If you haven’t noticed, your TSP stock funds are down.
You will see that the C fund is down over 4% for the past month or so. The S fund isn’t much better (down 3.66%) and the I fund isn’t so hot either (down 3.85%). (Check out the links on the left hand side of the page for more information.)
Simply put, most of your gains for the past couple of months have been wiped out. If you have $100,000 or so in your TSP fund and it is all invested in stock funds, your total is down about $4000.
Most people look at figures like these and ask themselves several questions. Why is this happening? Should I dump my stock fund? Will I still be able to retire?
Here are a couple of guesses as to why the stock market has dropped recently.
First, terrorism has hit the new again both in Europe and in the Middle East. The global terrorist threat seems more real than it did several weeks ago. This makes investors nervous. If people can be killed in Spain just before an election, it can happen here again. People are going to pay less for stocks when they get nervous. They want the highest return for their money and fighting terrorism is going to cost money and will require political will. We don’t know what the outcome will be and stocks have gone down.
Second, while corporate earnings are up, the stock market has already priced in many of these gains. Investors expected corporate earnings to go up as the economy has rebounded. Stock prices often anticipate future events (or try to anticipate them). Earnings are up. We expected earnings to go up and because of that stocks have been up for a couple of years. But can they keep going up?
As to the question about whether you should dump your stocks now, you will have to make that decision. But be careful. Investors who react to short-term events usually lose money. If you are a long-term investor, you shouldn’t panic or get exuberant every time events occur that impact the stock market. Doing so will drive you crazy and you are likely to destroy your investment returns.
As you will see from some of the articles in the links on this page, financial investors don’t usually tell people to sell all of the bond funds because the stock market is about to rebound. At the same time, they don’t advise selling stocks when they are down and putting all of their money into bond funds.
The stock market is likely to bounce back. It will go up and down as it has for decades. Your TSP money is your retirement fund and many readers won’t be using it for retirement for some time–perhaps not for decades. Instead, you should decide how to allocate your money between the different TSP funds to balance your risk.
Put the recent stock market decline in perspective. The S fund was up almost 43% in 2003. The I fund was up almost 38% in 2003. The C fund was up about 28% in 2003.
There is a good chance the stock market will rebound to produce at least a moderate positive return in 2004. If you dump your stock funds, you will miss out on those positive returns. Of course, the stock market may also continue going down and you may look back and wish you had dumped the stocks back in January and put all of your money into the G fund.
We can’t predict the future. But based on decades of history, those investors that keep a balanced perspective, don’t panic, and diversify their investments between different stock funds and bond funds are likely to come out better in the long run.