The Thrift Savings Plan (TSP) returns for January are in. For those who are a believer in the theory that the returns for January are a predictor for stock market returns for the year, it is not a pretty picture.
The TSP funds had the worst month since February 2009. The I fund was the biggest loser with a loss of 5.17% and the C fund lost 3.60%. The S fund was also down with a loss of 2.43%.
The big winner for the month: the F fund with a gain of 1.54%.
After a 64% gain in the Dow Jones Industrial Average between the middle of March 2009 and January 19, 2010, it would be unrealistic to expect the large gains to continue unabated.
Instead of pushing stock prices higher on good news as has been the case in recent months, stock market investors have been selling their holdings after a temporary gain in stock prices. The general belief among investors is that economic activity will remain low for some time to come.
Chances are the bull market is not over but it is likely to have some significant dips along the way. A number of analysts are comparing the current market to the 1930’s and the 1970’s when stocks were generally not in a time when prices were rising and the bull markets were relatively short-lived.
Here is a quote from an article we published early last year: "The current stock market seems to be eerily similar to the stock market’s performance in 1938. In that year, after hitting a bottom in the spring, the stock market went up 62% in seven months. If the current run continues, you will add significantly to your TSP portfolio in the next few months."
As noted above, the current bull market is up 64%. As you decide how to invest your money for your future retirement, keep this in mind: "While the stock market closed at just above 154 in 1938, the depression did not end. In fact, the stock market closed lower in 1942 than it did in 1938."
As Secretary of the Treasury Henry J. Morgenthau testified before the House Ways and Means Committee in 1939: "I say after eight years of this Administration we have just as much unemployment as when we started…And an enormous debt to boot." (See Thrift Savings Plan Funds Rebounding: Are We in a New Era or Can History Tell Us Anything About Our Financial Future?)
This does not mean that your retirement investments in the Thrift Savings Plan will be going down and that the recession will continue for another several years as it did in the 1930’s. It does provide a cautionary warning mean that investors should avoid exuberance in predicting the future of the stock market if you want to preserve your wealth.
The United States is setting records for deficit spending and record deficits are predicted for the near term future. Based on past experience, the projected deficits may be too optimistic and may turn out to be even larger than predicted.
Perhaps the continuing frantic pace of federal spending will result in economic good times and a rapid resurgence of the stock market. Perhaps it will prolong the recession or lead to a double-dip recession with minimal gains or even losses in economic activity.
If you are investing your future retirement income, keep these alternative scenarios in mind as you project the amount of money you will have to live on in retirement. While the more conservative funds (the G and F funds) do not shoot up with the market advances, they also do not fall as fast when the market declines. In 2008, the G fund was up 3.75%. That is a paltry return. The C fund lost almost 37%. That is a major loss in your retirement income and even a paltry return is a major benefit in a major market drop.
By diversifying, you can protect against major losses and also have the potential for increasing your investment if the stock market goes up.
But, as always, it’s your money to invest as you see fit. Make your financial choices and enjoy the ride.