The stock market is on a roll. Prior to the implementation of the Thrift Savings Plan for federal employees, the action of the stock market was not a primary concern for most federal employees. But, with large numbers of federal employees thinking about their retirement, and the financial stability of that future riding, at least in part, on the size of their TSP investments, federal employees now pay more attention to the financial markets.
The TSP funds have all done very well. In fact, anyone calling the stock market returns for TSP investors "extraordinary" would have plenty of ammunition to back up the claim.
Consider this: The C fund made money for investors in 11 months during 2006 and again in January 2007. 2005 was not a bad year either. The C fund went up for seven out of the 12 months. Going back still further, 2004 was also a good year with the C fund going up for nine months in the year. 2003 was similar with nine months of that year seeing positive stock market gains for the C fund. TSP investors have to go back to 2002 to find a year in which the C fund had more negative returns than positive returns during the year.
And the news gets even better for some investors.
Despite the positive returns for the C fund, the S and I funds have done even better. TSP investors with money in these funds have had yearly gains as high as about 43% (2003 return for the S fund) and had to settle for a gain of of just over 10% for the S fund in 2005. With some investors having more than $100,000 in the TSP funds, these yearly increases add up fast.
Investors who have parked their money in the safe confines of the G fund have not lost money but they have not been keeping up with their more adventurous colleagues either. Each year since 2002 the G fund has returned under 5%. That is better than inflation but not by much.
If you are a TSP investor with money in any of the stock funds, are you worried yet?
The stock market is hitting new highs on a regular basis. With housing prices stuck in neutral or reverse, money in the stock market has been providing good returns and those who decided to cash out of real estate several years ago and put the money in stocks have probably told you all about their brilliant financial maneuvers.
Here are a few items that may give those investing in the TSP some reason for concern.
- The stock market hit a new high on January 14, 2000. It went 1688 trading days before hitting a new all-time high on October 3, 2006. Since that date, it has hit record closing highs about 28 more times.
- The Dow Jones average has gone 53 months without a 10 percent correction. This is the second time in history that has happened. The S&P 500 index has set new records for going without a correction of at least two percent.
- The S&P 500 index (the index used by the C fund) went up about 1.5% in January. That means that this index has been up for 14 of the last 15 months. If that gain continues for the month of February, it would be the first time since 1983 that it has had nine months of positive returns.
- The Federal Reserve raised interest rates for the 17th consecutive time back in June 2006. Since that time, the S&P 500 index has gained more than 14%. Previously, the average annual return for the year following the final rate hike has been 5%
So what does all this mean?
If nothing else, it means that TSP investors should be as cautious as any other stock market investors. Several years ago, I received an e-mail from a TSP investor who lost money when the C fund went down about 9% in one month and continued falling the next month. In fact, the C fund went down about 12% for the year. The reader was in a panic mode as he had apparently put most of his TSP investments into the C fund. His rationale was along these lines: "I am a federal employee and put my money in the TSP stock funds thinking this was a safe investment. I have lost a great deal of money recently. How can I retire if my investments keep going down? Isn’t it true that the government has an obligation to protect its employees by not allowing them to lose money in the TSP fund?"
Please do not fall into this line of thinking. You may work for Uncle Sam and you may work in an environment in which your job is much more secure than many in the private sector. TSP investors have advantages over private sector employees have with their 40l(k) retirement plans because the funds have lower expenses and the match for FERS employees is quite good. In fact, the TSP is sometimes referred to as the platinum standard of retirement plans. Having said that, putting your money in the stock market means that you are taking the risk.
The folks working at the TSP will undoubtedly do a good job of investing and keeping your investment safe. But, when the stock market goes down, your stock investments will go down as well. There is no magic formula and no guarantee that your investment will stay as high as it is today.
One observation that may offend some readers but, hopefully, will help others. In the past several weeks, I have received e-mail queries from readers asking several variations of the same question. The questions are along these lines: "I have been hesitant to put my TSP investments into the S and I funds because of the risk. It seems that these funds are making more money than the others. I am thinking of transferring some of my funds into these TSP funds because their return rate is so much better. How do you know the best time to transfer money into these funds?"
And, in a similar vein: "I do not see why you are telling readers to spread their money between different funds. This is not rocket science. Put your money into stock funds when the market is going up and then transfer into the G fund before it falls again. How hard can this be?"
FedSmith does not provide financial advice on how a reader should invest his or her retirement funds. I cannot predict how the stock market will perform tomorrow, next week or next year. If I could do this, I would be living a much more lavish lifestyle–probably directing my stock purchases from my stateroom on my large yacht anchored in St. Bart. So, when I receive e-mails asking for financial advice, I do not provide an answer because I am as likely to be wrong as the next person.
Having said that, when I receive e-mails such as these, my first inclination would be to take any money I have in the S and I funds and put them into the G fund as quickly as possible. The reason is not based on any ability to predict the future or the stock market or to know whether an irrational dictator with the capacity to deliver a large bomb on a neighboring country will decide that now is the perfect time to try and control the world. Rather, market psychology is fairly predictable. There are a large number of investors that will wait until the worst possible time to make a financial decision. When the market has been going down, they will wait and wait and then decide to sell–often just as the market is starting to turn around. Conversely, if the market has been going up and up, they will decide to move into the hot market segments at the highest point of those market segments. Federal employees are no better or worse than other investors. (See "Timing the Market With Your TSP Funds")
On the other hand, if you think that investing your retirement funds is fun and certainly isn’t rocket science, you are free to invest in any way you see fit. Put everything you have into your stock fund of choice and then take it out and put it all into the G fund just before the market goes down. How hard can that be?
Remember one thing: For most of us, the fun goes away and it doesn’t seem as easy when your investments drop more than ten percent.