As 2007 closed, the stock market was continuing its volatile ways and the TSP stock funds posted a negative return for the second consecutive month. And 2007 was an active year for all of the funds as the market became increasingly volatile. Take a look at the TSP monthly returns for the past year and you will see how volatile it has been. The C fund went up 4.43% in April and jumped another 3.52% in May. It then went south 1.70% in June and dropped another 3.10% in July. The roller coaster ride continued: It went up for three straight months but took a sharp fall in November losing 5.65%. The final tally for the year for the C fund: Up 5.54%. It is still better than the very conservative G fund but finished below the F fund which is up 7.09% for the year.
But the C fund is not the most volatile. The international stock fund (or the I fund) is up 11.43% for the year–ahead of any of the other funds. That may surprise some readers who do not pay close attention to the overall activity of the stock market. With increasing globalization of the world’s economies, some financial analysts recommend having as much as 40% of your stock portfolio in international stocks. Their rationale is that the world is a big place, many economies are much smaller and growing faster than America’s is growing and the potential for further growth is substantial.
In any event, one smart move is to reduce risk in your retirement investments. Putting all of your money into one fund, even the very safe G fund, won’t reduce your risk–it can mean that you will run out of money before you die. 2007 was a volatile year. A mixture of all five of the TSP funds will reduce your risk and increase the chances of your investments not disappearing due to one bad time period after you retire.
The one certainty about your investments is that they will fluctuate. As noted in last month’s article about the stock market: “A correction in the stock market means that stock prices have fallen between 10% and 19.9%. A bear market means stock prices have fallen 20% or more. While the overall market trend may continue up, it is not uncommon for stocks to experience a correction–even for a short time. Since 1950, there have been 18 corrections to stock market prices during a bull market. There have been 10 instances of a bear market since 1950.”
Here are the returns for December and for 2007.
TSP Return Summary for Dec. 2007
|12 Month Return||4.87%||7.09%||5.54%||5.49%||11.43%|
And, for the growing number of investors who are in the lifecycle funds, here is a summary of how these funds did in the past month and year:
L Fund Summary for Dec. 2007
Investors who prefer to take an “invest and wait” attitude toward their TSP investments may want to pay close attention to the returns of the lifecycle funds. You will see that the income fund did better than the G fund in the past year. The other funds also provide diversification among the TSP funds and the TSP computer system rebalances your investments periodically without requiring any more decisions on your part. In effect, it provides the relative safety of diversification and also the potential for increased gains when the markets start going up.
Readers may also want to take a look at the annual returns of the TSP funds for the past several years. It would be hard not to make money in your TSP in any year since 2003. The only way a TSP investor could lose money in any of the TSP funds in the past three years is by trying to time the market to maximize a gain. In other words, if someone bought or sold a fund on the assumption the market is about to to go up or down, it is possible to “buy high and sell low” and to lose money. If you had money in any of the TSP funds since 2003 and left it there, you are a richer person than you were at the start of 2003.
That perspective may make those who are not happy with the December 2007 returns a little happier.
And one note of caution. When you take a look at the returns for the TSP funds over a multiple year basis, note also that the C fund went down for three straight years (2000 – 2002) after nine straight years of gains. In most years in which a presidential election is held, the stock market goes up. As noted in the Wall Straight Journal, since 1950, stocks have risen in the last seven months of the year in 13 of 14 presidential election years. The theory is that the politicians in power want voters to be in a good mood when they vote.
But basing your investment decisions on the election cycle may not be any more reliable than another indicator: that stocks rise or fall with the length of the fashion for women’s skirts.
It may be than 2008 is more like the markets in 2000. In that year, the dot.com bubble burst. The overwhelming impact of the stock plunge resisted any attempts to prop up the market. With the drop in housing prices, the subprime loan problems, and the politics of destruction rampant in our national government, no one can predict with any accuracy what next year will bring.
The safest bet for your TSP funds: diversify your portfolio and hope for the best. Investors that invest in stocks for the long haul generally do very well.
Happy New Year to all of our readers and best of luck with your TSP investments in 2008!