Stock market analysts have been predicting for some time that larger company stocks would do well in our current economic environment. Despite these predictions, small company stocks have generally done better than larger ones. Also, foreign company stocks have fared better than domestic company stocks. In other words, stock market analysts, even the ones who are very good, cannot accurately predict short term market trends.
The TSP results from April show a different result than we have experienced in recent months. This trend may be telling investors something. The C fund finished ahead of all other TSP funds for the month with a return of 4.43%. It is also up 15.23% for the past twelve months.
That does not mean that the other funds did poorly though. The I fund had a return of 3.76% for the month. Moreover, it still has a better return than any other fund over the past 12-months with a return to investors of 18.99%.
Here are the results for the five primary TSP funds:
|12 Month Return||5.03%||7.37%||15.23%||11.67%||18.99%|
With none of the TSP funds having a negative return for the month, the lifecycle funds also did well last month.
The 2040 fund had the best monthly return with a gain of 3.28%. It also has the best monthly return for the past twelve months with a return of 14.27%. The 2030 fund was not far behind with a monthly return of 2.95% and a 12-month return of 13.11%.
Here is a summary of the returns for each of the lifecycle TSP funds:
|12 Month Return||7.30%||9.63%||12.04%||13.11%||14.27%|
Federal employees work in a political environment and it is sometimes difficult to separate politics from economics. With an unpopular war in Iraq, the long knives out in the poisonous political atmosphere in Congress and railing against the Bush Administration by Congressional Democrats on a wide variety of issues as they try to gain power at the expense of the Republicans and win over voters for the next election, one could easily conclude that this is a terrible time for the economy and for stock market returns. Statements from candidates generate press headlines and can put a scare into any rational person who reads the news.
But the reality, as TSP investors probably already know, is different than the press headlines generated by politicians who have their own agendas and their own political interests.
Company earnings are generally good and stock market prices compared to these earnings are reasonable. Some companies are actually buying back their own stock and the mergers and acquisitions activitiy in our economy is strong. Tax revenues for the federal government are up, as is federal spending.
And, while the economy is slowing, it is still growing. TSP stock investors have been the beneficiaries of this economic climate with all three of the TSP primary stock funds (C, S and I funds) having substantial gains over the past 12 months.
So now that the last twelve months are history, and TSP investors have added quite a bit of money to their retirement fund, what does the future hold?
When an investor steps back and takes a broad look at the American and global economic climate, and ignores the political sniping and carping that is all around us, this has been an excellent time to be heavily invested in stocks. In fact, it is one of the best times in history for investors.
There have been occasional unnerving one-day market routs for stocks (remember the 3.5% drop in one day way back in February 2007?). Here is something to consider: We have not had a 10% correction in the stock market for four years.
If you are not a student of stock market returns, and most of us are not, that may not sound like a big deal. But, if you want to protect your retirement income for future years, don’t ignore this statistic. This is the second longest period in history that we have not had a major correction in the market for this extended time.
And, while I noted above that our economy is still growing, it is not growing as fast. Our economic growth is expected to stay below 3% for 2007. This means that the earnings growth of companies is likely to fall below 10% after 20 quarters in a row of double-digit year-over-year gains for the companies that are in the TSP’s C fund. And, while politics and economics are different, political decisions will have an impact on our future economy. Tax cuts can spur economic growth; tax hikes can stifle growth; fighting a war is very expensive; and creating new government programs can have a positive or negative ripple effect in ways that may be hard to predict.
If you have been a steady investor in the S and I funds for the past few years, take a close look at your investment portfolios. You may find that you have a large percentage of your retirement funds in the I and S funds. Small companies have nearly doubled the return on the stocks of large companies. The same things have happened in the global economy.
This should be a warning sign for TSP investors who need to take a close look at how your money is distributed among the TSP funds. The good times for stock market investors may continue for awhile. But history shows that the positive returns can disappear in one day and a major correction can be precipitated by an event that initially seems unrelated to the stock market.
In short, take a hard look at how your money is invested in the TSP.
There is an old saying used to apply to investors that have a great deal of value. "On Wall Street, the bulls make money and the bears make money, but pigs get slaughtered."
If there is a major correction, larger company stocks are likely to fare better than small company stocks. Investors that are diversified will fare much better than those that are trying to hit a home run and eek out more money in the next few weeks or months while hoping that a major correction will not wipe out all of your gains for the past few months.
The good news in all of this: It is your money and you have the ability to make your own decisions. If you have a theory that the next few months will bring huge returns in the S and I funds, and you decide to put most of your TSP investments into these funds, you could make a lot of money and be well on the way to a retirement filled with luxury cruises and expensive vacation homes in desirable locations. Or, your retirement investments could also get slaughtered if there is a major correction, and you could end up working another few years to make up for the losses suffered in a few bad days in the market.