Here is an interesting comment on investing your TSP money: “I have been watching the TSP fund returns for some time. My money in the S fund has grown a lot more than the C fund and the G fund has barely kept pace with inflation. I am moving the majority of my TSP investment into the S fund to get a higher return.”
One piece of advice: Be very careful of this approach to investing your retirement money.
The S fund has certainly done better than the C fund and the G fund in the past year. If you look at the month-to-month returns, the S fund seems way ahead of the C fund and the G fund is even further behind.
But here is our first piece of advice: Look at a cumulative number and the differences may surprise you.
While it looks like the S fund has clobbered the other two in recent months, looking at a one year period tells a different story-at least for the C fund. As of November 30, the S fund is up 15.62% for the past 12 months. The C fund is up 12.83% for the past 12 months. Not to make light of a difference of 3% because a small percentage difference can certainly add up over time, but the differential over a one year period is not as great as one might expect from just glancing at month-to-month returns.
Looking at the G fund can certainly be an eye-opening experience. Even comparing the funds over a one year period, the G fund is up just over 4% for the past 12 months while the S fund is up almost 16%. That obviously is a huge differential that cannot be overlooked.
And it actually gets worse. If you look at the rate of return for all of 2003, the G fund had a return of about 4%. The S fund, on the other hand, hit almost 43%. So, over a two year period, your dollar invested in the G fund isn’t worth much more than it was when you put it into the G fund while the S fund dollar you put in two years ago is worth much more money now.
And, in looking at the C fund, the picture is also very favorable to the S fund. In 2003, the C fund had a positive return of just under 29%. While this is an excellent return, most of us would rather have the 43% from the S fund.
Here’s the problem though. If we could see reliably into the future and had known what these results would be in January 2003, we could all have had a lot more money by ditching all TSP funds and stuffing them into the S fund.
Take a look at a longer time period. In 2002, the S fund lost 18%. The G fund gained 5%. The C fund lost even more than the S fund-it went down 22%.
The S fund has only been available to TSP investors for a relatively short time. No question, its performance has been very good to TSP investors.
But the recent past is not a prologue to the future. Small company stocks often do very well at the beginning of a business cycle. They are smaller; their profits are lower and it doesn’t take as much to see a big percentage increase as it does for a bigger company.
We are much further along in the business cycle. Small stocks have generally done better for investors than large stocks during this cycle. But here’s the catch.
The companies in the C fund are larger companies. The top 25 stocks in the index tracked by the C fund are near 20 year lows in terms of market value.
If this sounds like gibberish, put it this way: It is likely that the larger companies in the C fund will do better in the near future than the small companies in the S fund. There are no guarantees and any reader that puts his entire investment into the S fund chasing higher returns may still beat everyone else.
But it does mean that the odds will not be in your favor. Investors are more likely to see higher returns from larger companies in this phase of the business cycle.
And what about the G fund? Is this a good time to get out of this fund completely and take advantage of the higher returns from the stock funds?
Before you move your money this way, take a look at the returns of the C fund from 2000-2003. The C fund was down about 9% in 2000; it went down another 12% in 2001; and it went down another 22% in 2002. During that time, the G fund went up steadily each year. TSP investors who planned on retiring in that time, and had put their money into stocks in the 1990’s to take advantage of the long bull market, kept seeing their money drop and their retirement move further into the future.
Do you think it didn’t happen to some federal employees? Read A Nightmare Scenario for One Former Fed. to see an example of how chasing higher returns can lead to financial disaster.
So what does this mean for TSP investors? Here is our advice. Don’t try to chase the highest returns from the past year. You may end up putting your money where it would have done you the most good last year but hurting your overall investments. Determine how you want your portfolio to be distributed between stocks and bonds and stick to that distribution. It won’t help to watch the daily returns; you are investing for your long-term retirement. A diversified portfolio is likely to do better for most of us in the long run.
On the other hand, there are programs that will help you time the market. Most of us can’t do that because there are too many variables and the future is unknown to us. We occasionally hear from readers who claim to have successfully timed the market and made a lot of money.
That is great news. But with my retirement money, I don’t want to gamble that much.