Stocks Tanked This Week; Will You Sell Your TSP Stock Funds?

The stock market is down in August and has gone down faster in the last week. What will you do with your TSP investments in stock funds?

Are you thinking of selling your stock funds in the Thrift Savings Plan?

The S&P 500 (the index on which the TSP’s C fund is based) posted its biggest one-day percentage drop since November 2011 on August 21.  The Dow Jones Industrial Average closed 10% below its recent high on the same date.

The Dow Jones Industrial Average declined 531 points (3.1%) in one day on August 21. The S&P 500 dropped about 3.2%. The Dow’s drop of more than 1,000 points in the past week was the largest weekly drop since the end of the week on October 10, 2008. This average is now in a correction as it has dropped more than 10% from a recent high.

The C fund was priced at $$28.0099 on August 3rd. On August 21, the C fund closed at $26.3641—a drop of about $1.30 or about 6% so far in August. So far in 2015, the C fund is down a little less than 3%.

Stock market investors, including those in the TSP, often sell their stocks when the prices have dropped significantly. If the market keeps going down, even more will sell at least some of their stock funds. It is an emotional decision. When a person looks at a financial statement and sees how much money he has lost during a stock market decline, it is hard not to be concerned. If the market keeps going down for awhile, many investors will eventually cave and sell their stock funds on the theory that “I can’t afford to lose any more money.”

Past Actions by TSP Investors During a Market Decline

Oftentimes, investors sell at or close to the market bottom. Some of these same investors will reinvest in the stock funds when the prices are higher again.

From June through October 2002, when stocks were at their lowest levels during a market cycle, TSP participants 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).

The stock market also tanked in 2008. The C fund wet down about 37% in 2008. The S fund was down more than 38% and the I fund was down a little more than 42%. Some TSP investors became discouraged and fearful of losing what was left of their money and sold all of a large portion of their stock funds.

Some of these TSP investors never put money back into the C fund after they 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.

What Should You Do Now?

We do not provide financial advice to investors. Each investor has a unique set of financial circumstances and emotional temperament that have to be taken into account. Moreover, we do not know if the stock market will continue to fall or if it will rally quickly. In fact, if someone tries to tell you that he or she knows what the market will do next, watch out—these predictions often precede an attempt to empty out your wallet.

Some historical perspective is necessary. So, take a deep breath before making a decision to sell your TSP funds and consider this: Since 1950, the S&P 500 index has gone a full year without a 5% dip only five times. Those years were 1954, 1958, 1961, 1964 and 1995. In each of those years, unlike 2015, the market was in a powerful, upward trend. In effect, the drop we have experienced in recent days is fairly typical of stock market action during a year. A drop in stock market prices is not a bad thing. The stock market reacts to stock prices that have gone up over time and these stock prices may have gone up enough so that they exceed their underlying value.

But, there are investment advisors that provide general advice and have a good long-term record. Here are a couple of examples.

Investment adviser Richard Band, for example, wrote to his subscribers: “I advise long-term investors to keep accumulating our recommended stocks and mutual funds at these improved price levels.”

Another newsletter investment adviser, Daniel Wiener, writes about Vanguard funds for subscribers to his newsletter, and he is also optimistic. He wrote this week: “I’ve been saying we are due for a 10% to 15% pullback (I can’t wait for it) that will send the speculators scurrying for the supposed safety of cash and investors scurrying to scoop up bargains.” He also advised his subscribers: “Stop. Think. Take a breath, please. The stock market, whether the Dow or the S&P 500 or even one of the mid-cap or small-cap indexes, has been on a long tear, hitting all-time highs as recently as late July….”

No one knows, of course, what will happen in the next few weeks or months. There are, of course, plenty of people willing to speculate. One writer posted this comment on Marketwatch: “[S]omeone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70% until the Dow Jones Industrial Average falls to about 5,000.” The author also notes that: “[S]tock prices have been increasingly boosted by financial factors: collapsing interest rates and Federal Reserve manipulation, culminating most recently in ‘quantitative easing.’”

We do know that investors who panic and sell during a downturn without considering their long term investment goals often lose money. There is a good chance that the market will continue to go down and may decline more than it has gone down this week. Those who sell their stock funds, as many did back in 2008 or 2002, may be selling their assets at low levels and harming their long term financial future.

Since no one knows what will happen over the next few months, investing in stocks, as usual, involves taking some risk. We have been in a bull market for a few years. There are now many more millionaire investors in the TSP due to the increase in stock prices.

While we hope that trend continues, we wish everyone the best of luck in making their 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