The Thrift Savings Plan (TSP) is a long-term investment plan to fund your future retirement from federal employment.
To make it easier to invest without worrying about the ups and downs of the stock market, TSP participants can select a lifecycle plan that automatically diversifies TSP investments across the several TSP funds. Those that will be retiring later can select a more aggressive fund–which translates into more money going into stock funds and less into bond funds.
Those close to or in retirement can select more conservative funds such as the L Income fund.
In theory at least, a TSP participant puts money into the lifecycle funds, or spreads out investments among the TSP funds themselves, and keeps investing throughout a federal career.
The reality is that many TSP participants watch the stock market returns and then react to these returns by buying or trading their funds as they try to time the market. As pointed out in an earlier article, this led to many federal employees buying into stock funds close to a market peak in the 1990’s and selling their TSP stock funds near the bottom of the market. In other words, some folks lost a great deal of money. They bought stock funds when prices were high and, when the market went down again, sold their fund shares at a loss just as the next bull market was starting.
The markets have been volatile for some time now and, in November, December and January, the TSP stock funds have gone down. The worst month was January in which the C fund went down almost 6% and the S and I funds went down even more. All of the lifecycle funds lost money in January.
That market downdraft begs the question: How did TSP investors react this time around? The TSP monitors activity and follows monthly trends. Here are the results as noted by the TSP’s Chief Investment Officer, Tracey Ray: "Net interfund transfer activity soared in January. Participants liquidated $1.8 billion from the C Fund, $1.2 billion from the S Fund, $2.3 billion from the I Fund and $399 million from the L Funds. The money went to the G Fund ($4.4 billion) and the F Fund ($1.3 billion)."
In fact, over $1.4 billion was traded in the F fund in January, the second highest amount of record for this fund.
Also in January, the number of participants with balances in the 2010, 2020 and 2040 funds declined for the first time since the funds were launched.
Perhaps bailing out of the stock funds in January is a smart move. On the other hand, after 2-3 months of a declining market, it may also be that the fund transfers are an indicator that the market has bottomed and that these investors sold their stock funds to lock in their losses only to watch the shares that they sold start going up in value.
In short, there are nervous tremors among some TSP investors. The overall percentage of FERS employees in the G fund jumped from 32% to 35% in January and the number of C fund participants dropped from 33% to 31% in the month. The percentage of CSRS employee money in the G fund went from 39% to 42% and the percentage in the C fund dropped from 32% to 30%. So, while records were being set for interfund transfer activity, most of the TSP investment money has not moved that much. Whether those that fled to the safety of the bond funds turns out to have been a smart move or a costly financial move will not be known right away. Based on historical precedence, and the predilection of our human nature to preserve our assets and panic when these assets are disappearing, those that panic and sell stocks during a down market often lose out in the long run.
As of the close of business on February 27, all of the TSP stock funds were up so far in February with two trading days still left in the month.