The Stock Market Went Down--How Come Your TSP Is Up?
By Ralph Smith
Wednesday, January 4, 2006
Those TSP investors that included international stocks in their TSP portfolio are much happier today than those that have not done so.
The I fund returned 4.64% in December and is up 13.63% for the year--outpacing all other TSP funds.
The small company fund (the S fund) came in second. It returned 0.37% for the month and was up 10.45% for the year. 10.45% is a very good return, especially in a year when large companies did not do that well, but most readers would have preferred the 13.63% of the I fund.
The C fund did a little better than the super-safe G fund but not by much. It gained 0.07% in December and was up 4.96% for the year.
The F fund did not do as well with rising interest rates impacting its rate of return in 2005. It was up 0.95% for the month and 2.40% for the year.
And, of course, the G fund slugged along as it always does. It returned 0.45% for the month and 4.49% during the past year--not bad considering there is virtually no risk with the G fund so investors are relatively certain their only losses will be to inflation eroding some of their gains.
Here are the December returns for the lifecycle funds (which did not exist for most of 2005 so there are no yearly returns):
L2040: 3.32%
L2030: 1.22%
L2020: 1.11%
L2010: 0.93%
LIncome: 0.59%
You may have read that the stock market was flat in 2005. If that is the case, why did your TSP stock funds go up?
The Dow Jones Industrial Average finished 2005 down 0.6%. How come the C fund did not go down as well?
It all depends on how one counts the performance of the stock market. The C fund is based on an index of stocks (the Standard & Poors 500). In 2005, the S&P 500 index went up 4.9%. Some astute readers would then ask (and have asked in e-mail), "If the S&P 500 went up 4.9%, why was the C fund up 4.96%?"
The answer is "dividends." Companies pay dividends to stock owners. If you are an investor in a TSP stock fund, the dividends do not go directly to you, they go to the fund owner. That fund owner than distributes dividends to the investors who own the shares of the TSP fund.
In other words, your return in the C fund last year was based on a combination of the market value of the stocks going up with an additional amount earned through dividends.
Small companies and international stocks may also pay dividends and these are also returned to investors who own shares in these TSP funds.
There are also administrative expenses that are automatically deducted from the returns of your TSP funds. In 2004, according to the TSP, the average cost to an investor was 60 cents for each $1000 that you have invested.
We occasionally read complaints from readers who think there should not be administrative costs or think the administrative costs are excessive. Some of these readers also complain that private sector funds charge less than the TSP.
For those of you who may think you are paying too much, you are living in a fantasy world or perhaps have subscribed to a conspiracy theory about your TSP investments (See Conspiracy Theory and the TSP). The reality is that you are paying much less than most private sector investors in administrative costs.
For example, Vanguard has a reputation for having one of the lowest expense ratios for mutual funds. The company pioneered the concept of stock indexing (which is what the TSP stock funds consist of). However, if you have your money in a Vanguard stock index fund similar to the C fund, you will pay approximately $18 a year on an investment of $10,000. For a TSP fund, you will pay approximately $6.00 for the same investment. (Based on 2004 figures; the cost may be slightly different for 2005.)
And these figures for a private sector mutual fund are low. According to USA Today, the average managed mutual fund charges approximately 1.5% per year. That means on an average mutual fund which is managed by a company (and not an index fund), an investor would pay approximately $150 on an investment of $10,000--and you only pay about $6.00 per year.
Any TSP investor made money last year if you put your money into one or more of the funds and left it in for the duration. It wasn't the best year for stock returns but certainly not the worst one either. Hopefully, some of our readers are now one small step toward having a more secure retirement. (To see how much better or worse your return could have been compared to past years, check out the TSP corner.)
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