Investors, including those who invest their money in the Thrift Savings Plan (TSP), want to see their money grow as it works for them to invest for future needs, including retirement. Unfortunately, there are years when you actually lose money—perhaps a lot of money.
Ignoring the loss may make you feel better if you don’t think about how much you lost. But, to be honest with yourself, you need to know how much you need to make just to break even after your investments have gone down.
For example, in 2008, most TSP investors lost money. Unless your entire investment was in the G or the F fund, your investment dollars decreased (not including any new funds you may have added). The C fund went down about 37% and the S fund declined more than 38%.
How much do you need to make in order to get your money back. According to Investors Business Daily, here are some figures that may put your losses into perspective.
- 25% loss requires a return of 33% to break even
- 35% loss requires a return 54% to break even
- 45% loss requires a return of 82% to break even
What do professional investment advisers say about stock investments in 2010?
The “New Normal”
Richard Band is a well-known investment professional. He is the editor of Profitable Investing, which has grown to be one of the nation’s largest financial newsletters by stressing value and safety. He was a speaker at the “money show” in Orlando, Florida recently and he described several trends that will comprise a “new normal” for investors that he describes as the “new normal” for stock investors.
- Lower long-term returns unlike what we have experienced from 1982-2000
- Less tolerance for high valuations of individual stocks
- A two-year uptrend like the 1970’s with shorter, cyclical bull markets
Several factors will weigh down potential stock market returns.
A primary factor is America’s debt which is growing fast. Our total debt ratio as a percentage of our Gross Domestic Product (GDP) is higher than it has ever been before. In 1933, this ratio shot up to 2.6. In 1992, many were concerned about this ratio as it went up to about 2.3. It is now about 3.6 and on a fast, upward trajectory.
A second factor is the massive change in demographics. People from 40-60 are the prime savers for retirement. They buy stocks and bonds in these peak earning years. People who are 65 and older are typically retirees. They sell stocks to meet their living expenses. They are not big savers as their incomes have usually declined in retirement.
In most years, the number of people 65 or over is smaller than those from 40-60. In years where the number of older people increases faster, the stock market often declines.
Baby boomers are defined by the federal government as those born between 1946 and 1964. It is a huge demographic group in the United States but they are no longer babies and are quickly becoming the elders in society. This group has impacted every aspect of American life from overwhelming elementary schools in their early years, dominating the job market as they matured and, now, having a massive influence as America’s population ages.
Richard Band described this trend outlined in the chart below as “uncannily accurate” in its impact on stock prices.
In recent years, there were more people in the 40-60 age range. The first year in which the number of people turning 65 exceeded the younger folks was in 2007. And, as the “baby boomers” get older, this ratio will increase dramatically.
In 2008, the number of people in the 40-60 age range dropped compared to the number 65 and older. This trend was reversed in 2009 and 2010. In 2012, this ratio of older Americans will be more dramatic than it was in 2008—when the stock market also fell dramatically. In effect, our financial and economic system may be overwhelmed by new retirees starting in 2012 with expenses and services that are used by the elderly ranging from Medicare to Social Security.
Band does not see the stock prices getting back to the highs of 2007 this year. He thinks the current market will be more like the 1970’s when stock prices were impacted by high inflation and controversy surrounding the ultimate resignation of President Nixon. Stocks bounced around with temporary upswings followed by dramatic drops.
To illustrate his example of the stock market during this era, early in 1970, the Dow Jones Industrial Average was at 811. Early in 1972, it stood at 904. Early in 1974, it was back down to 880. President Nixon resigned in August 1974 and, early in January 1975, the average was down to 632. Six years later, in early 1981 in the waning days of the Carter administration, the stock market average was at 972.
The market rebounded in the 1980’s and, in the waning days of the Reagan administration, the stock market stood at 2810.
Stock Prices: 1966 – 1982
It was possible to make money and increase investments in the 1970’s as the market bubbled up and down as it wavered within a small range. But the stock market did not go up much between 1966 and 1982.
The average annual return on stocks from 1966 – 1982 was -1.5%. By comparison, stocks went up an average of 14.8% between 1982 – 2000.
A “buy and hold” strategy worked well during the bull market years. Investors who were able to buy and sell stocks within the range were able to profit during the 1966-1982 period but a “buy and hold” strategy was unlikely to produce a substantial profit for most investors.
In effect, Richard Band sees opportunities for stock investors in 2010 but advises investors to be more proactive with their stock investments. Most Thrift Savings Plan investors do not care to become heavily involved with stock charts and stock market experts.
For these folks, your best bet is diversification of your investments between stocks and bonds or investing in the appropriate lifecycle fund. We cannot control demographics, economic or political events that may influence the value of current or future retirement investments. But you can try to protect your investments with rational diversification efforts.