Investing in the stock market can be an activity that induces ulcers for readers who nervously follow their investments on a regular basis. When your retirement funds are at risk, it can be nerve wracking to watch your nest egg take a quick dive based on economic or political events that sometimes seem mysterious or at least beyond our control.
2006 was no exception. In the short term, it seems like the past year was a good one. And it was – if you forget how you may have felt in the late spring.
At that time, the stock market was down. Most major domestic market indices were in the red and, as a result, your retirement nest egg may have been lower in June than it was at the end of December 2005.
But after the Federal Reserve called a pause to interest rate hikes, investors apparently got more optimistic. The S&P 500 index (on which your TSP C fund is based) was up 13.6% in 2006. In 2005, in contrast, it was only up 3%. And the Dow Jones index which is often followed by investors was down slightly in 2005 but up over 16% for 2006.
Keep in mind that the new record highs you are reading about for the stock market are based on the Dow Jones average – not the broader S&P 500 index. Since the C fund is based on the broader market index, your C fund may not have been chugging along the high road you might have expected from a quick glance at the news headlines.
But having said that, your TSP investments for 2006 did quite well overall.
A big surprise for some investors has been the performance of small stocks and the performance of foreign stocks. A number of analysts were telling investors that small stocks were about to run out of steam and the place to be for 2006 was larger company stocks based in America. And, the the large gains in foreign stocks prior to 2006, American stocks were set to advance faster than foreign investments. The rationale behind the advice seemed sound. But, for TSP investors counting their dollars and perhaps fantasizing about their future retirement years, the dollars mounted up faster for those willing to shoulder the risk of the international stock fund. S fund investors did not fare poorly either, finishing up just a little behind the C fund for the year.
Here are the results for the basic TSP funds for 2006.
|December 2006 Return||0.34%||(0.54%)||1.42%||0.11%||3.11%|
Let Your Computer Do The Thinking For You
This is also the first full year for L fund investors and readers who put their faith in these funds have not been disappointed. No doubt the automatic diversity combined with the success of these funds to date will find the Lifecycle funds becoming more popular than ever as many readers do not want to make the decisions necessary to have a diversified portfolio. Here are the results for the L funds in 2006.
|December 2006 Return||1.31%||1.18%||1.17%||0.90%||0.63%|
And G fund investors who like the security of this very safe fund may want to take note: the income investors for the L fund did much better in 2006 by having some of their money in other securities. That approximate difference of 2.5% may not sound like much but over time the difference can be significant.
So what does the future hold?
The usual caveat: No one really knows. TSP investors should always strive for a diversified portfolio to take into account the possibility of an unexpected dive in stock prices – or perhaps an unexpected dive in some stock prices while other funds continue to go up.
For 2007, it is likely that corporate earnings will drive stocks along with the level of interest rates. The economy and productivity increases are not likely to start heading up dramatically in the coming year. On the other hand, the job market is good and the housing market seems to be recovering. Inflation, at least so far, also seems to be fairly mild. While it may seem irrelevant to some, the third year of a presidential term has historically been very good for stocks as well.
The stock market, despite the ups and downs in 2006, has been relatively calm. World events may bring a change in this relative calm and investor uncertainty could also lead to big swings in stock prices in the coming year. The falling value of the dollar could lead to more foreign money being put into American stocks in 2007 and the price/earning multiple of many stocks is much lower than when the S&P 500 index hit record highs a few years ago.
In short, there is plenty of reason for optimism for investors in 2007. A recent survey cited by the Wall Street Journal shows that about 80% of money managers think American stocks will go higher in 2007 and about one-third think the gains will be 10% or more for the year.
And, for those readers who think the housing market will go bust, terrorist attacks may derail the markets and our economy, or that the growth in debt by Americans will put a significant damper on stock prices, you can always park your money in the G fund where you are likely to get a return of between 4 and 5% without any risk – other than the risk that you may miss out completely on any stock market gains that may occur this year.
For now, you can enjoy your TSP monetary gains that you can see in your accounts from 2006 as you continue to increase your retirement nest egg.