When is the best time to invest more of your money into the stock funds available through the Thrift Savings Plan?
Some might say that the best time is when TSP investors are pulling out their money and embracing the safety and security of the G and F funds. Human nature being what it is, there is some logic in investing by acting in a way that is contrary to what your colleagues are doing with their retirement funds.
For the first three months of 2008, TSP participants headed for the exits as the stock market dropped. TSP participants transferred about $9 billion dollars from the TSP stock funds into the G and F funds. (See “Follow the Crowd With Your Investments–and Plan on Working Until You Die“)
Whether moving money out of these funds into the bond funds is a good idea or not depends on when the money was actually moved and whether the money is still in the G fund. Depending on who you ask, predicting when the market is going to turn up or down is either tricky (for optimists) or a foolish game played by delusional individuals (the pessimistic view).
But, since that $9 billion or so has left the harried activity of the stock funds, how did the TSP stock funds do in April? They all went up. In fact, every TSP fund went up with the exception of the F fund which dropped 0.16% (but it is still up 2.10% for the year-to-date). The F fund was the fund of choice for about $2 billion of those dollars that were transferred from the stock funds during the first three months of this year. Those that transferred money from the stock funds in January are probably still ahead of the game as this fund had a 7.12% return for the past twelve months–the best return of any other fund during that time.
Still, those that added money to the C fund saw their investment go up 4.94% in April while the S fund went up 5.30% and the I fund advanced 5.55%. That still leaves the C fund down 5.01% so far in 2008; the S fund down 4.70% and the I fund down 3.92% as of April 30.
Here is a quick summary of the results for April:
|12 Month Return||4.37%||7.12%||-4.61%||-5.70%||-0.88%|
Here are the results for the Lifecycle Funds:
|12 Month Return||3.21%||2.13%||0.06%||-0.94%||-1.78|
Several readers have recently asked about “dollar-cost averaging” with regard to investing in TSP funds and whether this is a reasonable philosophy for investing in the TSP.
Dollar-cost averaging is something that is already practiced by many, probably most, TSP investors. When you have money deducted from your paycheck, it goes into your TSP funds of choice. It doesn’t make any difference if the market is up or down, your money is automatically invested after it is taken out of your check.
The result is that you are not trying to time the market–you are just investing a set amount at regular intervals. In effect, it spreads your cost over a number of months or years instead of putting in one large amount of money at once.
As a practical matter, most people in the TSP are using dollar-cost averaging because you do not have a large lump sum of money to invest all at once anyway unless you are switching money from one fund to another. In other words, there is no real choice to be made because you don’t have the money until you get your paycheck.
As if often the case, there are dueling experts who argue for or against the idea of dollar-cost averaging. Some argue the idea is nonsense (while acknowledging that is what most of us do anyway out of necessity) while others advocate it is a good way to smooth out the ups and downs of the stock market.
For most of us the most logical way to invest is to decide what mix of stock and bond funds we want to have and put money into these funds each pay period. (See “How Should You Diversify Your TSP Portfolio?“) And, at least once a year, check out your percentage in stocks and bonds and re-balance your funds to reflect the changes that have occurred in the market. (See “It’s a Good Time of Year to Tend Your Garden”)
And, for those who think that keeping up with all of this is too confusing or too much of a bother (which apparently includes a large number of TSP participants), just put your money into the appropriate lifecycle fund and the TSP will do the balancing act for you on a regular basis.
April was a good month for TSP investors. The first day of May also started out with a bang. Enjoy the good feeling of having a little more money in your retirement fund balance.