For those who pay attention to the stock market, October was an unsettling month. During the first half of the month, the S&P 500 index (the index on which the C fund is based) dropped about 7.7%. Then, it abruptly reversed course, gaining 10.8% and bringing the index to a new high at the end of the month. The result was that the C fund was up 2.45% for the month.
Moreover, all other Thrift Savings Plan (TSP) funds, with the exception of the I fund, also had positive gains for the month.
The S fund posted the largest gains for the month with a return of 4.11% (up 5.34% for the year). For the year, the C fund is ahead of all other funds with a gain of 11.06%. The G fund, often referred to as the “safest” fund within the TSP, is at the other end of the spectrum with a year-to-date gain of 1.95%.
Here is how each of the funds finished up for October, the year-to-date, and for the past 12 months.
|G Fund||F Fund||C Fund||S Fund||I Fund|
|L Income||L 2020||L 2030||L 2040||L 2050|
As the stock market hits new highs, and many TSP investors are undoubtedly pleased with the results of their investments, it is a good idea to keep in mind that stock market declines can and do occur. Depending on which data one wishes to accept, on average, there is a decline of 10% about every 18 months. It has been more than three years since we have experienced a drop in stocks of 10% or more (although the market was close to the 10% drop a few weeks ago).
It is easy to look at your returns in the Thrift Savings Plan after a few good months and to assume that panic will not set in and that a 10% correction will not lead to selling your shares when they are down significantly. The reality is that losing money, even on paper, hurts more than we think it will. Assume that your TSP stock funds dropped 10% over a period of a few weeks. Will the market keep going down? Should you sell now to avoid further losses? Will you be able to live comfortably in retirement if the market continues to drop?
What Happened in 2008?
Here is a quote from an article published by FedSmith on November 4, 2008:
“The scope of the devastation is nothing short of breathtaking. As of Thursday, more than 500 stock funds–more than one out of 10 stock funds with at least a one-year track record–had lost at least half their value in the previous 12 months….The TSP’s S fund is down 33.69% for the year. It is an index fund. The Oakmark International Small Cap fund, one of the top 15% of funds in this category, is down 45% for the same time period. The average small company growth fund is down over 37% for the year. The average large company “core fund” is down more than 33% for the year.”
The drop in stock prices in 2008 was unusual but not unprecedented. Those that sold their stocks after seeing them go down so much lost a great deal of money in subsequent years as stocks started going higher in 2009 and are now hitting new highs in 2014. But, as the stock market declined in 2008, TSP investors withdrew large amounts of money from the C fund each month during 2008 with total withdrawals from the C fund of about $8 billion. No doubt, some of that money was reinvested at a later time and at a higher price.
To put the panic into perspective, in the last three months of 2008, almost $9 billion dollars was transferred into the G fund by TSP investors. Much of this was being transferred from the TSP stock funds. And, with the benefit of hindsight, the C fund has been going up every year since 2008. Those that sold their stock funds at lower prices lost money that would have been put to good use during the 6 years stocks have been increasing in value since that time.
The best insurance is often having diversity in your investments with both stock and bond funds. At times, these investments move in tandem but at others one will rise while the other falls. Diversity in investments will in some years prevent you from keeping up with the returns some of your colleagues get by staying invested in stock funds only. On the other hand, spreading out your assets will sometimes prevent losses that are as large as those who are invested only in stocks.
Those that diversify their investments, refrain from checking the prices of their stock portfolio every day, and do not panic and sell when prices fall probably breathe easier and often do better in the long run than those trying to outwit the markets and to time their buying and selling by predicting what is largely unpredictable.
But the money in the TSP is yours to invest as you see fit. Your future retirement income will rise or fall depending on the performance of your TSP portfolio. Enjoy the ride.