Volatility Can Be Good: TSP Funds Generally Up in August

The stock market has been volatile. The leading stock market average has been up or down triple digits on a daily basis for the past month. The final result? Most TSP investors will be satisfied with the results if not the process.

The stock market has been having spasms throughout the month of August.

Concerns about interest rates, subprime loans, speculation about the actions of the Federal Reserve, concern about the housing market have all combined to lead to the market falling about 280 points–only to have the market come roaring back the next day with a gain of 247 points.

Many TSP investors are conservative investors and have an understandable concern about seeing their TSP investments go south when they are seriously contemplating retirement.

But, with all of the major ups and downs, what happened to the TSP funds in August when the door closed on the month? Every fund, with the exception of the I fund, went up for the month of August.

The I fund dropped 0.71% for the month but it still has a year-to-date game of 7.56% and a 12 month gain of 18.79%. To save you the trouble of studying the charts, that is the biggest gain of any of the TSP funds for comparable time periods.

Here are the results for your primary TSP funds for August:

TSP Returns for August 2007
Fund G F C S I
August Return 0.33% 1.23% 1.54% 1.38% (0.71%)
12-Month Return 4.86% 5.32% 15.21% 16.38% 18.79%

In short, despite the volatility and uncertainty of the stock market over the past several months, investors are still doing well overall.

Here are the results from the lifecycle funds from the TSP:

TSP Lifecycle Fund Returns for August 2007
Fund LIncome L2010 L2020 L2030 L2040
August Return 0.61% 0.73% 0.80% 0.88% 0.90%
12-Month Return 7.28% 9.99% 12.34% 13.65% 14.82%

For what it is worth, notice that the most conservative Lifecycle fund, the L Income fund, has a 12-month return of 7.28% and an August return of 0.61%. That beats the more conservative G fund by more than 3% over a 12-month period. If that differential were to continue, and it is likely to continue that way over a longer period of time, a retiree who is planning on having his or her money last throughout a lifetime may want to consider the relative risk of the G fund versus the L Income fund.

There is risk in stocks. There is also risk in being too conservative. While putting all or most of your money in the G fund may sound like a very safe move, be sure to weigh the risk of losing out from the traditionally larger increase you may get from your investments from having invested in stocks.

Overall, TSP investors can perhaps sleep better knowing that, for the past month and for the past few years, their TSP fund investments have continued to grow. In fact, depending on timing and the amounts, the biggest losers may have been those investors that cashed out their stock funds as the market started to become more volatile.

But there is reason for any investor to be cautious. If you are thinking of cashing in your more conservative funds and putting a larger part of your investments into the C, S or I fund, consider this: September is usually the worst month for stock market returns. The Dow Jones average is down 1.2% for September over the past 50 years according to the Wall Street Journal. This may be because investors have come to expect market losses in September or it may be because many mutual funds end their fiscal year in October and sell stocks to take tax losses before they close their books on their fiscal year.

Unfortunately, none of us has a crystal ball to tell us what will happen in September 2007 but a wise investor will probably diversify and hope the overall market return is favorable when looking at your entire investment portfolio.

For now though, you can count your extra money from your TSP returns for the past month and the past year.

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