Stocks Hit the Skids in January: Time to Sell?

Stocks went down in January. Does the January indicator mean you should dump your stocks? Also, see how investing in the C fund versus the G fund may have impacted TSP account balances over the previous three years.

The C fund went up for 11 of the last 13 months. The only exceptions were in  June and August of 2013 over the past year. For all of 2013, the C fund went up 32.45%.

The ugly reality is that stock markets do not always go up. Most people have heard the advice: Buy low and sell high. That sounds great. The trick, of course, is when is the market at a high point and when is it at a low point? No one knows what is low or high until after stocks have reached these points. Bernard Baruch, the successful financier, economist, and political advisor said of this strategy: “Don’t try to buy at the bottom or sell at the top. It can’t be done, except by liars.”

So, after a multi-year bull market, stocks went down in January. Here is how the Thrift Savings Plan (TSP) funds fared in January:

G Fund F Fund C Fund S Fund I Fund
Month 0.21% 1.58% -3.45% -1.91% -4.03%
YTD 0.21% 1.58% -3.45% -1.91% -4.03%
12 Month 1.98% 0.44% 21.58% 26.88% 12.21%
L Income L 2020 L 2030 L 2040 L 2050
Month -0.42% -1.57% -2.04% -2.35% -2.71%
YTD -0.42% -1.57% -2.04% -2.35% -2.71%
12 Month 5.36% 11.06% 13.66% 15.59% 17.34%

Not surprisingly, the first emails that I received this morning were from readers who asked several variations of this question:

I have most (or all) of my TSP funds in the S, C and I funds. With the market going down in January, would you recommend moving a large amount into the G fund? I am afraid with the Federal Reserve not pumping as much money into bonds. Do you feel that the market is experiencing a major correction or are people selling off their losers? I don’t want to keep losing money in these funds and wonder if I should cut my losses and transfer a large amount into the safer G fund.”

The “January Indicator” and the Stock Market in 2014

These readers are asking a good question and no one will know the answer until 2014 is in our rear view mirror. Because of the reputation of the “January effect” or the “January barometer” for stocks, many investors are asking the same question. Mark Hurlburt has been tracking the advice of about 160 financial newsletters for several decades. In a recent column, he discussed the January effect and the stock market–no doubt in response to people wondering if this is a good time to dump their stocks or their stock funds.

According to the so-called “January indicator,” there is a historic basis for the market’s direction in January to set the tone for the next 11 months. Mr. Hurlburt makes this observation:

“In the years since 1973 in which the S&P 500 SPX -0.82%  rose during January, the index proceeded over the next 11 months to gain an average of 11.2%. That compares to an average February-through-December gain of just 0.2% in those years in which — like this year — the market fell during January.”

Certainly, based on this statistical observation, investors would be inclined to run out and sell stocks to preserve their assets.

But before rushing to the TSP website to sell your stock funds, ask yourself this question: Why has the January indicator worked? Is it a coincidence or is there a rational basis for it to work? Unless there is a plausible explanation for it, it may be just a coincidence.

One influential market researcher has made this observation which is worth noting:

“[T]he S&P 500 since 1945 has risen 56% of the time following down Januarys. That is lower than the 84% frequency of February-through-December gains following a higher market in January, but still positive.”

So, for those who are adverse to any risk of losing money, selling your stock funds may be a good idea. On the other hand, putting all of your money into the G fund may mean that you will actually lose money if the stock market goes up. As risk averse TSP investors have learned over the past several years, putting all of your money into the G fund may mean that you gave up a significant gain in your future retirement income because you did not want to risk “losing money in the stock market.”

(You can follow the daily returns of the TSP delivered to your desktop each business day with a free subscription to “The Daily Wrap-Up” – sign up using the box on this page)

Safety vs. Risk From 2011 – 2013: The Difference in Rate of Return

Just seeing a rate of return amount for a fund is not that enlightening. Here is a approximation of how investing in the G fund and the C fund over the past three years impacted two hypothetical investors. During this time, the stock market has generally been up and interest rates are low and the investing climate certainly favored stock investors. The average rate of return for the past three years for the G fund was about 1.94%. The average rate for the C fund was about 16.88%. That is an unusual disparity but, as we know from experience, the market often moves in ways that we do not expect.

In this example, each investor started with $50,000 in the G and I Funds. Over a three year period, each one contributed $150 per month. Using the average rate of return for the three year period, at the end of this three year period (2011-2014), here is an approximation of how the G fund investor would have fared and how the C fund investor would have fared (no amount has been added for an agency contribution in these hypothetical investments):

G Fund

Year one Year two Year three
Initial amount invested: $50,000 Initial amount invested: $53,069 Initial Amount invested: $55,675
Investor adds $150 per month Investor adds $150 per month Investor adds $150 per month
Interest rate in Year One: 2.45% Interest rate: 1.17% Interest rate: 1.89%
Value after Year One: $53,069 $55,675 $58,561

C Fund

Year one Year two Year three
Initial amount invested: $50,000 Initial amount invested: $52,893 Initial Amount invested: $63,482
Investor adds $150 per month Investor adds $150 per month Investor adds $150 per month
Interest rate in Year One: 2.11% Interest rate: 16.07% Interest rate: 32.45%
Value after Year One: $52,893 $63,482 $86,466

Differential from 2011 – 2013: $27,905

Investing risk comes in different forms. TSP investors who do not like taking a risk with their money may be risking their future retirement income by being a very safe investor. G fund investors have not lost any money they have invested. They have, however, lost money by not obtaining a rate of return that they could have received by investing at least some of their money in the TSP stock funds. And, in some years, the real rate of inflation has exceeded the interest rate of the G fund.

Of course, there are also years when the stock market goes down and, in some years it can go down dramatically. In hindsight, taking money out of the stock market at the end of 2007 would have been a brilliant move. Because, in 2008, the C fund went down almost 37% and the G fund went up 4.87%. The challenge though is knowing when the market will go up or down. Numerous studies have demonstrated that most investors, even professional investors, cannot accurately predict future short term views of the market.

The Advantage of Diversifying

What will the stock market do in 2014? Will the “January indicator” prove to be accurate and the stock market will decline this year?

No one really knows.

Fortunately, the Thrift Savings Plan is a straightforward plan that makes investing relatively simple. For those who prefer to invest and not worry about moving their investments around from time to time, the lifecycle funds provide instant diversification with the longer term funds (such as the L2050) having more in stocks and less in bonds. Those closer to retirement can use funds such as  the L Income or L 2020 fund for more conservative investing.

For those who prefer to make their own decisions, an investor can spread investments between the two bond funds and the three stock funds in any manner the investor desires. For those who have been heavily invested in stocks for the past few years, some of these investors have probably moved some of their stock investments into bond funds as a way of spreading the risk between stocks and bonds. For those willing to take more risk, and have other sources of income such as the CSRS annuity or a sizable FERS annuity, putting more into stock funds could provide a greater (or lesser) income after retirement depending on how the stock market fares between now and your future retirement.

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