Good News? TSP Funds Don’t Go Down As Much in November as in October

If you are looking for good news with regard to your stock funds, try this: Your funds did not go down as much this past month as they did in October. If that doesn’t give you a thrill, perhaps the bottom of the market has been reached.

If you are looking for good news with regard to  your TSP fund returns, you may have to stretch. Here is one arguably piece of good news if you are an optimist: Your stock funds did not go down as much in November as much as they went down in October.

Of course, the returns for November did not include the big drop that occurred on December 1st. In any event, all funds other than the G and F funds went down in November and the TSP stock fund returns for the year-to-date are all lower this month.

Unfortunately, the lifecycle funds did not do much better. Here are the returns for the lifecycle funds for November and the year-to-date. In anticipation of questions, you are not reading the chart incorrectly: All of the funds are down both for the month of November and for the year-to-date.

Has the stock market now bottomed out and ready to go back up? The market dropped dramatically on December 1st and, at the time of this writing, the market is up in triple digits again today. Triple digit changes in the Dow Jones index on a daily basis used to be unusual but have become commonplace. Some stock market investors are looking for signs, any sign, that the stock market is going back up. Here is one that may give you some confidence (or hope). The Chicago Board Options Exchange’s Volatility Index often reflects fear in the market. The historical average for this index is about 20, according to the Wall Street Journal. It peaked at 81 about two weeks ago and it has fallen since then. It is now at about 64. The index has had higher peaks in 1987 and 1929 but the volatility of the current index was only exceeded in the 1930’s. Perhaps there is some good news in this state of confusion and volatility.

Can You Time the Market?

I cannot time the market. I have occasionally tried over the past several decades. I convinced myself the myriad of studies demonstrating that one cannot time the market successfully were spot on.

Having said that, there are services available, usually for a fee, that purport to tell people how to successfully time their investments. Some readers have posted comments proclaiming their ability to successfully time the market. Perhaps one or more of these systems will prove successful and make significant money for those who use these methods.

So, if you can or at least think you have the key to timing the market, a period of high volatility such as the one we are currently in now is the perfect situation for moving into or out of stocks. Sell them when the market is at a temporary peak and buy again when they are down. Good luck. Please don’t comment later that I was advising anyone to try timing the market as people who do this are probably more likely to lose money than they are to make it as they are likely to miss any significant run-up in stocks with this method.

What Should You Do Now?

TSP investors who are not using the lifecycle funds for their investments should have an allocation strategy. That is, how much of your investment portfolio do you want to have invested in stocks and how much in bonds? That answer will depend on your age, your appetite for risk and your personal financial circumstances. For example, a federal employee with a CSRS payment coming each month may feel more secure with a higher percentage of investments in stocks than another employee who will not receive the same monthly, guaranteed check as a person who is under the CSRS system.

One "rule of thumb" that some financial advisers suggest is that your bond allocation should be approximately equal to your age. In other words, if you are 55, you should have 55% of your portfolio in bonds (the F and G funds) and the other 45% spread out among the TSP stock funds.

For a more complex strategy, and probably a more aggressive strategy, see the formula for determining your allocation as suggested by the T. Rowe Price Company several years ago.

Regardless of how you choose to allocate your investment between stock and bonds, there is a good chance that you now have a higher percentage of your investments in bonds and less in stocks that you did a year ago. There is also a good chance that if someone has asked you about your risk tolerance several years ago, you would have quick to state you were willing to invest more heavily in stocks and take a bigger risk for the possibility of a higher gain. A bear market, especially an extreme bear market such as the one we are currently experiencing, often gives one a new perspective on risk tolerance. This revelation may also heavily influence your stock/bond allocation if you have concluded you were not willing to shoulder as much risk as you thought now that reality has come within your line of vision.

Take a Long-Term Perspective

Take a long-term perspective for your investments and, chances are, you will sleep better at night. Several years from now, you will recall the current bear market and today’s problems will not look the same.

Bear markets lead to people getting out of stocks because human affairs look grim. We tend to think that the bad news will continue and there will not be any good news. But, while there will be different problems, we have been through a number of bear markets and stocks have gone up–eventually. Chances are that will happen again. Some readers may be wondering, several years from now, why they dumped all of their stock funds when they were so low in price because they were overcome with pessimism.

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