Reversal in the TSP: Investors Buying Instead of Dumping the C Fund

How have you fared in the investment volatility facing the stock market? TSP investors dumped shares of the C fund throughout 2011 started buying again in January.

February was a good month for Thrift Savings Plan (TSP) investors. All of the TSP funds were up in both the underlying funds and in the lifecycle funds. The I fund was the leader for the month with a gain of 5.14% on top of its gain of 5.36% in January. The C fund with a return of 4.34% was again in positive territory for the third straight month and the  S fund with a return of 3.99% also did well.

In 2011, TSP investors poured money into the G fund. They transferred about $5.7 billion from the C fund and about $10.3 billion into the G fund and another $1.8 billion into the F fund. But, in the first month of 2012, TSP investors appear to be more optimistic about stocks as buying of the C fund started up again. $821 million was transferred out of the G fund and $141 million into the C fund—the first positive increase in C fund transfers since the stock market rally started last Fall.

For 2011, the C fund had a positive return of 2.11% despite losses for five straight months in the middle of the year. The G fund was up 2.45% but the big winner was the F fund: up 7.89%.

“A recent article entitled Main Street’s $100 Billion Stock-Market Blunder” notes that stocks have recovered the ground they lost since the market collapsed in the Fall of 2008. “When you include dividends, someone who invested on the day before Lehman collapsed is now up a remarkable 18%. If they invested at the lows three years ago, they have doubled their money.” In short, some people got rich; some lost a lot of money.

Instead of buying stocks, many “main street” investors have been selling. And, when they turned into buyers instead of sellers, they sold at the worst time to do so by selling when the market was down and buying after it went up.

How have TSP investors done? Have they followed the same pattern of buying and selling at the most inopportune time to to do? For the most part, they have followed a similar pattern.

Individual TSP investors will vary in their actions and results but we do have enough general information to spot trends in TSP investors’ actions. A number of TSP investors, like most American investors, sold their stocks and stock funds as the market was tanking in 2008. (The C fund went down 36.99% in 2008.) Some of these TSP investors never put money back into the C fund after the sold. In 2006, for example, 35% of CSRS employees’ investments and 36% of FERS employees’ investments were in the C fund. At the end of January 2012, only 23% of CSRS employees’ investments and 24% of FERS employees’ investments were in the C fund

In October 2008, after the stock market collapsed, private sector investors withdrew about $45 billion from their U.S. stock funds. TSP investors had been transferring money out of the C fund throughout 2008 but the withdrawals reached a crescendo in September 2008. In that month, about $1.1 billion was transferred from the C fund. Another $988 million was withdrawn in October 2008; $225 million was withdrawn in November and $180 million in December 2008. At the same time, money was pouring into the G fund: $3.5 billion in September 2008 and $4.3 billion in October 2008. In all of 2008, about $19.4 billion poured into the G fund.

But, for those investors who sold their TSP stock funds at a low price after the market dropped, and did not buy back into the fund at a later time, they lost money. The C fund was up 26.68% in 2009; 15.06% in 2010 and 2.11% in 2011.

As the market went down early in 2009, money continued to pour out of the C fund and into the G fund. $2 billion went into the G fund in February 2009 and another $1.5 billion in March of that year. Money was being transferred en masse from the TSP stock funds and into the G fund. TSP investors started flowing back into the stock funds in April 2009 after the market started to back up.

Some TSP investors lost money as they sold their stock funds at a low point and bought back into the market after it was trending up again. Others did much much better by selling before the low point and buying before the market went up. But, in general, TSP investors appear to have followed the same pattern as most “main street” investors by selling their stock funds when the market was nearing a low point.

The G fund is the TSP fund of choice for most TSP investments. In January of 2012, 51% of TSP investments by CSRS employees were in the G fund. Another 7% is in the F fund. FERS employees have a different allocation as 43% of their money is in the G fund and 7% in the F fund.

Which Inflation Figure is Correct: 8% or 3%?

According to the federal government, inflation in 2011 was 3%. For January, inflation was 0.1%. In other words, inflation is very low and under control. Here is an observation from investment adviser Louis Navellier on this subject:

“[I]f you step out your door to the gas station or grocery store, you’re probably not going to believe those official numbers. It’s easy to get “sticker shock” when buying food or gas, especially considering that in the last year, grocery prices are up about 5.3%, and gasoline prices are up about 9.7%—quite a bit higher than the official inflation rates.

This is because the U.S. is heavily weighted towards real estate to the tune of about 40% of the Consumer Price Index. And of course that sector and persistent weak housing prices have been weighing down the average for some time now. So the official rate of consumer inflation in the past year is just 2.9%.

As a result, the Fed is able to say that inflation is under control and keep short-term interest rates artificially low. However, when you take real estate out of the equation, inflation is closer to 8%, a whole lot higher than the “official” rates.

In other words, the purchasing power of your dollar went down about 8% last year due to inflation. If you are retired, or close to being retired, and most or all of your money is in the G fund, you actually lost money as your purchasing power went down.

The Truth About the G Fund

The truth about the G fund is that you are going to get your investment back. It is a great investment option that is not available to the general public. But here is another “truth” about the G fund: Over time, you will lose money to inflation. Last year, the G fund gave investors a return of 2.45%. That is not too far off from the official rate of inflation. It is a long way from the rate of inflation that most of us live with on a daily basis.

Here is a quote from the February 2012 Money Magazine: “[I]t’s still the case that equities, with their long-term annualized gains of 9.8%, remain the best way to earn inflation-beating returns.”

What Should You Do?

So what should an investor do who is retired or nearing retirement?

You may want to keep in mind how long your money will have to last and your own financial situation. From the same Money Magazine article:

“[D]efine ‘long run’ not as five or 10 years but as two decades or more…stocks have delivered returns that bested inflation. That doesn’t mean that if you’re in or near retirement you should bail on equities, but you should have no more than 60% of your money in stocks, and probably less, especially if a pension and Social Security don’t cover your expenses.”

TSP investors have the advantage of the L funds which automatically diversify your investments depending on where you are in your federal career. Some readers say they have done much better by buying the TSP stock funds at low prices and selling at high prices. Most readers tell us they don’t have the time, education or inclination to keep up with stocks on a daily basis and, even if they did, restrictions on frequent trading makes market timing even more difficult.

But, while TSP investors are conservative in their investments, there are still attempts to time the market or predict the market as the figures about moving money into and out of TSP funds demonstrates. Some investors are also using financial advisers to help them with their investment strategy by tailoring their investments to their specific situation.

Since no one can accurately predict the future with any certainty, you may want to hedge your bets with some diversification. That diversification will vary for each person though, including your ability to withstand volatility in the stock market that appears to be with us for the short-term at least.

Keep investing for your future retirement. We wish you luck with your investment decisions.

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