The stock market has been giving investors nervous indigestion in recent days and it may not end anytime soon. Headlines are screaming about new records being set by the Dow Jones Industrial Average throughout the month of February. Then the headlines point out that the same average has dropped more than 400 points in one day–after having been down earlier in the same day by over 500 points–and that the drop is the biggest since the terrorist attacks on America on 9/11.
Federal employees reacted, or perhaps overreacted, by moving millions of dollars from stock funds into the supersafe G fund and the TSP F fund (a bond fund) just after the market took a dramatic dive.
Despite all the hoopla and the wild swings, how did your investments do in February?
After the dust settled, the damage is not all that bad.
Here are the monthly results for your TSP funds in February. After looking at this chart closely, you may want to put away your stomach acid medicine, take a deep breath, and take the time to check your TSP balance. It may make you feel better. Despite the dramatic ups and downs of the market, the changes for February are not bad–and actually some welcome good news for F fund bond investors who have not fared all that well in the past year or so.
One of the biggest mistakes many investors make–perhaps all investors make–is reacting too quickly to short-term market trends.
If you saw the dramatic news in the past week about the stock market dropping, and then placed an order to sell your shares of the C, S or I funds, you may have lost more money than you had to. When the market opened the day after the dramatic drop, it quickly fell another 200+ points. Why? Because investors in stocks around the world were panicked. The placed a sell order after seeing the market news and the market kept going down the next day. But, within a few hours, the market stabilized and actually went up some the day following the well-publicized drop.
So, if you sold stocks fast and quick during or after the big drop, you may have cost yourself a few extra bucks. Don’t beat yourself up though if this is your situation. You are one of a very large number of investors that did exactly the same thing.
A lesson that many TSP investors may have absorbed this week may also help you sleep better in the future. Diversification can make your investments less volatile.
Check out these results from the L funds for the month of February.
As you can see, there is less volatility in the lifecycle funds than in the individual TSP funds. The reason is simple: The money in these funds is spread between all of the TSP funds. The investment in the bond funds kept the overall price for each L fund more stable as the bond funds went up while the TSP stock funds went down.
As expected, the more aggressive L2040 fund went down more than the more conservative funds. The L2040 fund has a greater investment in stock funds because of the longer time horizon for people who are planning on retiring about 2040. The probably greater returns in stocks, and the wider swings in stock prices, will be balanced out over a 30 year period. But, if you are going to retire in the next several years (or would really like to retire in that time), you probably don’t want the stress of watching your retirement future dependent on what happens to the price of stocks in China or the swings in the currency value of the Japanese yen.
On a personal note, thanks to the readers who sent a note thanking me for last month’s article warning about the need to diversify your investments because of the possiblity of the stock market falling. One reader wanted to know how I knew the market would fall.
I hate to admit this but I did not know what the market would do in February anymore than I can tell you what it will do in March. The article I wrote about the TSP was just an evaluation of trends that sometimes lead to the stock market going down in the short-term. As it turned out, the warning to exercise caution proved to be correct by the end of the month but did not look as good earlier in the month as the market continued to go up. To any readers who decided to diversify their investments early in the month and saved some money as a result of their personal decision to invest cautiously, congratulations on having more money than you would have had with more aggressive investing.
The real lesson of the recent volatility is this: No one can predict market trends and trying to do so is probably not a good use of your time and energy. Diversify your investments and be prepared for seeing your TSP balance go up and down depending on the market.
One other important lesson: A market correction is frequently defined as a drop of more than 10% in a stock index. The recent volatility was a drop of about 3%. Just because the market went down 3% in one day does not mean it will now go up. A drop of another 5-8% would not be a major surprise after so many months of increasing stock values in an economy that has been very favorable to investors.
Enjoy the ride of the market. I hope your investments have been profitable so that you can enjoy a well-deserved retirement in the future.