Riding the Stock Market Roller Coaster In Your TSP

The stock market has been volatile as new market highs are followed by dramatic drops in stock prices. Should you yield to your inner conscience and sell your TSP stock funds while you can still get out? Invest your money wisely and enjoy the ride.

Perhaps you missed the news about your TSP while you were working hard or on leave yesterday. Here is the quick and dirty summary of yesterday’s stock market impact on the TSP funds if you have not yet seen the carnage on your computer screen:

S Fund: Down 47 cents

I Fund: Down 51 cents

C Fund: Down 39 Cents

In fact, stock prices have been down quite often recently. But yesterday was a big day. The Standard & Poor’s 500-stock index went down 2.3%. The Dow Jones Industrial average was also down 2.3%. And, while investors won’t like to read the figure, the Dow average has already fallen 2.7% this week, including two daily drops of more than 200 points.

As you can see from our TSP charts on the FedSmith home page, the TSP stock funds are still up for the year despite the price drops this week as well as the big drop back in February (See "Is This What They Mean by Stock Market Volatility?")

Having worked as a federal employee and as a federal contractor (and then writing for the federal community for FedSmith without any kind of official status) for more than three decades, I will go out on a limb and accept the inevitable disparaging hate mail and make the following observation: While investors do not generally like volatility in the stock market, federal employees as a group are very uncomfortable with financial risk. They like lots of security. They react quickly to changes in the stock market. Many federal employees do not understand financial markets and some will blow rapid changes in the market out of proportion. The result is that they will make emotional decisions with their TSP funds based on short term events. Unfortunately, when they do this, their overall financial results will take a beating.

The stock market now seems to be confused. When that happens, investors can expect extreme reactions in the market. It seems hard to believe that stocks were hitting record highs a few days earlier.

In effect, there is a risk reduction change going on in the market. Investors are not sure what impact will result from tightening lending standards. The tightening of standards will affect the housing market but it will also impact the broader market. There may be a slowdown in corporate takeovers, a slowdown of companies buying back their own stock and there is also likely to be a slowing of business expansion.

There is also good economic news as the economy is now growing at an annual rate of 3.4% and stocks are more fairly priced compared to the cost of bonds. Also, lower rates on Treasury bonds will mean lower mortgage rates. That will help the American housing market. But, when uncertainty looms large in the minds of investors, the bad news will overwhelm the good and stock prices will drop. As we have seen, they can drop very fast.

As pointed out in previous articles this year, many investors react to bad news and sell their TSP stock funds after reading a headline or noticing a big drop in the prices of their TSP funds for the previous day. Chasing the market will often result in lowering your overall return as you sell your stock funds at lower prices based on an immediate emotional reaction.

You cannot control the markets. Your best bet is to diversify your TSP holdings (or invest in a lifecycle fund) and rebalance your portfolio on a regular basis (not based on an immediate reaction to stocks zooming up or down). (See TSP Gives Investors Good Returns: Is This Bull on Its Last Legs?)

Last February, many TSP investors sold billions in TSP stock funds at market lows–just before the stock prices headed back up. This market is going to be volatile and will probably continue to be that way for much of this year. In short, take a deep breath. Go back to work or continue on your summer vacation. If you have a balanced TSP portfolio, history is on your side and your investments will continue to go up over time.

Or, alternatively, you can yield to your inner conscience by resorting to panic, selling all of your TSP stock funds and put all the money into the G fund, and hope that the market continues to fall fast so that you can tell your colleagues you were smarter than they were.

The investment path you take is your decision to make. In the long run, investors that make considered decisions over time and do not react to short term decisions have historically done much better than others. But, perhaps, your short term instincts will be better than most and will serve you well. Or, perhaps, as some investors always say during volatile financial markets, the situation is different this time and events will lead to a market meltdown and financial catastrophe.

Unless you are under the defined benefit plan of the old Civil Service Retirement System (CSRS), your retirement future is entirely in your own hands. Invest your money wisely and enjoy the ride.




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