funds needs to objectively consider the risk of staying out of the market for an extended time--as well as the risk of absorbing future losses.
One other item to consider: You may live longer than you think. The number of people living to be 100 is going up. if you are a 60-year old man, your average life expectancy is another 20.36 and many people will live much longer. If you are a 60-year old female, you can anticipate living an average of 23.53 years--and perhaps another decade or so longer.
If you are a long-term investor, it may pay to keep in mind that bear markets do end and the stock market tends to go up ahead of positive economic news. Mutual fund company T. Rowe Price calculated returns of the S&P 500 following each decline in the market of at least 20%. In those six instances (not including the current bear market), the S&P has been up an average of 31% in the subsequent year.
While 31% seems wildly optimistic from our current perspective, stocks do go up a few months before the economy turns up. We have already seen some signs of this occurring as the stock market has gone up when the economic news has been bad, including days when new jobless figures were announced and the news broke about a huge fraud involving as much as $50 billion by a well-known Wall Street investor.
Your retirement money will have to last as long as you do. While Social Security and a federal annuity is about as safe a future income as you may be able to get, the money from your TSP can go quickly and many federal retirees will need the extra income that stocks are likely to provide over the safe and secure G fund.
© 2009 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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