Investors who lose money in the stock market usually have to work to make sure they lose their investment. Some TSP investors are hard at work and may find it is possible to lose money in the stock market despite the overall upward trend of the market.
If you look at a historical chart for a major stock index such as the Dow Jones Industrial Average or the Standard & Poors 500 index (on which the C fund is based), you will see a definite trend. The stock market dips–often as a result of a specific event. The market dipped significantly when terrorists attacked the World Trade Center and the Pentagon. The market really took a dive in 1987. In one day, the market dropped by about 22%. It was the worst stock market crash in American history. The market also went down in the previous few decades because of a variety of political and military events that made headlines. Whether the politics of the moment were focused on clash with the Soviet Union about missiles in Cuba, the events leading up to World War II or the Great Depression earlier in the 20th century, there were always reasons to worry that led to downturns in the stock market.
Last week, the market went down about 3%. It shook up a number of TSP investors who moved hundreds of millions of dollars into the safety of the G fund immediately after the big drop.
Rebalancing your portfolio is a good idea. Panic selling is a fool’s game. Those who suddenly decided to put a substantial portion of their money into the safety of government securities after a big drop in the price of stocks locked in the sale of their TSP stock funds at a price that will almost certainly be lower than those same funds will be selling for in the future.
Many investors need to get a perspective of their investment. Take a look at this chart of how the S&P 500 stock index has performed over time. This chart shows how stocks have performed for the past 46 years and it shows the dips and the gains. The dips are clearly there. More importantly, the dips are dwarfed by the overwhelming gains.
If you were a smart investor, you would have reacted to the panic of the Cuban missle crisis, the panic surrounding the resignation of President NIxon, the bad news during the 1970’s on the progress of the Vietnam war, and the multiple concerns about raging inflation and the economic crisis under President Carter. But a smart investor reacting to these events in real time did not sell stocks. The big dips caused by the momentous news of the moment was a chance to buy stocks at a much lower price than those same stocks sold for a year or two later.
Investors need to have perspective. Watching 24 hour news shows on cable television will scare the hell out of any rational person. If you watched the headlines from last week and then went out and sold your C, S and I funds as a result of a big dip in prices for that day or that week, you ensured that you sold your shares at a lower price than those shares sold for the week before and lower than they will sell for in the future.
Here are some general guidelines that may put your investments into perspective and give TSP investors some piece of mind.
First, diversify your investments. The G and F funds wiill give some balance to your portfolio. They are not likely to fluctuate widely as the stock market will do. Don’t put your money into these funds while in a panic selling mode. Balance your portfolio once a year or so and spread your investments out among all of the funds in a rational, thoughtful way–not when you are putting yourself under pressure to do something instantly to save your retirement future.
Second, recognize that the stock market will go down as well as up. During a bear market, the stock market will be on a downward trend for a couple of years. Many TSP investors, along with many or most private sector individual investors, wait as long as they can stand it during a down time in the market and, when they think it will never go up again, they sell their stocks. This market psychology is often an indicator that the market is about to go up again and that the suckers have now sold their stocks to smart investors at the lowest prices of a current market trend.
How can this happen? Federal employees are often better educated and have better jobs with better pay than most Americans. Does this really happen? Consider this: When TSP participants got their December 2000 statements, many realized for the first time what was happening to the value of their stock investments. TSP participants started selling their stock funds with abandon. From June through October 2002, when stocks were at their lowest levels, TSP particpants pulled $3.8 billion out of the C fund and put their money into bond funds. They sold their stock funds at the lowest levels just before the C fund jumped up 29% in 2003 (the I fund went up 38% and the S fund went up 43% in 2003).
Here is my prediction: during the next bear market, the same thing will happen again. Federal employees will lose hundreds of millions of dollars by selling their stocks after seeing the value of their shares dwindle for two or three years. The smart investors will follow this trend and start buying as much as they can just as the rest of the herd is selling out their shares to put their money into the G and F funds.
Third, recognize that the stock market is often rational but it can and will go down for no apparent reason. Why did the stock market go down so much last week? Perhaps because the talking heads on TV and in the paper said it would go down. Enough people believed it would go down so that when there was an indication of problems in China, the American market fell. Our economy has been very strong. Interest rates are low. Stock market prices have been up. The unemployment rate is at a level that was unimaginable a few years ago. Earnings are up in companies across the board. Still, the stock market suddenly dropped and caught many investors by surprise.
Fourth, keep enough money in the G fund and in cash so that you feel secure. This is related to the advice to diversify your investments. Some readers will ignore this advice and put all of their investment into one or more funds that will fluctuate widely. That is okay and they may make a lot of money doing that. Ignore them. Most readers will not feel comfortable doing that. Insecurity will fuel panic selling during a downturn in stock prices. You need to invest in a way that makes you feel comfortable and secure–not to impress your colleagues in your car pool or at the lunch table. Pay attention to your investments outside the TSP as well. Keep enough cash on hand or in secure investments that you can pay your expenses for a year or so if you have to do so during an emergency. That financial cushion will make most people feel secure enough so they will avoid panic selling and, instead, plan rationally for a future retirement.
Finally, remember that the overall trend of the stock market is up. You may not like the party in power at the moment. You may be panicked over world trends and events. You may be upset over something Congress is doing and you may want to rail and moan about how the world is treating you unfairly. If history is any guide, a smart investor will ignore these urges and remember that despite the serious problems of the world, stocks have gone up throughout our history. The losers are usually the ones who react too quickly to a short-term event.