The federal Thrift Savings Plan continues to grow and prosper and those who are investing in it continue to see their balances increase as they glide toward what they hope will be a smooth and joyful retirement.
The last several years have been a profitable and happy time for TSP investors. Here is a perspective you may have missed. The Dow Jones Industrial Average closed at 13676.32 on June 4th–a new record high. This average has gone up five of the last six days and is 9.7% higher in 2007.
The S&P 500 closed at 1539.18. This is the index on which the TSP’s C fund is based. This is the fourth consecutive record and this index is up 8.5% so far in 2007.
So, to make your day a little brighter, here are the results of your TSP funds for the month of May 2007.
And, for those who have put their retirement funds into the lifecycle funds, here are the results for these funds:
For a broader perspective, keep in mind that these latest figures are only for the past month and for the past twelve months. If you take a look back at the past several years, your return rates have been stellar.
Those investors who panicked when the stock market dropped a couple of percentage points in one day earlier this year, and promptly sold some of their more aggressive funds, made a big mistake. They sold their funds on the cheap and most put their money into the safer funds such as the G fund. So, while the C, S and I funds have been zooming up ever since, the "safe" money in the G fund has been languishing. In effect, these investors lost on two occasions. They sold their funds cheaply and the watched their money grow much slower than it would have if it had stayed in the more aggressive funds.
Articles in recent financial publications have made an obvious point that TSP investors should note. The logic goes something like this: A bull market that runs for a decade is a a once-in-a-generation event. Think of the roaring market of the 1920s; the run-up created by the economic prosperity of the "boring 1950s" and a third in the 1990s. Most bull markets have run their course in three or four years.
That means, from an historical perspective, that despite the recent stock-market highs, the current bull market should be nearing an end. Certainly, any prudent investor will want to be careful and diversify investments in several different TSP funds or other funds for money outside the TSP.
But the Wall Street Journal cited a contrary belief by some very optimistic investors. These professional economists and investors think that the global economic boom may keep shares going up. Economic booms in places like China and India, Japan and even Western Europe may fuel more economic growth. Even France, which has a socialist state, has recently voted in a more conservative government–in part probably because of high unemployment, restrictive labor laws, slow economic growth and very high tax rates in a country that is unintentionally sending some of its more entrepreneurial citizens to London to participate in the economic boom in Great Britain.
Stock prices have gone up more slowly than corporate profits. This means that the overall stock market is likely to be much less volatile than it was in 2000 when the market took a nose dive. The price/earning ratio of stocks is now about 18 times company earnings–way below the high 30’s during the peak of the tech-stock bubble of the 1990’s.
What does this mean? Perhaps your TSP stock investments will continue to go up and they may go up a lot. It also means that there is likely to be significant drops along the way and investors regroup and some take profits.
In short, the key to a retirement in which you are financially comfortable may mean that you have to take some risk–a concept that is anathema to readers such as the one who sent me a note several years ago complaining that the federal government should protect federal retirees from stock market fluctuations by guaranteeing that the value of a TSP account can never go down because a recent drop in stock prices was not "fair" to someone plannning to retire in the near future.
The reality is that the TSP does have such an option. The G fund does not go down. It also won’t have annual returns of 10%, 20% or 25% in a year. Over time, the person who puts all of his retirement funds into the G fund will be safe but is likely to be much poorer in retirement than one who puts faith in American and global capitalism and invests in stocks.
For now, celebrate your recent returns but don’t forget to rebalance your portfolio to account for the inevitible ups and downs.