As the Market Drops, Expect Doomsday Scenarios and Transferring to Safety of the G Fund

Federal employees are fleeing to the G Fund amidst the ongoing historic bear market.

In a bear market, when stocks drop dramatically, many investors just give up and sell their stocks. Some of them are in desperate need of the money. Others cannot sleep at night thinking about how much money they have lost. Others may not need their money now but are fearful for the future. All are understandable reasons and all may be justified.

Most investors became relatively sanguine as the stock market went up for years and the bear market earlier in this decade was not as pronounced as the current one. Anyone who has invested in stocks (or other investments) has now experienced the fear than can accompany a dramatic downturn. And, unlike some earlier recessions or bear markets you may have lived through, this one is unique and much more chilling as some ponder the possibility of a collapse of our entire financial system.

There are always plenty of extreme views. Here is one that came out in 2003: A prediction that the widely used Dow stock average would be hitting 20,000 as we enjoy a long period of prosperity. Perhaps history will prove the prediction is correct but, as we now know, there are going to be some very rough bumps along the way.

So, while we are wallowing in what may or may not be at the bottom of a bear market, you can expect predictions of a doomsday scenario in stocks. For example, here is a column published yesterday with predictions of a 100-year bear market, never-ending federal spending deficits and general tragedy and despair for the world’s population and America in particular. Note that one of the predictions says that the Dow will get down to about 400 (it is currently at about 8500) before it heads back up. And, if you want to wallow in real depression, note that the person predicting that the stock market would go through a terrible fall was making this prediction back in 2002. “We’ve been in a long-term uptrend since the Depression lows, but that ended in the first quarter of 2000. So we’re now in one of those setback periods. It won’t be the end of the world, but it should be the deepest one since the Depression. It will shake up the lives of anyone unprepared”

As the stock market continues to fall, we get depressed, morose and fatalistic. That always happens. And, sometimes, terrible events do come to pass. There are currently articles now appearing speculating that Britain will go bankrupt and that the United States is self-destructing and will be broken up into several countries.

Several years from now, we can look back and find out which analysts were accurate in their predictions and which ones were just bogus.

For now, investors have to decide for themselves how to invest their retirement money. As we noted several weeks ago, the TSP funds had their worst month in 21 years in October.

With that background, one would expect TSP investors be be bailing out of their TSP stock funds and heading into the safety of the G fund. In fact, that is what is happening. Along with the TSP stock funds going down, TSP investors were pulling money out  of the other funds and moving heavily into the G fund.

Here is a quick summary of what happened in October according to the TSP:

  • The number of interfund transfers rose to 267,859 during October as more than $4 billion was moved from equity funds to the G Fund.
  • Over $1 billion was transferred out of the L Funds during October.
  • Participants are now directing 42% of contributions into the G Fund.

As you might expect, the amount of money leaving the C fund is also increasing.

The question on the minds of investors is whether the market has reached a bottom or if the current drop is just the beginning of a longer cycle that will take our investments even lower.If it continues to go lower, those that are cashing out their stock funds, or have already done so, will be much better off. On the other hand, if the market turns up again, those that have sold have just locked in their losses.

What do the experts say? A recent Money Magazine article pulled together predictions. One predicted a big jump in stocks by the end of 2009. At the other extreme, another predicted stocks would stay down until 2010 because of a slower economy and housing prices.

We do know that in the last bear market, TSP investors left the TSP stock funds in droves at the very bottom of the market.

For those who subscribe to the asset allocation theory of investing, the percentage of money you have in stock funds is probably much lower than bonds because of the rapid drop in stock prices. This theory certainly worked well earlier as those who follow this theory were moving money out of stocks and into bonds to meet their allocation percentages. But, according to the TSP, many TSP investors are now moving out of the lifecycle funds. These funds essentially follow an allocation theory. Obviously some are giving up on stocks and just moving into the G fund. History may prove this to be a smart move or the folks moving their money may end up locking in their losses and missing a big rebound in stock prices. And, with the stock market having moved up the most in a two-day period in 20 years this week, some investors are breathing a sigh of relief; others are selling their stocks while the prices are up somewhat; and others are hoping that the bottom has been reached and the market is headed back up.

It’s your retirement and no one can accurately predict the future: Pay your money, make your decisions and take your chances. Some will be enjoying a sunset on the beach with a secure future and others will have to keep working. Feel free to put your predictions into writing by sending in your comments.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47