New Stock Market Record Reached
The Dow Jones Industrial Average (DJIA) index for the stock market closed above 25,000 for the first time on January 4, 2018.
While the DJIA is less significant than the S&P 500 index (the index on which the C fund in the Thrift Savings Plan is based), the Dow was first calculated in 1896. The S&P 500 first appeared in its current form in 1957. The Dow gets credit for the most long lasting index and is often cited in news reports and generally well known to investors, so the new record has psychological significance.
The new record comes just 23 trading days after the DJIA first ended a trading day above 24,000. The new average is the fastest move between 1,000-point milestones in history, although as a percentage increase the new figure is less impressive than it may first seem to be.
Are You Missing Out on This Bull Market?
The reaction of some TSP investors will be, as it is for private sector investors as well, “I am missing out on making money with this bull market in stocks.” In fact, according to the Wall Street Journal, small investors have withdrawn more than $1 trillion dollars since 2012 from mutual funds investing in American stocks. Some of this money was transferred into exchange traded funds (ETFs).
Despite the skepticism from investors, this bull market has been notable and long lasting. The Dow first crossed the 10,000 mark in 1999. The Dow reached 14,000 in the fall of 2007 before collapsing and falling to 6,500 during the recession before heading back up in 2009. Those who stayed invested during the recession and held on have been well rewarded.
For the few who sold before the recession, and may have bought back stocks around the 6,500 low, they have been financially rewarded.
Very few people are fortunate enough to be able to correctly guess a market bottom before it arrives and to be right again in investing as stocks start heading back up again. No doubt, many will take credit for having this insight while bragging about their financial acuity. It is likely that far fewer people actually accomplished this feat despite their braggadocio.
It is much more likely that investors sold stocks near the 6,500 bottom and were scared to start investing again when stocks started back up. In fact, one reason the current bull market may have lasted as long as it has is because many investors have held back and withdrawn money from the stock market after having been burned way back in the last decade.
What Drives A Bull Market?
One of the world’s most successful mutual-fund managers, John Templeton, is often credited with having said “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
That quote is applicable to the current bull market as it now stands. The bull started to run at the depth of pessimism with a major drop in stock market prices. It continued to run despite considerable skepticism. It continued a very successful run through 2017 and is still going on today as we can see by the new record that has just been set. Perhaps this is the “mature on optimism” stage of the market.
Often what happens next is a rush of euphoria. Stocks sometimes continue to go up fast. Investors think about how much money they lost by not investing in stocks earlier and they stampede into the market. These euphoric “melt-ups” are often followed by selloffs.
Of course, if we knew precisely when this is occurring, it would be easy to make money in the stock market. We really do not know. Perhaps the melt-up will continue for a period of months. The tax cut bill that was recently signed into law may provide more impetus for the market continuing to go higher.
Is This a Time to Rebalance Your Portfolio?
Chances are, the value of the stocks in your TSP or other investment accounts has grown while the percentage of investments in 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 those 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.
A cushion of bond funds, such as the G fund, will help contain possible future 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 and it is not available to investors outside of the TSP.
For those who conclude they are missing out and want to make up for lost time by selling bonds and moving most or all of assets into stocks, ask yourself how you will react if there is a significant drop in the value of stocks. Can you stand a loss of 30% or 40% if (or when) stocks do drop quickly?
Those who conclude the market is too high and sell all of their stock funds may end up missing out on future gains that may add to your account in the next few months.
Since no one can predict what the market will do, think through your personal financial situation, the current stage of your federal career, and your realistic ability to avoid panicking when stocks do drop (and they always do go down at some point). Once you have done this, you may be in a better position to decide how to best increase and protect your future retirement income.