Lessons for TSP Investors from a Volatile Market

The stock market has been volatile in 2007. Billions of dollars have been traded in the TSP during the year as some investors have decided to buy and sell different funds as the market ebbed and flowed. What lessons can this volatile market provide for investors?

Every so often, we receive comments from readers that read something like this:

"Investing in the TSP is not rocket science. I transfer the money from my stock funds into the G fund when the market is going to go lower and I transfer back into the stock fund when prices are headed up."

"Keeping it simple" is a pretty good motto in most things we do in life. And, no doubt, this philosophy sounds like investing for your retirement future is a simple matter. The obvious problem is this: How does one know when the market is going to go higher or lower? If we knew that, investing would be simple and most of us would be rich.

If some TSP investors are honest with themselves, they may have learned something this year. We are in a bull market that is getting close to an old age as these things go. For a variety of reasons, most of which are easy to discern after the market has reacted, the market has been more volatile. There are always worries and concerns that could impact the stock market and force prices down.

Some TSP investors, apparently following the logic of transferring money into the G fund when the market is about to go down, transferred millions of dollars from the TSP’s I, S and C funds into the more safe and secure G fund. It’s not hard to see why. The stock market has been fluctuating wildly with ups and downs of triple digits in the Dow Jones stock average.

But here is the actual result of all the turmoil. When the markets went down in February and in August, there was a buying opportunity. For TSP investors who were watching and saw the markets dive, the dip was a good time to transfer money into stock funds. Anyone who did that has made a great deal of money as the stock market is now at a new all-time high.

Who could have predicted the market would continue to go up after taking a steep dive earlier in the year? It is easy to understand why some TSP investors panicked and sold their TSP stock funds after their value dropped. Who wants to lose more money than they have already lost? As one reader said, "I slept better at night knowing my money was safely invested in the G fund."

The reality is that those who have been putting money into stock funds each pay period and periodically adjusting (pehaps once or twice a year) their allocation between stocks and bonds have done much better than those who saw the market head south and then sold their stock funds.

Here are a couple of suggestions for TSP investors.

First, never sell when there is panic in the stock market. When that happens, the value of stocks has already dropped. After the price of your TSP stock funds has dropped, selling your shares is likely to result in "buying high and selling low." This is not a good investment philosophy to follow if you want to have a secure financial future after you retire.

We have not seen comments from readers who said: "I made a mistake and sold my S, C and I funds back in mid-August when the market was going down. As a result, I lost a great deal of money because the value of these TSP funds went back up." The reality is that TSP investors traded $2.9 billion out of stock funds and into the more conservative G and F funds in August. Many of these investors have cost themselves money by not leaving their funds where they were because they panicked and acted on their emotions at a low point of the market. And, as an aside, investors who try to chase returns by frequent buying and selling may also be costing other investors money because of the trading costs incurred by those who use their TSP funds as a form of day trading in the stock market.

Second, there will always be volatility in the stock market. When you put money into stocks, you should be prepared to see their value fluctuate. Sometimes they will drop rapidly. At other times, they will go up just as fast. If you try to react to these fluctuations, you will lose sleep and perhaps develop health problems. Expect the volatility. Over time, the markets have always gone up. Once you sell your stock funds at a low price, you will probably not be able to buy those shares back at the same price you sold them. If you find you cannot sleep because you are worried about your retirement investments, consider investing in the lifecycle funds and see if that works for you.

Third, TSP investors who buy and hold will often come out ahead. TSP investors who have tried to time the market are taking a big risk. They have to correctly guess when the market is at a high point and they have to also guess correctly as to when the market is at a low and about to head back up. Guessing correctly is a crapshoot. Investors who put their money into the TSP stock funds and then let their money continue to work for them are ahead for the year.

The best news for TSP investors is this: You have the freedom to make your own decisions and invest as you see fit within the parameters of the TSP program. Moreover, your retirement plan has the lowest expenses and, therefore, a better return than the vast majority of private sector retirement plans. Enjoy the ride, take advantage of the benefits offered to you by the TSP, and don’t panic and invest based on your emotions of the moment. Chances are, you will have a better retirement than most Americans.


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