Bumpy Ride for Thrift Savings Plan Investors But Patience Was Rewarded

2010 was a bumpy ride for investors in the Thrift Savings Plan (TSP). The gains for the year were solid but most of the advances occurred during the last half of the year–rewarding those investors who had the fortitude to withstand the ups and downs along the way.

2010 provided a stressful ride for stock market investors, including those in the federal employee Thrift Savings Plan (TSP).

It is tempting to look at the final results for each of the TSP funds for the year and conclude it was a great year without any significant problems. As it turned out, it was a good year for investors but the ride along the way was not smooth. In fact, most of the gains for the stock market in 2010 came in the last half of the year–if investors stayed invested despite the turmoil that occurred earlier.

To put this in perspective, remember the “Flash Crash” that occurred in May 6, 2010? In one day of trading, these were the results for the TSP:

I Fund: Down .56

S Fund: Down .66

C Fund: Down .45

F Fund: Up .06

G Fund: Up .0012

 (See Checked Your TSP Funds? What Happened on May 6?)

Midway through the year, all of the underlying TSP funds were down. In fact, the I fund was down more than 14%. (See Stocks Drop in June and for the Year)

After hitting a closing low in July 2, the stock market went up more than 19% as measured by the Dow Jones Industrial Average. For TSP investors, the C fund was up 15.06%. The big winner for the year was the small cap fund which gained 29.06% while the I fund finished at 7.94%.

The bond funds did not fare poorly either. The F fund was the only TSP fund to lose money in December (-1.05%) but was up 6.71% for the year. The safe (and some would say “stodgy”) G fund gave investors a return of 2.81% for the year. 

For even more good news, remember that this is the second year in a row of positive returns for each TSP fund.

In 2009, the biggest gainer for the year was also the S fund which was up 34.85%. The I fund was a close second coming in with a gain of 30.04% while the C fund gained 26.68%. (Also see: Worst Decade for Stocks in History But All TSP Funds Provide Positive Returns in 2009)

What About 2011?

Early in 2010, we published an article entitled Demographic Destiny? How Your TSP May Fare in 2010 and Beyond. Financial advisor Richard Band predicted:

Lower long-term returns unlike what investors 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

 2010 generally followed this tend. It was down for part of the year; had a dramatic one-day drop in May and then ended up by the end of the year. Whether the baby boomer demographics will play a role and lead to more modest stock returns in 2011 remains to be seen. The wave of retirements is expected to go up as 10,000 boomers per day turn 65. A large number of these folks are at or near the peak of their highest earning years. When they retire, their spending habits change along with their income and that can impact the stock market.

Most TSP investors, and particularly those who are closer to retirement and do not have the luxury of time to recover potential losses, will choose to diversify their investments. There is already a trend for TSP investors to seek out the lifecycle funds while others who like to watch and analyze stock market trends are moving money in and out of the various funds to try and sell at high points and buy when the market is down. Either method can increase your overall return but trying to time the market carries the added risk of making a bad decision and enhancing your losses (as well as the possibility of enhancing your potential gains.)

No doubt, there will be plenty of surprises for investors in 2011 and predicting the nature and timing of these surprises is impossible. The best bet is to expect the unexpected and try to cushion your investments for possible losses if you are approaching retirement–either through the TSP bond funds as well as the stock funds and diversifying your investments through the lifecycle or underlying TSP funds. If you are a relatively young federal employee with more than a decade of earnings and investing before you are likely to need the money in your TSP, and you are inclined to watch your money and stock market trends, it could be a great time to enhance your future earnings if you can stand the stress and strain of the likely ups and downs in the market.

It’s your choice and your future retirement. Enjoy the bumpy ride. 

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