Predicting the short-term future of the stock market is tricky and can cost you money if you guess wrong.
Here is an example.
In April, Thrift Savings Plan (TSP) investors withdrew more than $1.3 billion from the G fund and another $277 million from the F fund. These withdrawals were on top of about $1.3 billion withdrawn in March from the G fund.
Where did that money go?
A lot of it went into the C fund which saw an influx of $316 million in April and the S fund which received $958 million in the same month. Investors were apparently hoping that the rise in the stock market would continue in May. With the benefit of hindsight, we know that the C fund actually declined about 8% in May while the S fund dropped 7.5%. (See TSP Funds Take a Hit in May)
So what did investors do with their money in May after the stock market dropped in April?
TSP investors reacted by pouring $3.7 billion into the G and F funds in May. Also in May, they withdrew $1.085 billion from the C fund and $865 million from the S fund and another $1.3 billion from the I fund.
We won’t know for another couple of days how the figures will work out for the month of June. Presumably, at least some of these nervous investors took their money out of the stock market after it dropped in May and deposited their funds into the relative security of the G and F funds. Here is what happened so far in June.
On June 1st, the C fund had a per share value of about $12.79. At the close of the market on June 25th, the value was about $12.88. For the same dates, the S fund went from $17.04 to $17.20 and the I fund went from $15 to $15.17. So, while the G and F funds have not gone down, some of these investors may have been better off leaving their money in the TSP stock funds. (The F fund went from $13.84 to $13.99.
Human nature does not change much when it comes to investing. All of us want to minimize our losses and increase our personal wealth. As the market goes up, we often feel good and put more money into stocks. Conversely, when the market is down we get nervous and often dump stocks while the prices are low. Here is what happened during a major market move a few years ago.
From June through October 2002, when stocks were at their lowest levels, TSP particpants pulled $3.8 billion out of the C fund and put their money into bond funds.
The timing of these investors was as bad as it could be. They sold their stock funds at the lowest levels just before the C fund jumped up 29% in 2003 (the I fund went up 38% and the S fund went up 43% in 2003).
And it wasn’t just these investors. TSP participants kept putting more of their regular pay allocations into stocks throughout the bull market. The highest perecentage was 66% going into stocks in March of 2000 at the absolute peak of the stock market.
Investors are not always wrong in predicting the next market move. We noted in a column last year that investors were moving money into stocks and, as the market moved up after a period of lower stock prices, these investors did well. (See The G Fund and Predicting The Stock Market) Chances are, those that timed the market in this instance were eager to discuss their financial acumen with you at lunch or over a beer in the local pub after work. Some of these same folks may be considerably more reticent about their exploits when their market timing resulted in a financial loss.
Events that are often unpredictable and entirely beyond our control can have a dramatic influence on stock prices. Some investors claim to have done very well by timing the market by using a variety of methods to determine the next move up or down in stock prices. For most of us, deciding an appropriate percentage of our investments between stocks and bonds and keeping this percentage roughly the same by rebalancing a couple of times a year works better.
Choose the method that works best for you. Just remember that you will reap the rewards (or the losses) when you need your TSP investments after your retire.