Remembering 2021 Fondly: High TSP Returns
2021 was a great year for stock investors. The C Fund provided Thrift Savings Plan (TSP) investors with a return of 28.68% in 2021. 2021 was the third consecutive year of significant positive returns for the C Fund. In 2020, the C Fund had a return of 18.31%. And, in 2019, it provided a return of 31.45%.
Investors in the C Fund were not the only TSP investors coming out ahead in the past year. The S Fund had a return of 12.45% and the I Fund had a return of 11.45%.
While that is great news, stocks do not always go up. So far in 2022, they are going down. On the morning of January 24th, stocks went into correction territory. A correction means a drop of at least 10% from a recent high.
In 2022 So Far; Biggest Drop in Stock Prices Since March 2020
A decline in stock prices on the last day of March 2020 finished the worst quarter for the Dow Jones Industrial Average (DJIA) since 1987.
For those who were not investing in 1987, between October 14 and October 19, 1987, major stock market indices dropped 30 percent or more. On October 19, 1987, a date that is now known as “Black Monday,” the Dow Jones Industrial Average dropped 508 points, losing 22.6% of its total value.
The C Fund lost 19.65% in the first quarter and was down 12.4% in March 2020. The distinction for the biggest declines for the month or the quarter went to the S Fund. That fund lost 21.4% in March 2020 and was down 28.14% at the end of the first quarter of the year.
Stock Returns So Far Do Not Match Start of Pandemic
As of the close of the stock market on Friday, January 22nd, all of the TSP stock funds, as well as the lifecycle funds, were showing losses for the year. The S&P 500 (the index fund on which the TSP’s C Fund is based) has gone down in three consecutive weeks. And, on Monday, the S&P 500 dropped another 2.4% in the morning which sent it (and the C Fund) into correction territory.
Here are how the TSP Funds are faring as of the stock market’s closing bell on January 21, 2022:
|Fund||Share Price||Year-to-Date Return|
In effect, every TSP Fund is down with the exception of the G Fund which so far has gone up 0.09% in January.
Investors will not know until February 1st, 2022 how the stock market will perform in January. Back in March 2020, the C Fund declined 12.40% and the S Fund went down 21.40% in that month. So far in January 2022, the fall in prices is not as dramatic, but economic and world events look rather bleak at the moment and may lead to more dramatic price declines.
What is Driving Market Direction
The biggest single factor driving bond yields higher and stock prices lower is the expectation that the Federal Reserve will raise interest rates multiple times in 2022. Inflation is going up at its fastest pace in 40 years. The Federal Reserve is likely to raise interest rates to try and dampen the soaring inflation rate.
World events often play a role in stock market prices. That is proving to be the case so far in 2022. With a large build-up of Russian troops on the border of Ukraine, the possible invasion of Ukraine is undoubtedly having a negative impact on stock prices. The State Department has told families of U.S. diplomats in Ukraine to leave the country, and the White House is considering sending several thousand military personnel to Europe to counter the Russian threat.
Interfund TSP Transfers and Timing the Market
In December, TSP investors moved more than $1.9 billion out of the S Fund. More than $1.16 billion went into the G Fund and $453 million into the C Fund. Another $400 million went into the I Fund. The TSP now holds almost $812 billion in assets.
Many investors have not lived through a bear market (defined as a 20% drop in stock prices). Stock investors have enjoyed a time of rising stock prices for a few years. We know from past experience how many will react should prices go down significantly.
When the stock market drops fast, TSP investors (as well as other stock investors) often bail out before their losses become more dramatic. For example, in March 2020, TSP investors transferred more than $15 billion into the G Fund. How much of this $15 billion was transferred into the G Fund before and after March 23rd, we do not know. Based on past history of how investors reacted to significant stock downturns, it is likely that a significant portion of that $15 billion was transferred around March 23rd.
The same reaction was evident during a bull market in 2000. TSP investors flocked to the TSP stock funds in late 1999 and 2000. When TSP participants got their December 2000 statements, many realized for the first time what was happening to the value of their stock investments. Billions of dollars were withdrawn from the stock funds. The timing of these investors was as bad as it could be. Some investors sold their stock funds at the lowest levels shortly before the C fund jumped up 29% in 2003 (the I fund went up 38% and the S fund went up 43% in 2003).
Those that pulled their money out of the stock market when the market dropped quickly as a reaction to the COVID pandemic drove stock prices down may have regretted their actions later. Despite the rapid drop in stock prices earlier in the year, the C Fund finished up 18.31% in 2020 and the S Fund went up 31.85% as the stock market recovered quickly.
Not all down markets end this fast. When prices drop dramatically, it can take months or years to recover. Timing the market to try and sell when prices are high and buy when prices are low is very difficult and requires considerable luck and well as knowledge of the stock market. Most investors who try to time the market end up losing money.
Should the current market correction drag on for a while while the impact of inflation and unsettling world events unfold, we know from past experience many TSP investors will lose money by buying stocks at high prices and selling at low prices as their patience wears thin.
In 10 Things You Should Know About Bear Markets, FedSmith author Thiago Gleiger wrote:
Except for those who have ice in their veins, we’re presented with the indisputable truth that persevering through turbulent markets is only made possible by having a formalized investment policy that has been planned out in advance. This allows an investor to know the reasonably acceptable level of risk they can take, and how much of a pullback they can sustain before it jeopardizes their goals and forces them to adjust their portfolios.
No one knows if the current drop in stock prices is a blip that will be quickly forgotten or the start of a more long-lasting drop in prices. The average bear market lasts just over nine months which can seem like a very long time when waiting for the market to rebound. Having a financial plan to deal with the emotions that can accompany a significant market drop is a good approach. Coming up with a plan in the midst of watching prices drop is likely to lead to panic selling and financial losses.