Do Your Emotions Dictate Your Retirement Investments?

The stock market has hit new high levels. TSP stock funds are hitting new highs. Some investors are elated. For those TSP investors getting ready to retire, and who may have sold their stock funds when the market dropped back in February, their emotions may be moving in the opposite direction. Will they now sell the bond funds and move into stocks?

Perhaps you were working hard yesterday, or thinking about your vacation over the July 4th holiday, or looking forward to a weekend at the beach.

If so, you may not have noticed something: the stock market soared on July 12th.

The Dow industrials average went up 283.86 points yesterday. That is the biggest one-day gain since since October 2002. The blue-chip average is up 11% so far this year. In one day, it broke through new high levels. For the first time in history, this stock market index is approaching 14000.

A FedSmith reader recently asked if his money in the TSP’s C fund is based on this Dow Jones Industrial Average–the average you will frequently see cited in news reports. The answer is no. Your C fund is based on the Standard & Poor’s 500 index which is a broader universe of stocks. There is a link in that when the commonly cited industrial average goes up, the C fund tends to go up also. But the C fund is not based on the Dow average you will read about in the headlines.

But here is some more good news you may have missed while earning your government paycheck yesterday. The Standard & Poor’s 500-stock index also hit a record, jumping 1.91%, or 28.94 points, to 1547.70. That does directly relate to the value of your TSP C fund which also jumped up yesterday as a result.

The C fund closed at $17.29 on July 12th. That is a new high for the fund. It is now up more than 10% so far in 2007.

Some readers will see these figures and go into a deep funk. They will think about how much money they would have made if all of their investments were in the TSP stock funds instead of the G fund. Some of these investors will decide: "I have had enough. I am selling the G fund and putting my money into the C, S and I funds."

No doubt, these are some of the same investors who, when the stock market took a big one day drop way back in February of this year, quickly sold their stock funds and moved into the G fund. You could call this investment decision "a flight to safety." On February 27, the C fund dropped 55 cents in just one day. Selling the stock funds and moving money into the G fund was intended to preserve retirement funds and to try and avoid losing any more money.

At the end of February, the value of each share of the C fund stood at $15.62. Each share of the G fund was $11.80.

Now, the value of a share of the G fund is $12.01. In other words, your investment has gone up 21 cents per share since the end of February. If you quickly sold your C fund and moved funds into the G fund to feel safe and secure, you have a profit of 21 cents per share since making that decision. That isn’t bad; you did not lose any money and, after inflation, you still made a (very) small profit.

But, since the C fund has gone up $1.67 per share in the same time, your flight to safety may have cost you a few hundred or a few thousand dollars depending on your total investment.

And, from the end of February through July 12th, the I fund has gone up in value from $22.55 to $25.48 and the S fund has advanced up to $21.15 from $19.30.

In other words, investors who panicked and sold their stock funds late in February lost a considerable amount of money by not leaving their money invested in stocks.

But what about the future? Will stocks continue to go up? And how will TSP investors react to the recent stock market run?

No one can tell you that with any certainty. But what the recent stock market volatility does portray is that investors who put their money into stocks will probably make more money over the long term than investors who put their money into the G fund because they don’t like seeing their investment totals drop when the market goes down.

Here is another prediction: When the stock market goes down dramatically again (and it will have big drops again), TSP investors will sell their stock funds as soon as possible and move their money into the G fund. They will, in effect, lock in their losses just as they did back in February 2007. They did the same thing during the last bear market (when the stock market goes down). According to the Wall Street Journal, 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 locked in their losses. When the market started going back up (and it is still going up), they had less money in the C fund–if they had any at all in stock funds–and watched stock prices continue to go up while their investment languished in the G fund.

A cynic would say that when TSP investors start to sell their TSP stock funds is a good time to buy more in the C, S and I funds. And, when TSP investors start pouring money into the stock funds, it is time to sell.

Many FedSmith readers worry about their retirement investments. But, rather than spend time worrying about the future of the stock market, which is beyond your control despite the time spent worrying about it, try to diversify your investments. One way to do this is to put money into the lifecycle funds which more TSP investors are now doing. In this way, you benefit when the stock market goes up as it has done for the past several years. And, when the stock market drops dramatically, some of your money is in the bond funds so that you will not feel the full brunt of the rapidly sinking stocks.

That is a logical approach. But, for many people, this approach is hard. We like to try and maximize our investment opportunities and make as much money as we can. It is human nature to try and beat the stock market. Some readers will do this successfully. Others will decide to give in to their human nature and, despite their good intentions, will buy stocks at high prices and sell them at low prices as their emotions soar between elation and depression as they watch the stock market rise and fall.

How you invest for your retirement is up to you. Uncle Sam is not making any guarantees that your money in the TSP stock funds will continue to go up. You can decide to buy and sell based on your emotions of the moment. You can decide to have a balanced portfolio and periodically adjust the amount in each fund every few months or once a year. My guess is that those who try to time the market and make the most money possible will end up with less money than those that take advantage of the lifecycle funds or create a balanced portfolio. Pick an approach that lets you sleep well at night and then invest wisely and dream about what you will do when you turn in your government ID and go home to enjoy your retirement.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47