Market Timing and Your TSP

Imposing restrictions on frequent trades in the TSP has generated numerous comments and frequent expressions of outrage from readers. Some readers give examples of how they have made considerable amounts of money with their frequent trading. Should everyone be trying to time the market with their future retirement funds?

A recent article posted on the FedSmith site regarding the imposition of trading limits in the Thrift Savings Plan generated a large number of comments from readers. A number of the comments were from readers who indicate they have made a great deal of money by frequently trading their TSP funds. It is not surprising that those most affected by the new rule are often the ones who are the most opposed to the proposal.

In its recent study (See, Recommendation on Limiting Frequent Trades in the TSP,) the TSP board did not consider whether the frequent traders were making or losing money. Rather, they looked at the overall costs incurred by about 3000 frequent traders that are spread among the 3.8 million or so investors in the TSP.

Any TSP participant reading these numerous comments may get the impression that the best way to make money through the stock market, including the Thrift Savings Plan, is by trading stocks or funds frequently. As one reader commented on one of our TSP articles, the idea is simple: Buy stocks when they are down and sell them when they are up.

That is a simple concept to understand. It is also hard to implement.

In fact, it is so hard to implement, that very few professional fund managers can successfully execute this simple idea. Many investors who own stocks actually sell at low periods and buy when prices are higher. As Wall Street Journal columnist Johnathan Clements recently wrote: “We take the market’s decline and extrapolate it into the future. We fret feverishly over our losses, even though the Dow industrials are still up 79% since 2002’s market low. Our confidence ebbs away, and we grow increasingly risk-averse.” Clements’ research also shows that investors who do not try to time the market do better over time. “Even as investors grow more restless, the big money continues to be made by those who stay the course.”

But that is one columnist writing for one paper. Unfortunately, for the would-be multi-millionaires among TSP participants, his views are typical of many professional stock market analysts. Jason Zweig writes for Money Magazine and recently wrote an article in the December 2007 issue entitled “How to Lose $9 Trillion in a Bull Market.” His point: bad market timing costs investors a great deal of money and the $9 trillion was the loss to investors over a 25 year period when they tried to buy stocks at a low ebb and sell them at a high price. Zweig concluded that the annual return of a leading stock market (NASDAQ) gained an average of 9.6% between 1973 and 2002. Despite this good average return, the amount that NASDAQ investors actually earned was 4.3% because many put money into stocks and then sold them at the wrong time.

These are not just recent conclusions. In 1998, Mark Hulbert, editor of the Hulbert Financial Digest took a look at financial newsletters that told stock traders when to buy and sell stocks in order to maximize their returns. He found a total of five market timing newsletters that did not do significant harm to investors because “they can at least immunize investors, relatively speaking, from more risk than the performance they forfeit in the process.” But, out of these five best newsletters, only one successfully beat the overall market return in an 18-year period.

But some readers contend they can, and have, been able to beat the overall market by engaging in frequent trading of their TSP shares. For example, a reader who identifies himself as a Postal Clerk, wrote:

“Up $35k since late July, 24% for 2007, 32% for 11/23/2006 to 11/23/2007. I have become QUITE (sic) since the market has been so up & down begining (sic) 7/23/2007.”

A management analyst with the VA has started giving lessons on trading in the TSP so that his fellow fellow federal colleagues can emulate his success:

“I have personally seen a 20% return these last 12 months based on our collective effort, recognizing patterns in market behavior, and using a reliable investment algorithm. (4) I’ve given several training sessions to other VHA employees in an ongoing effort to share our techniques & tactics. (5) Feds who will not control their own TSP$ are doomed to 5% – 8% returns rather than the 15 – 20% we are seeing.”

An NCO with the Air Force says he is getting rich with his day trading techniques as well (The all caps were in the original):


Another reader who identifies himself as a soldier has a similar comment:

Any worthwhile investment advisor will tell you that the “buy and hold” for the long run strategy is the certain way to guarantee minimum return on your investment. It is not hard to identify trends in the market up or down, (market timing). By buying the dips and selling the peaks many of us who actively manage our TSP accounts have been able to increase our returns anywhere from 10% to as much as 50% above the normal returns provided by any of the TSP funds if you just put your money there and left it!

How is it possible that TSP participants who, perhaps, have little experience compared to professional investment traders can make money by engaging in frequent trading? It is not possible to know for sure but, human nature being what it is, there are a couple of possible explanations.

Here is one example of how some Thrift Savings Plan participants have been using the TSP funds:

  • On October 19, $371 million was transferred into the I Fund
  • On October 24, three business days later, $391 million was transferred out of the I Fund
  • 2,018 participants who redeemed on 10/24 had purchased on 10/19
  • The dollar amount attributable to those traders was $295 million
  • 323 of these participants traded $250,000 or more

Using the figures for these dates, the I fund was being sold at $25.13 on October 19, 2007. On October 24th, the I fund closed at $25.32–a gain of 19 cents per share. Those who bought and sold in large amounts of those dates made a considerable amount of money and they are entitled to brag to their colleagues that they made a considerable amount of money. But also consider that on October 31, the closing price of the I fund was $26.31. Any TSP participant who just left money in the fund would have made more money than someone who sold on the 24th.

As the NCO shouted out in all caps: “PEOPLE WHO KNOW HOW TO TRADE AND MANAGE OUR TSP ACCOUNTS MADE ALMOST $100 MILLION DOLLARS IN FIVE DAYS FROM OCTOBER 19 TO OCTOBER 24….” But any person reading this should note: Anyone who left money in the fund and did not trade would have made even more money than those that sold their I fund on the 24th.

As the Thrift Savings Plan has pointed out in its recent report, a small number of people are driving up the transactions costs for everyone in the TSP by trading their funds frequently. Some readers claim they have made a considerable amount of money by frequent trading.

The advantage of the TSP system is that you can make your own decisions. I have been involved in the stock market for about 40 years. By far, the best returns I have achieved in this effort are from finding inexpensive funds sold by a reliable company and holding that fund for a number of years. The various stock market advice newsletters and systems always have an intriguing message and are always able to give examples of how much money people have made using their system. The reality is that a good statistician can take a period of time to show how much you would have made within that time frame. Most people lose money by trying to time the market–even in a system in which your trade is executed immediately rather than waiting another 24 hours to see the price of the fund being sold.

The overall judgment of researchers is that people who try to time the market do not do well in the long run. I do not have any money in the TSP fund as I have not been a federal employee for some time. Objective observers of the financial management industry refer to the TSP fund as a “platinum” system that is much better than most private sector plans. As readers have pointed out, the TSP is not designed to be an account for frequent trading of funds. That philosophy is certainly underlying the proposal by the TSP to restrict frequent trading.

There are some very bright people who buy and sell stocks for a living. Some of them sell newsletters. Some of these people have become very rich by selling advice or selling their stocks and other investments. As noted above, people like this who have been trying to time the market for a living for many years are not able to successfully move in and out of the market on a regular basis. Keep that in mind if you are tempted by your colleagues to try and time the market based on their advice–especially if their experience may be limited to investing in the Thrift Savings Plan during the recent bull market in which all of the funds have been going up for some time.

While a more restrictive policy will not benefit some participants, it is likely to produce better returns for the majority of TSP participants who do not trade on a regular basis. That approach is paternalistic, as one reader commented. But keeping the TSP true to its original intent, and not changing the system into a vehicle that allows or encourages frequent trading in its accounts, is likely to save many federal employees a great deal of their retirement money in the long run.

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