Investors in the small company fund of the Thrift Savings Plan are certainly smiling again this month. The fund returned 4.12% for the month of August and is up 25.39% for the past 12 months. The S fund is by far the best investment TSP investors have had recently as the American economy appears to be headed toward recovery. This is the sixth straight month the S fund has had a positive return.
The international stock fund (the I fund) also did well in August gaining 2.39%. It is up 9% for the past twelve months.
The common stock fund, which tracks the S&P 500 stock index fund, also did well in August with a positive return of 1.94%. It is up 11.95% for the past twelve months.
Investors in the TSP bond funds also had a positive return with the F fund returning 0.73% (up 4.41% for the past twelve months) and the G fund up 0.40% (up 4.05% for the past twelve months).
The returns this month show in a nutshell why TSP investors need to have money invested in the stock funds as well as bond funds. While you want your retirement money to be safe so it will be there when you need it, you can actually lose money over time by keeping all of your money in “safe” investments. The G fund is a very safe investment and TSP investors are fortunate to have this option for some of their retirement funds. But an annual return of about 4% may cost you money as the rate of inflation degrades your investment (i.e., if inflation is 5% and you receive a 4% return, you are losing money).
On the other hand, stocks generally are a better investment over time as they usually stay ahead of inflation. The large disadvantage of stocks is that they are volatile, especially in shorter time periods, and if you have to withdraw money when the stock market is down, you will never recover those funds.
Some readers have asked why the stock market is up and we are not yet certain an economic recovery is here. Looking into our crystal ball to try and answer this question, our best guess is that the market tends to look forward to what investors think will happen in the near future (a year or so) rather than waiting for economic data to be sitting on the TV screen in front on you.
Stocks tend to go up in short bursts and are unpredictable. If you wait to invest money in the market after the good news has arrived, you are too late. Similarly, if you withdraw your money when the market is down (anticipating more bad news ahead), you may very well miss out on a major move up.
That unfortunate sequence of events happened (again) to a lot of investors in the past year. Unable or unwilling to continue to watch the stock market drop in a bear market. a number of investors sold shares in their stock fund and invested in bonds. Just as they did that, stocks started going up again and bonds have remained relatively stable.
But if you were one of the many investors who keeps a diversified portfolio with a good percentage of your retirement funds in the stock market, enjoy reading the results of the last few months.