The stock market hit new highs on October 9, 2007. The stock market has dropped dramatically and, on October 9, 2008, hit a multi-year low (although it is dropping again at the time of this writing).
No doubt, most TSP investors are well aware of how this has impacted their retirement portfolios. At this point, it is fair to call the drop in the stock market a financial panic. These panics occur ever few decades but, human nature being what it is, our emotions go into high gear as we see our net worth falling by the day, hour and minute. We have more safeguards in place than investors had in earlier decades but it is fair to say that the emotions TSP investors are having now are about the same as the emotions stock investors felt in panics such as those in similar financial panics in 1873, 1893, 1907 or 1929. You may also want to throw in the rapid fall of the stock market in 1987 and the bursting of the Internet bubble starting in 2000 when the NASDAQ index fell about 80% before rebounding.
Your TSP accounts are certainly suffering, assuming you have money in any of the TSP stock funds, as these funds obviously track the stock markets.
And, in case you missed it, the TSP is trying to reassure TSP participants. It has issued a newsletter urging TSP investors to “stay in for the long haul.”
The TSP makes several arguments for remaining invested in stocks. Here are the main points:
- The stock market has always rebounded over time.
- Stocks are “on sale” after a big drop in the market as we have seen in recent months.
- If you try to time the market by jumping in and out to avoid the pitfalls and catch the up markets, “that’s ‘market timing,’ which even the professionals say is impossible to do with assurance.”
In effect, your dollars buy more shares when the market is down. And, when it goes back up, as it always has in the past, your will have more assets as the cheaper shares will be worth much more after stock prices increase.
For understandable reasons, many people are comparing the current market rout to the situation in 1929. From 1929 – 1932, the stock market dropped about 89%. To put this in perspective, comedian Groucho Marx lost $240,000. (He was wealthy as this was a much larger sum in 1929 dollars). He borrowed from the bank, against his life-insurance policy and against his house to try and pay back the money he had borrowed to buy stocks when the market was going up. He later joked, “I would have lost more, but that was all the money I had.”
In the 1920’s, people borrowed money to buy stocks. They put down a small percentage of a stock’s price to buy more stock. It was legal and as long as stocks went up, this worked great. But, when stocks tanked, there was not enough money to cover the loans that had been made.
In today’s world, people borrowed money to buy houses and real estate, including equity lines of credit and second mortgages. With government encouragement, banks loaned money to people who ended up borrowing more than they could pay back. That worked great as long as housing prices continued to go up. When housing prices dropped, there was not enough money to cover the loans that had been made. No one knows yet how many loans are floating around that do not have money to back them up.
There are certainly some similarities between the two situations. But there are major differences and they are likely to make a big difference between now and the Great Depression.
- The government has stepped in quickly to address the economic problems. The government raised taxes at the start of the Great Depression to offset the loss in government revenue significantly exacerbating the economic problems that already existed.
- Banks have been making loans against houses and this real estate still has value. Stocks during the era of the Great Depression had almost no value left.
- The Federal Deposit Insurance Corporation guarantees bank deposits–now up to $250,000–while deposits in banks that closed during the Great Depression were lost forever.
In short, while the current situation is unique and certainly new to many TSP investors, remember that stock investors have been through similar periods in the past. The market has always come back (although the length of time it may take to recover the current losses could take years instead of months).
Stock prices are, in part, based on emotions of the moment. In October 2007, there were articles projecting the next big jump in the market. Optimism was high among many investors.
There is now panic and pessimism in the stock market. Some are predicting another Great Depression. We may be near the point of capitulation. In effect, when enough investors become fearful, lose faith, and sell, it is referred to as capitulation. Capitulation is generally followed by the bottom of the market.
At some point, investors will step in and begin picking up stocks at bargain prices. That usually happens when most individual investors have given up and started dumping their stock shares. Warren Buffet, a famous and very wealthy investor, has recently started spending billions to purchase stocks now that they have gone down significantly in price. Of course, a billionaire can withstand a market downturn much better than the rest of us. On the other hand, keep in mind that he has made billions by investing on logic and analysis and not reacting to the emotions of the moment. In the next few years, Mr. Buffett probably intends to add hundreds of millions of dollars to his investment portfolio by taking a risk in the current market.
When the stock market snaps back, it is likely to start quickly. Historical technical markers lead some analysts to now predict that we are close to a market bottom–in part because so many investors have dumped stocks at low prices Look back over the past three decades and you will find that missing just twelve of the best months in the market can cut your long-term return by more than one-third on an annualized basis–a huge difference over a period of years.
Many TSP investors have undoubtedly been dumping their TSP stock funds and putting the money into the G and F funds. Others will make this move before the market hits a bottom.
Since no one can predict the future, you are on your own and will reap the consequences of your decisions. Keep in mind the advice from the TSP, the history of how markets act during and after a financial panic, and analyze your own financial situation. Avoid reacting on the spur of the moment to the latest headline or analyst prediction. Your fear benefits some people and organizations. Politicians are looking for votes. TV stations and newspapers are selling ads at profitable rates as people rush to hear the latest news.
Finally, consider all of your options. You may want to put more money into the TSP stock funds in the current downturn as stocks are much cheaper than they were a short time ago. You may also want to consider working longer before retirement to give your portfolio a chance to rebound before you start taking money out of your TSP account.
Keep an open mind and then act according to your own best judgment.