Do I Buy TSP Stock Funds, Sell, or Ignore the Market?

View this article online at https://www.fedsmith.com/2020/03/10/buy-tsp-stock-funds-sell-ignore-market/ and visit FedSmith.com to sign up for free news updates
By on March 10, 2020 in Retirement with 0 Comments
Illustration of a bear and a bull overlaid on a stock market graph

The stock market volatility is continuing to make significant moves up and down – often during the same day.

Coincidentally, March 9th was the 11th-anniversary for the end of the 2008 credit crisis. After falling about 65 percent, the low point for the S&P 500 index (the index used for the TSP’s C Fund) was reached on March 9, 2009. A large number of people sold their stocks and stock funds during that declining stock market.

The people selling during that period ended up missing out on a large stock market recovery in the next 11 years. At its recent peak, the S&P 500 was up about five times the 2009 low.

How TSP Investors React In Rapidly Declining Market

The current situation with stocks is not unique. Human nature is sometimes predictable.

The market turned down late in 2007 but still went up about 5.5% for the year. Then it got ugly. The C Fund dropped about 37% in 2008.

That did not happen all at once. There were months when the market went up and months when it went down. But, for the year, the C Fund was kind to investors.

Here are a couple of examples of how TSP investors reacted during this downturn.

In July 2008:

  • TSP investors transferred 2.4 billion dollars into the G fund.
  • Most of this money came from the C fund from which TSP participants transferred $826 million;
  • the I fund from which they transferred $831 million;
  • and from the S fund from which they transferred $359 million.
  • TSP participants also transferred $413 million from the lifecycle funds.

In September, as the market continued down, the trend continued:

In September 2008, TSP participants transferred close to $3.5 billion into the G fund. Here is a quick summary of some of the more significant money transfers that month:

  • Almost $3.5 billion moved into the G fund
  • More than $1 billion moved out of the C fund
  • Almost $1.2 billion moved out of the I fund
  • $483 million moved out of the S fund.

But, despite more drops in the market before it ended, and the amount of TSP contributions declining as the market dropped, the C Fund came back in 2009 with a return of more than 26%. In fact, the C Fund went up every year from 2009-2017 resulting in huge gains for those who kept their money in the stock funds and, presumably, kept investing despite the rising or falling stock market.

If stock prices continue to fall, as happened 20 years ago, chances are the same scenario will unfold.

Seeking Assurance or Financial Advice?

Since publishing The Sky is Falling! Time to Sell Your TSP Stock Funds? on February 28, a few readers have asked me this type of question: “Should I sell my TSP stock funds now and put my money in the G Fund instead?”

The honest answer is that I have no idea about your personal financial situation and tolerance for risk and stock market volatility. A qualified financial advisor who looks at a person’s total financial and personal situation is a much better source for advice and guidance than asking a person who does not know you or your situation.

I also don’t know any better than the next person what the stock market is going to do now or in the future.

However, here is some food for thought.

A Bear Market? Lock-In Losses Now?

A “bear market” is a sustained period of stock prices generally going down and one that is often triggered by a 20% decline from near-term highs.

The bear market in 2007-2009 lasted about 1.3 years and the S&P 500 went down by 50.9% during that time. A bear market can last for an extended time, and when that happens many investors will lose a great deal of money if they sell at the wrong time.

Over time, the stock market has always recovered. Those who sell stocks at a loss lock-in in their losses when the sale occurs.

If a person is likely to need the money they have in a stock fund in the near future, selling to cut any further losses may make sense (although truthfully, it really should not have been invested in stocks in that case anyway).

No one really knows when the market will recover or how much further it will drop. A person with a longer time frame is likely to make back any losses and then some as the recovery since 2009 has proved. Investors who continue to buy stocks when the market is down significantly can reap a sizable reward by being patient and not panicking when there is a rush to sell stocks.

In the near future, we will likely see days with a substantial gain in stocks as stock traders pile back in when the stock sales suddenly seem excessive. Large daily declines are often quickly followed by a large increase in stock prices.

An investor who sells based on negative emotions that follow a big decline may miss the recovery that often follows a short time later, although a bear market will see up and down prices inside of a longer trend.

Hopefully, those invested in the TSP and will need money from the TSP in the near future have diversified their investments so they can avoid selling in a panic. Federal employees and retirees have an advantage over many other Americans as both the CSRS and FERS retirement systems provide for a defined pension that keeps a check coming without regard to the stock market going up or down. That helps avoid the sudden panic gripping your investment statement.

A Sustained Bear Market or Quick Recovery?

No one knows if we are now starting a bear market that could last months or years or if there will be a quick recovery. A major recovery from fear of the impact of COVID-19 could have a much shorter impact than a continuing spread of the disease with a substantial death rate and a significant impact on our lifestyle and national psyche.

Advice sometimes offered is that the most successful long-term stock market investors invest their money and don’t look at stock prices other than every year or so to rebalance their portfolios. That is less stressful and often leads to long-term success but is hard to do.

© 2020 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

Tags:

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 onĀ federal human resources. Follow Ralph on Twitter: @RalphSmith47

Top