TSP Investors Frowning From May Results

Red ink dominates the return rates for TSP funds in May. Here’s why.

Some months are good for investors–other months most investors would rather forget.

May was one of those months that most TSP investors would probably rather forget. When looking at the monthly returns across the board, there is a lot of red ink. The only exception was the G fund which went up 0.44% in May. Here are the "quick and dirty"return results:

Fund C S I F G
12 Month Return 8.68% 17.73% 28.92% (0.38%) 4.60%
May Return (2.87%) (4.36%) (3.87%) (0.09%) 0.44%

As usual, the news is not all bad. Looking for the bright spot amidst the red ink, the 12 month returns for most of the funds are all still showing healthy returns. The exception is the F fund as bonds have taken a beating in the past several months because of rising interest rates.

Because both stocks and bonds (in the F fund) were down in May, the L funds did not fare much better.

L2040 (2.87%)
L2030 (2.45%)
L2020 (2.06%)
L2010 (1.31%)
L Income (0.33%)

No doubt, many TSP investors will be wondering why their stock investments went down last month.

The answer is most likely because of the fear of inflation taking hold in our economy. Many are concerned that inflation will continue to grow and, as a result, the Federal Reserve may continue to try and slow the economy with continuing increases in the interest rate.

Some readers are probably wondering why an increase in the interest rates by the Federal Reserve would have such a strong impact. The answer is that the increasing cost of money slows economic growth and creates less demand for goods and services. In effect, raising the interest rates may help to curb inflationary pressure by cutting back on economic expansion (and company profits).

Investors in the F fund may be particularly frustrated. Some readers may be wondering why an increase in interest rates would have a negative impact on the F fund. On the surface, it seems like higher interest rates should push the F fund returns up–not down.

The answer is that while new bonds will pay higher interest to investors, existing bonds are less valuable. The existing bonds pay less so they are not as valuable as newer bonds which pay more as interest rates rise.

Astute TSP investors will notice that the TSP stock returns for June 1st went up on the first day of the new month. The economy is in a state of flux and as investors try to decide what the future holds, there is likely to be fluctuation. As the latest economic figures create the possibility of slower growth in the economy, and lower inflation, it may not be necessary for interest rates to rise so stocks went up.

There are some who will tell you what (they think) the future of the stock market will be in coming days or weeks. The reality is that most people do not really know; all anyone can do is make a reasonable guess. For most TSP investors, the key to successful long-term investing for retirement is to keep track of your investment portfolio and periodically rebalance the percentage of your money allocated to each fund. If you constantly try to keep up with the latest changes in the market, you are likely to lose more money than those investors who keep plodding along by adding new funds each pay period with an eye toward their long-term retirement goals.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47