The stock market hit its highest mark in over two years yesterday.
Investors in the TSP stock funds will certainly be happy about this. The S fund is continuing its torrid pace with a gain of about 4.7% in the past month or so. The C fund is also doing very well as it is up about 3.23% since early January.
One reader asked recently how he noticed the market often goes down again after a big run (like the one we had yesterday) but was unhappy when the gains did not always stay in his account. Like most of us, he wanted to know what to do in order to keep the gains and eliminate the fluctuation in stock prices.
The short answer: Invest in the G fund to avoid price swings in the stock market. It doesn’t fluctuate much and you may sleep much better at night. Losing your health may not be worth the extra money. The choice is yours.
The difference is that the more conservative investment doesn’t go up (or down) over 4% in one month. The price volatility is the price an investor pays for participating in the stock market. For example, if you look at TSP chart for all of 2003, you will see that the G fund looks like a line going across the page because there is very little volatility in the price. The chart for the stock funds looks like a yo-yo across the page. If you follow the returns on a daily basis and are suffering excess stomach acid each time the market drops, you may not want to put much of your retirement fund into the stock market.
On the other hand, volatility can pay off. The S fund was up almost 43% for 2003. The G fund was up just over 4% in the same year. In real terms, this means that if you have invested $50,000 in the S fund, your investment would be up more than $21000 for the year. The G fund, on the other hand, would show a difference of about $2000. (These are very rough figures. Your investment would fluctuate daily and most people are putting more money in or taking it out of a fund during the year so the actual result would be different. There is no doubt though that the S fund investor would be much richer than the G fund investor at the end of the year. See your financial advisor for the exact figures.)
In other words, for those investors willing to put up with the price volatility, you can make more money and potentially have a lot more in your retirement years. Over a career of 25 – 40 years, the difference in the amount of money you have available for retirement will be huge. The investor who puts all of his money into the G fund may not be able to retire at all because the rate of return will be unlikely to provide enough money to live on.
But each investor has to determine how much volatility he or she is willing to endure. For example, just one year earlier, the G fund investor saw a return of 5% while the S fund investor had a negative return of just over 18%. In dollar terms, this means the G fund investor made $2500 in that year while the S fund investor lost over $9000.
As you can see, for the two year period the S fund investor is still way ahead of the more conservative investor. Over time, the difference is likely to be even larger than the example because of the compounding effect. In plain English, if you make an extra $20,000 in one year, the following year your return is calculated on $70,000 instead of just $50,000 (the original $50,000 investment plus the extra $20,000 in profit).
The advantage of the TSP funds (and the FERS retirement system) to you as a future retiree is that you control your own future. You don’t have to depend on the government to provide a good retirement. You don’t have to stay with the government for your entire career as the money you invest is yours to keep regardless of where you decide to work.
The disadvantage of the TSP funds (over the older CSRS retirement system) is that you have to invest your own money and realize that your ability to retire will depend on the actions you take throughout the career in investing your own money.
Consider it the price of freedom.