Will Your TSP Recover From Its Down Years?
By Ralph Smith
Tuesday, February 14, 2006
Diversification is usually a good investment strategy for any investor. We can lament our past investment mistakes. We still can't predict the future. Some federal employees are lamenting their return rate in the C fund. For the reasons outlined below, that is understandable and perhaps unfortunate. The best you can do now is to learn from your mistakes.
Any TSP investor who does not include the I and S funds in your portfolio should reconsider. These funds have had very good returns in the past three years and, if you did not have some of your investment portfolio in these funds, you missed out on the highest rates of return for TSP investors.
That is a positive note for those TSP investors who put at least some of their money into these funds.
But here is an observation that will dismay some investors in the TSP program.
Assume, in a hypothetical example, that you watched the stock market rise and keep in rising from 1988 to 1999. During those years, an investment in the C fund (which invests in the S&P 500 index) went up every year except one--in 1990 it went down just over 3%.
Ponder that for a minute: From 1988 to 1999, the C fund went up continuously. If a federal employee invested $2500 in 1988, added $1000 each year until 1999 and averaged a return of 20% a year, that investor will have more than $50,000 in a future retirement fund (not counting agency contributions). In effect, anyone who was savvy or fortunate enough to start investing in the TSP's C fund as soon as possible, and kept putting in the maximum amount allowed, would have a hefty six figure retirement sum accumulated after the first 11 years.
But what about those investors that saw what happened to their colleagues in those years and were not investing? Some of them watched the returns; they heard from the person down the hall about how much money he was making each year watching his C fund investment head steadily up. This happy investor with continuous double-digit returns was undoubtedly planning on retiring early, taking trips and moving to an exotic locale far away from the daily grind of his federal job.
Some federal employees couldn't take it anymore. After hearing about the incredible stock market returns for the past eleven years, they decided to abandon their fiscal conservatism and jump into the stock market, dumping their slow and steady G fund in the process.
Here are some statistics from the Wall Street Journal about actions that TSP investors were taking at that time. In December 1999, TSP participants put $427 million into the C fund. At the same time, they withdrew $427 million from their bond funds. In January 2000, another $728 million was moved into TSP stock funds.
In accordance with Murphy's law, the stock market tanked. The C fund went down 9% in 2000. It went down about 12% in 2001. And it didn't get any better. The C fund went down more than 22% in 2002.
The last three years have been favorable. The C fund was up more than 28% in 2003. It was up another 11% in 2004. And it went up about 5% in 2005.
So, in a hypothetical example, if you put all of your TSP investments into the C fund in 2000, after watching your colleagues making money rapidly for more than a decade, after your last six years of investing, you are just about even.
The reality is that the C fund for the past six years has been a dog for investors.
The stock market usually averages a return of about 10% a year. The stock market has climbed back the past several years; it is still below its high water mark in 2000.
In effect, the first decade of the 21st century has not been good for stock investors who have put their money into the C fund. By some yardsticks, this decade could be the worst for stock returns since the 1930's.
So how should you plan for the future?
Here are several steps you may want to take. First, plan on having your stock funds return less than 10% a year. If you assume an average return of 8% (or less) in your planning, you will be safer than if you anticipate a return of 30% or more per year as occasionally happened in the "go-go" decade of the long-ago 1990's. If you are wrong, and you do have a couple of years of double-digit returns, you can always go back and recalculate your retirement plans. But, if you overestimate, you are likely to have a problem making up the difference.
Second, diversify your investments. Consider putting some of your retirement funds in bonds as well as the I and S funds. The I and S funds have had good runs the past several years beating the C fund. That may not continue but you can't count them out. You could also invest in the appropriate lifecycle fund (the L fund) most appropriate for this point in your federal career.
Third, consider increasing your investment in the TSP. Set more aside than you have done in the past if at all possible. The higher the amount in your TSP, the greater your chances of having a larger number of dollars for your retirement future.
If you are in the CSRS, you will have a defined benefit annuity. The TSP may be extra spending money for you, depending on your lifestyle and spending habits. But, if you are in the FERS program, that TSP money will probably be critical to your financial future. Uncle Sam is not likely to bail you out.
This means you need to plan your future and make your investment decisions. No one can tell you what to do or how to do it.
Remember that your retirement future is entirely in your own hands. Some TSP investors will do well by investing as much as possible and retire early and live well as a result of making sound (or perhaps lucky) investment decisions. Others will never be able to retire comfortably.
In any case, you should review your investment portfolio on a regular basis and decide if you are investing as much as you can and with the diversity spead that makes you comfortable.
Enjoy your investment freedom!
© 2010 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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