The Coronavirus Pandemic and Your TSP

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By on March 23, 2020 in Retirement with 0 Comments
A bull and a bear wearing surgical masks look at a falling financial chart with images of coronavirus cells overlaid on top of the chart

As you have already heard, the Coronavirus has become an international issue that is sweeping the globe. Many countries have issued border restrictions and cancellations of public events. Companies have shut down their retail locations and many have had issues in supply. 

Consequently, this makes investors in the markets nervous about the sustainability of the ever growing economic boom that we’ve experienced over the last decade. It is said that there are decades where nothing happens and there are weeks where decades happen. These last few weeks have certainly made up for the global economy having relatively low volatility, and now we’re seeing swings in the markets as much as 20%.

Just last week, the S&P 500 index daily returns were as follows: -9%, +5%, -5%, -10%, +9%. In your TSP, the equivalent of this would be the TSP C Fund (common stock index investment fund). The S&P 500 is commonly used as a form of measuring the broad US markets. 

When Federal employees think about how they should be reacting when it comes to their TSP accounts, it would be imprudent to attempt to predict what the future will hold. There is a lot of uncertainty in regard to the actual impact that this virus will have on companies globally. This uncertainty is precisely why the markets have been behaving as they have in the past few weeks. Fear and uncertainty are two major drivers of investor behavior and can certainly be credited for the recent market swings that we’ve experienced lately. 

While it’s hard to predict the future, we can take a look at how the markets have reacted to past pandemics, specifically the most commonly remembered: SARS, Swine Flu, and Ebola.

The common theme here is that each of these outbreaks had an initial downturn in the market, sometimes pretty significant, but all recovered to higher values in due time. 

This doesn’t mean that it wasn’t difficult to deal with. The account value swings were deeply painful and personal to everyone, much like what we are experiencing right now. 

In measuring the S&P 500 (remember, essentially the TSP C Fund), the initial selloff led to a nearly 14% decline in the first couple of months during SARS. The red portion of the line indicates the time frame when the cases were increasing up to its peak, and the green is when we began to see recovery, according to the World Health Organization. 

line graph showing S&P 500 performance during SARS
Line graph S&P 500 performance during swine flu outbreak
line graph showing S&P 500 performance during Ebola outbreak

We can conclude that it’s no surprise that the markets are experiencing this level of volatility in response to the Coronavirus and other economic factors. Historically, the world as we knew it did not end, and markets made their recovery in the following months and continued to grow to where they are today. 

We can’t predict the future, but the probability of this world coming to an end because of this is undeniably low, and the markets should recover their values as the global economy pushes past this troubling time. This means that we will be tapping into our TSP accounts in the future and our behaviors today will have tremendous impact on our economic safety in the future. 

Should You Make Changes to Your TSP?

We’ve established that it’s probable that the global economy will not collapse in light of the Coronavirus, but that still leaves us with the question of whether or not we should be making changes right now to our TSP. 

There is not a single blanket answer to this question because each Federal employee has their own individual circumstances, but there are some general principles that good investors can follow to maximize their chances of success.

Risk Tolerance

The first thing federal employees should do in determining whether changes in their TSP accounts are warranted is to determine their risk tolerance. This is a technical term for defining how much potential loss you as an investor can financially handle, as well as determining how much market movement you can safely stomach. In other words, what is your aptitude and attitude towards handling risk and volatility? 

You may be ready to retire as a Federal employee within the next five years and you’re concerned that your TSP account didn’t grow fast enough, so you want to move 100% of your TSP into the C Fund. Your attitude towards risk is high, but the problem is that your aptitude may not be as high as your attitude is. 

Here’s why: if you’re retiring in five years, you might need to start accessing your TSP funds to help pay for expenses, especially while waiting for your pension to start. If you’re invested heavily in stocks, and the markets have volatile times such as these, you might be forced to sell some of your TSP investments while they’re down to get the cash that you need. 

On the other hand, you may be a younger employee with plenty of time for the markets to recover their lost value, so your aptitude to handle risk and volatility is high, but if massive value swings keep you up at night, your attitude towards that amount of risk and volatility is lower than your ability to take that risk, and you probably shouldn’t be as aggressively invested.

Knee-Jerk Responses

It’s important to note that any changes an employee makes to his or her TSP account should be planned and intentional. This is one of the foundational principles of good investor behavior. 

Knee-jerk responses to volatility very often cause more harm than good. If the recent market volatility was too much for you to handle, then you were likely not invested properly in the first place. 

Limitations of the TSPIt is my opinion that the TSP is a great accumulation tool, but it has its limitations when you are pulling your money out. 

The TSP does not let you pick which funds you will be selling in order to withdraw money. It will proportionally sell each fund in your TSP account.

 If you have the C Fund or I Fund inside of your TSP, they tend to be the most volatile when markets are moving up and down. By requesting a distribution when the markets are down, you are effectively selling your C or I Fund in a down market. 

It takes much more market performance to recover your account from the double whammy of a market downturn combined with a withdrawal. Good financial planning would involve having some liquid assets available to you in the event that the markets were rocky and you needed some cash.

Short-Term Versus Long-Term

By design, the TSP is considered a long-term investment vehicle, much like a 401K, IRA, 403b, etc., because it is a retirement account. This means that you generally have a longer time horizon before you need to touch the money in your TSP. This flexibility generally allows you to take on more risk.

The danger comes when you’re looking at the short-term. If you’re going to need access to your money in the next few years, then you may not want to be invested in stocks of companies like the S&P 500 (C Fund). This is due to the fact that if we happen to be in a year where the markets are not performing as well (such as right now), AND you need to access your money, you’re forced to sell at a much lower amount. So for money that you know you’ll need sooner, a better investment would be a TSP fund that is much less aggressive, or perhaps utilizing your other investments or savings to meet those short-term income cash needs.

Working Towards a Proper TSP Allocation

There are a variety of factors that play into crafting the right allocation in your TSP account. I encourage federal employees to take all of their finances into consideration. 

If your spouse works in the private sector, you should consider what he or she is invested in too if you consolidate your finances.

You should also consider your other investments accounts. You might have old 401Ks or IRAs in which you still own investments. 

You should also consider what types of income you have available to you. This goes back to how soon you need access to your TSP money. If you know you and your spouse both have a substantial pension relative to your income needs, then perhaps you can afford to be a little more aggressive. Perhaps your spouse is still working and generating an income. 

The point is, your life has many moving parts and they should be considered in your total financial picture.

In Summary

As you can see, there are many factors when considering how to properly build an allocation of investments in your TSP or other investment accounts. The Coronavirus is certainly having an impact on our global economy and on your investment accounts like your TSP. The good news is that it’s highly unlikely that this is the end of it all, and we’ll likely see the other side of this storm.

When deciding how to allocate your TSP, make sure you’re honest with yourself. The stock markets are driven by greed and fear, and federal employees must be careful to recognize those emotions in themselves. 

I wanted to leave you with one final chart; data sources from the WHO, Kaiser Foundation, Morningstar, and Hartford Funds. 

Line graph showing performance of S&P 500 from 1980 to 2020 through 8 epidemics

You can see that, historically, each event had its phase when the markets were rocky but continued on to make a full recovery and into much higher ground. I show this as a means to illustrate that over the long-term these pandemics have had little impact on market performance. In the short term, it causes craziness. In determining how to allocate your TSP, remember your attitude and your aptitude for risk and market volatility, how much time you have until you need your money, and remember to consider more than just your TSP account.

© 2020 Thiago Glieger. All rights reserved. This article may not be reproduced without express written consent from Thiago Glieger.

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About the Author

Thiago Glieger, AIF®, ChFEBC℠ is a Private Wealth Advisor in the DC Metropolitan area. He and his team serve Federal employees by helping them grow, manage, and protect their wealth.

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