Some readers may be surprised when they check out the Thrift Savings Plan (TSP) returns for May. The S fund is, far and away, the best performer among any of the funds. It had a positive return of 4.88% for May. The C fund was a distant second with a return of 1.27%.
This isn’t the first time that small company stocks have done well. When it appears that a sluggish market is recovering, small company stocks often perform better than their larger competitors. When the previous bear market ended in 2002, small company stocks had a great three years of returns for investors.
Here are some specifics for your consideration: in 2002, the S fund had a negative return of 18.14%. But in 2003, it had a big run and went up 42.92%–ahead of all the other TSP funds. In 2004, it went up another 18.03%–still way ahead of the C fund but about 2% less than the I fund. It was up another 10.45% in 2005.
Here is a quick summary of the fund returns:
For the first three months of 2008, the S fund was down every month. It rebounded in April with a return of 5.30% (behind the I fund’s 5.55% return).
When the market is headed down, investors often put more money in larger company stocks. Larger companies normally do better in a recession and investors often dump the small company stocks. Typically, the small company stocks are then undervalued and do very well when the market turns around and heads back up.
So how will small company stocks do in 2008? No one knows but the rally in small company stocks over the past two months has resulted in much of the value being put back. In part, while the market downturn that started last year has been painful, the falling value of stock prices has been relatively mild compared to the larger losses that have sometimes occurred in a vicious bear market. (See the chart in "Riding Out a Volatile Stock Market")
Small company stocks are often more volatile than larger company stocks. In plain English, they can go up faster and down faster than the companies that have much larger balance sheets. Small company stocks should be part of your overall investment strategy but, unless you have the ability to predict the future of the stock market and stock market segments, putting too much confidence in one TSP fund is asking for trouble. If you dumped all of your S fund stocks last year, you may want to consider putting some of your money to work in this fund. Of course, if you are invested in one of the lifecycle funds, it has already been done for you.
Several readers have recently asked why I do not give out specific advice on how they should invest their retirement funds. There are several reasons. First, see the previous paragraph. I can’t predict how a particular fund is going to perform over the next month or year.
Second, while I have been investing in stocks and funds for several decades, I am not an investment adviser. There are many successful companies and individuals who have certification as a professional adviser and they charge for their service. If you feel the need for this advice, there are numerous choices available.
Third, professional stock advisers are often not successful. The most recent example: The Wall Street Journal pointed out in the last several days that professional stock pickers are often lagging behind index funds in their performance. In other words, index funds, such as the TSP funds which are based on stock market indexes, often do better than professional stock managers that charge for their services. Actively managed funds have fallen behind indexes in six of nine major categories of U.S. stock funds. They lead by less than half-percentage point in the three areas where they are ahead of the stock indexes.
In other words, investors that diversify their money into index funds (usually divided up into several categories of funds such as bonds, large and small companies and international stocks) are likely to do as well or better than those that try to predict the future direction of the market.