Freedom in your TSP: Will You Get Rich Now?

With online access to TSP accounts, readers can trade shares quickly and easily. Is market timing a good thing?

With recent changes to the Thrift Savings Plan program, investors have more choices and more options. While realizing that initial problems with the TSP site have made going online to access your TSP account frustrating or even impossible at times, these problems are apparently getting resolved.

As more people start to successfully use this online feature of the TSP, there are several considerations for investors and for agencies.

The TSP system has been very successful. The returns have been as good or better than most private sector 401(k) plans. In fact, a financial writer for Newsweek magazine wrote last year that the TSP system is a “model” retirement program with features that should be emulated by other retirement programs.

The new online access to your TSP account gives investors more flexibility. That sounds like a good thing and for many people it will certainly be a good thing. For some investors, it will create problems.

Here’s why. Investors are not good at timing the market. If you think stocks are going to go up, that is a good time to cash out of your bond funds (think of the F fund) and into stocks (such as the C fund or the S fund). Logically, if you can determine when bond funds are going to do badly and stocks are going to go up, you can make a lot of money by trading online. For example, if you knew in April or May that the F fund return for your TSP account was going to do much worse that your S fund account, you could have made quite a bit of money by selling your bond fund and putting all of your money into the S fund. (Note that the guidance given by the TSP on its web site says that they have no responsibility for the financial results you achieve as a result of your trade.)

The F fund actually lost money in June (-.30%) and July (-3.41%). The S fund made money in those months (2.20% in June and 4.60% in July). Depending on how much money you have and your timing in trading your F fund for new S fund shares, you could have made thousands of dollars.

It sounds simple. The concept is simple. And, while the opportunity to do this quickly with your TSP funds is new, investors try to implement this simple concept all the time. The one big question is “Does it work?”

The answer is also simple. It doesn’t work. A recent study showed that mutual fund investors are not good at timing the market. In fact, trying to time the market leads to buying shares at high prices and selling shares at low prices. Since you are playing (or rather “investing”) your future retirement, the issue will be important to you.

A recent article in the Wall Street Journal illustrates what happens to most of us. In a recent study by Dalbar Inc., researchers found that mutual fund investors held their stock fund shares for less than 30 months between 1984 and 2002. They earned an average 2.6% per year gain. On the other hand, had they left their money in an index fund for the Standard & Poor’s 500-stock index (think of the C fund which tracks this index), they would have averaged an annual return of 12.2%.

Previous studies have had similar results.

This study should give most of us pause. While it does not show the precise returns for any one investor, it illustrates the dangers of trying to time the market. Investors tend to put more money into funds doing well and take money out of funds that are not performing well. This human instinct can get us into trouble. Many investors, for example, got sick of looking at their investment in the C fund continue to go down. Many of them took money out of the C fund and put their funds into the F fund at what now appears to have been the low point of the bear market.

In effect, they sold their shares in the C fund at a low price and put the money into the F fund (or even into the G fund which is very safe) shortly before stock prices started to go up and the bond fund shares started to decline. Do that very often and you can plan on working for a long time.

Since all of us presumably want to invest money for a secure retirement, a more cautious approach is to determine what percentage of money should be in stocks (in the C, S and I funds for TSP investors) and what percentage should be in bonds (the G and F funds). Periodically adjusting your investment to reflect this percentage and investing in these funds on a regular basis is likely to give most readers a better long term return than trying to decide what a particular fund will do in the next few weeks.

But, for those who want to take a shot at rapidly increasing your retirement portfolio and think you can time the market, go for it. Let us know how you fare and we wish you the best of luck.

The next question, of course, is does your agency care how much time you spend during the workday using your agency computer for timing your investments?

Feel free to post your comments for other readers to see in the box below this article.

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. Follow Ralph on Twitter: @RalphSmith47