Are you trying to time the market by investing your TSP funds? In other words, do you try to put your money into funds that you think will grow in the near future or take them out of funds that you think will be dropping?
Market timing is a logical thing for investors to do. It seems natural to invest your money into funds you think will give you a greater return.
Here’s the conundrum. I suspect that most TSP investors would say they do not try to time the market. And, in the strictest sense of the word, they probably do not do that.
But human nature is fairly predictable–at least in some circumstances. Federal employees are no better or worse than other American investors. Money is an emotional topic. While many federal employees would clearly state they are not motivated in large part by money, all of us like the safety and security that money represents.
So, when it comes to your retirement money, you can anticipate that you and your colleagues in your workplace will react emotionally with how you invest your money if the circumstances are right.
Here is a classic example.
The Thrift Savings Plan is getting a lot of attention in the press. Your TSP program may be the model for a new version of our Social Security System that will allow all Americans to invest some of their money for their future retirement without giving it to the government in the form of a Social Security tax. Billions of retirement dollars will be impacted by the final action taken by Congress and the President on this issue.
There are two conflicting philosophies about this. In a very simplified form here they are. One view, often associated with Democrats, is that the government should collect the money and then give it back to those who need it the most. People can’t be trusted to invest their money or, if they invest it, they may do a lousy job and they won’t have enough for retirement. It is a form of benign Socialism with a different name with Uncle Sam taking the risk and responsibility instead of each individual.
On the other side, the view often associated with Republicans, is that each individual should be able to invest his or her own money and benefit from those efforts. The theory is that a person who works hard should be able to keep more of it and put it away for a successful retirement and the government should not be allowed to take that money away. If a person doesn’t invest the money and then doesn’t have enough to retire, a modified form of the Social Security System will presumably be available to provide a modest level of support.
So how safe is the Thrift Savings Plan?
The Wall Street Journal took a look at this issue recently. It found that most TSP participants put their money into TSP funds of their choosing and then left them alone.
But that isn’t true of all participants. Some tried to time the market. Or, more accurately, they panicked and sold their stock funds and put the money into safer bond funds.
The result? Those who panicked lost a lot of their money. They bought stock funds at a high price; watched the funds fall during a bear market; and then locked in their losses by selling their stock funds just before they started going back up as the bear market receded.
Here are some of the statistics found by the Journal. In December 1999, TSP participants put $427 million into the C fund. At the same time, they withdrew $427 million from their bond funds. In January 2000, another $728 million was moved into TSP stock funds.
This was just about the peak of the bull market. In other words, American stock prices were at their highest level in history. Several months later, the bear market hit and hit hard. Stock prices started dropping. They continued to drop throughout much of 2000.
When TSP participants got their December 2000 statements, many realized for the first time what was happening to the value of their stock investments.
TSP participants started selling their stock funds with abandon. From June through October 2002, when stocks were at their lowest levels, TSP participants pulled $3.8 billion out of the C fund and put their money into bond funds.
The timing of these investors was as bad as it could be. They sold their stock funds at the lowest levels just before the C fund jumped up 29% in 2003 (the I fund went up 38% and the S fund went up 43% in 2003).
And it wasn’t just these investors. TSP participants kept putting more of their regular pay allocations into stocks throughout the bull market. The highest percentage was 66% going into stocks in March of 2000 at the absolute peak of the stock market.
As stock prices fell, TSP participants put less and less money into stocks on a regular basis with 47% going into stocks by the end of 2002.
None of this means that the TSP is an inferior retirement plan or that investing in the TSP is a bad idea. It is a retirement plan that is far superior to what is available to most Americans.
But, unfortunately, TSP investors have proven that, as investors, the TSP program doesn’t prevent panicking and throwing away retirement money based on short-term gains and losses.
Those investors that didn’t panic and invest wisely will have a financially secure retirement. Those that don’t invest will not be able to retire. Those that invest and panic with the ups and downs of the market will not have as much money during their retirement years.
No one makes a person invest or sell stocks. But be smart and don’t follow their lead. You have the power to determine how successful your retirement will be.
