The Dow Jones Industrial Average has crossed the 23,000 threshold. What does this mean and what, if anything, should Thrift Savings Plan (TSP) participants do with their investments now?
Most TSP investors probably do not spend time each day watching the performance of the stock market. In fact, doing so is probably not good for your financial or mental health.
The 23,000 mark on the Dow Jones Industrial Average (DJIA) is significant to investors. To put it into perspective, it took about 103 years for this index to reach 10,000. That was in March 1999. Reaching the 20,000 figure took almost 18 more years. We do not know when the 30,000 figure will be reached but the DJIA is up more than another 3000 points so far in 2017—an indication it will not take another 17 years to reach the 30,000 milestone.
What does the latest threshold mean for stocks? Is the market going to keep going up or is a significant correction just around the corner?
No one knows, of course, about the immediate future of stock prices. Here are a couple of sample headlines in today’s news:
- Is the most hated bull market in stocks becoming dangerously over-loved?
- Three reasons the next crash may be worse than 1987’s
- Does this market have another 10% to run?
So, as is usually the case, the prognosis from stock market experts is mixed. The individual investor has to make his or her own decisions about how to invest in the stock market or whether to pull the money out of the TSP stock funds and, instead, switch to a bond fund or lifecycle fund with a predetermined of the underlying TSP funds.
The last month for which data are available from the TSP is August. In that month, TSP investors were pulling money out of the C and S funds while it was pouring into the G fund. It may be coincidental but the Wall Street Journal reports that the new milestone in the stock market “masks a potentially worrisome trend investors keep yanking money out of stock funds.”
In other words, TSP investors are acting much like other investors. In the third quarter of the year, $36 billion was pulled out of American stock funds and exchange traded funds. Money is leaving stock funds while the Dow Jones Industrial Average has hit 51 new highs so far in 2017.
What Is Your Investment Plan?
If you have an investment plan with diversified investments, ignore the daily headlines on stocks. The TSP is designed for long term investments and not day trading. In fact, there are trading restrictions that strongly discourage TSP investors from jumping in or out of the TSP funds on a frequent basis.
With the recent gains in the stock market, you may find that your investments are now much more heavily invested in stocks than in bonds. If you want to have a broadly diversified portfolio that includes a predetermined mixture of stocks and bonds, this may be a good time to rebalance your TSP investments.
The stock market, as measured by the DJIA, is up more than 21% since the November election. The C fund is up more than 22% since the presidential election. The S fund is up more than 25% since the last presidential election. These are big gains in a short time. Enjoy the ride, but are your TSP investments still balanced in a way that makes you comfortable?
Chances are, the percentage of stocks in your account has grown while the percentage of bonds has gone down. If your asset allocation is now out of balance (it will be different for each person depending on personal preference and your employment status), rebalancing your assets may be a good idea.
If the stock market drops, the bonds in your portfolio will typically go down less than stocks will go down. Particularly for retirees or someone close to retirement, it may take longer for the stock market to recover than you can afford if you are withdrawing money from your TSP to meet living expenses.
Having the cushion of the bond funds, such as the G fund, will help to cushion the losses in the stock funds. In fact, the G fund has never gone down in any market since was initiated. In 2008, when the TSP stock funds dropped between 37 and 42%, the G fund had a positive return of 3.75%. That is an incredible cushion for your investments in a down market.
Some investors who are close to retirement and have a more short term focus may sell some of their stock funds out of caution if they will be relying on investment income from the TSP in the next few months.
If you do not have a clue how to allocate your money in the TSP, look for a financial advisor with a knowledge of the TSP program. Or select the appropriate lifecycle fund and let the TSP make the decision for you as to how to allocate your money.
Not investing in the TSP because you feel ignorant about investing will result in less money available to you when you retire. Most federal employees are also giving away “free money” if they do not invest in the TSP as the government will match your contributions up to a point. You will not get this free money if you stay out of the TSP.
Politics and Your Investment Plan
Some readers will focus on politics as an investment guide. Whether you like or do not like the politics of the Trump administration, do not let political emotions interfere with your future retirement. For those who wish to make a comment on this, we gave the same advice during the Obama administration.
Reasonable people can argue about why that has happened. Politics may play a role in the stock market returns. For example, will Congress pass a tax package that will reduce taxes for many Americans and for companies—especially for companies with overseas earnings? If that occurs, it could have a positive impact on stocks.
Some investors will invest in stocks based on their political preferences. They may dump stocks after an election only to see the market continue to go up substantially in the next year. Or, on the opposite side, they may throw caution to the winds and sell all of their bond funds to invest in the C fund, S fund or the I fund after an election. Predicting stock market returns based on political preferences, like trying to time the market based on short term predictions, is likely to result in losing money that will be needed during your retirement years.
When the stock market drops substantially in the short term, as it did from 2002-2004 and again in 2008, some of these “investors” will sell when they panic after seeing their investment assets drop as fast or than they went up.
How TSP Funds Have Increased
In 2008, the C fund dropped about 37% in one year. On December 30, 2008, a share of stock in the C fund was worth $10.43.
The S fund dropped about 38% in 2008. Many investors could not take the stress and sold as the market was dropping. Some investors sold at the lowest point of the market. A share of the S fund had a value of $12.21 on December 31, 2008.
If you owned 1,000 shares of the C fund on December 31, 2008, your asset had a value of $10,430. If you left that 1,000 shares in the C fund, as of October 18, 2017, your fund had a value of about $35,884.
In that same time, your S fund went from a value of $12,210 to a value of $46,760.
In other words, in this hypothetical example, your retirement fund was worth $82,644 instead of $22,640—an increase of $60,004 in less than nine years. Of course, many investors were adding new money into these accounts every pay period so their TSP fund would be worth considerably more than the $82,644.
These increases have occurred under a liberal Democrat and a more conservative Republican. TSP investors with an allegiance to either party have a reason to celebrate their new wealth.
Regular investing is how investors in the Thrift Savings Plan may become a member of the TSP millionaire’s club as a federal employee over a long federal career. (See How to Be a TSP Millionaire)