If you are one of those people who doesn’t pay much attention to the money in your Thrift Savings Plan, here is a hot tip.
You probably have less money now than you did at the beginning of the month. In fact, you probably have less money today than you did yesterday at this time.
The stock market is going through one of its periodic pullbacks. It isn’t unusual or even unexpected. But, even knowing that, watching your TSP balance dwindle is never much fun. And, with many federal employees planning on retiring on the next few years, many of these future retirees will be depending on the balance in their TSP funds to help them survive the next 20-40 years.
Since May 1st, the I, S and C funds have all gone down. The I fund has taken the biggest hit. It is down almost 6% since the first of the month. To put it in more stark terms, if you had $100,000 in the I fund at the beginning of the month, you now have about $94,000.
The S fund is down about 5%. The C fund has fared better than the other two as it is only down about 3%.
How come? In part, the funds that have just gone down the most have also gone up the most in recent months and years.
For example, the I fund was up almost 38% in 2003. It went up another 20% in 2004 and almost 14% in 2005. Since the first trading day of 2006, it was up over 11% as of May 1st.
With that perspective, a drop of about 6% doesn’t seem too bad.
Stock investors have to accept some volatility. Stocks usually give a better return than bonds but there are some big bumps in the road.
As usual. there is a reason for the decline. In this case, it is probably fear of inflation and interest rates. Central banks around the world may be getting ready to raise interest rates more than had been expected. Also, the American consumer price index has risen faster than expected and there are fears that inflation will be more difficult to control than expected.
Stock markets in countries with smaller or less developed financial systems often feel the economic pain first. That has happened as the stock market closed in India for a time yesterday as the stock market there went down rapidly. But, when markets in developing countries start to fall, there is likely to be a ripple effect and that occurred in European countries as well.
The result: Your I fund went down about 47 cents in one day. The S fund went down 17 cents and the C fund was down about 5 cents.
What should you do?
No one really knows if the stock market decline will continue or if stocks will bounce back quickly. In all likelihood, there will continue to be considerable fluctuation in stocks until the the fears about interest rates are confirmed or go away. Some analysts are indicating that a fall of another 5% or so in stock prices would not be a big surprise as stocks sometimes drop as much as 10% during a stock market "correction" as investors decide to take some of their profits and put them into other investments. (See "How Should You Diversify Your Stock Market Portfolio?")
For most TSP investors, the best advice may be to ensure that your investments are diversified into the options available to you in the TSP and not worry too much. Panic selling is not uncommon among any group of investors and it usually leads to selling at a low point and locking in your losses. (See "Timing the Market With Your TSP Funds?")
On the other hand, if you check and find out that the I fund is now taking up a much larger percentage of your portfolio than you think is prudent, it may be a good time to spread out some of those gains from recent years and put the money into less volatile funds.
As an example, the bond funds have not been keeping up with stock funds in recent years. TSP investors putting their money in these funds have considerably less than those that invested in stocks in the past several years. But, on the bright side, while stocks fell this month, the G fund is actually up 4 cents since May 1st and the F fund (which has lost money the past two months) is up a nickel so far this month.
It’s your retirement money. Enjoy the ride of ups and downs–and don’t panic.