Bear Growling? One TSP Fund Falls 4% in One Day; Down 17% in 2022

Recent experience impacts future expectations. TSP returns have been very good for the past decade. Here is how TSP investors reacted in previous bear markets.

TSP Performance Drops As Bear Market Starts to Roar

Some Thrift Savings Plan (TSP) investors who pay close attention to the stock market may not be sleeping well at night, and if these same investors are retired or planning to retire in the near future, their apprehension and fear of their financial future may be rising.

On May 18, the S&P 500 Index (the index on which the TSP’s C Fund is based) dropped 4% in one day. The C Fund decline was about the same as the S&P 500. So far in May, the C Fund is down 4.93% and it is down more than 17% so far in 2022.

Perhaps it will make those C Fund investors feel some relief if they do not have a large investment in the S Fund. The S Fund actually went down less Wednesday than the C Fund. The S Fund declined “only” 3.82% but it is down almost 25% so far in 2022. So, for S Fund investors, welcome to a bear market.

Here is how the TSP core funds have performed so far in May and for the year-to-date:

G Fund0.14%0.79%
F Fund-0.16%-9.47%
C Fund-4.93%-17.20%
S Fund-7.14%-24.62%
I Fund-2.77%-15.15%

Expectations Dashed?

It is human nature to make predictions for the future based on recent experience.

For 2022, many investors had high expectations for stock market performance this year. Double-digit stock returns in 2020, the reality of vaccines in 2021, and the prospects of global economies reopening created a wave of investor optimism. This optimism added up to big expectations for investment returns.

According to one survey, Americans were expecting future stock market returns of 17.5% going forward. This projection was naive and among the highest among the world’s investors. The long-term annual U.S. stock returns for the S&P 500 are about 9.8%.

The optimistic expectation of 17.5% annual returns makes sense from the short-term perspective of the past decade. In 10 years—through the end of 2021— the compound annual return of the S&P 500 index was 16.6%—fairly close to what the survey results noted above.

C Fund Performance Over 10 Years

Recent experience often determines future expectations. The past decade has been very good for stock market investors. Many federal employees retired with financial security bolstered not only by a reliable annuity but also by TSP returns. This was particularly the case for those under the FERS system as the system is more beneficial for those under FERS for investing in the TSP.

In the past ten years, there has only been one down year for the C Fund. Here are the year-by-years returns for the C Fund in the past decade.

YearC Fund Return
Average Return 2011-202115.74%

What Does the Future Hold for Stocks?

When there is a significant drop in stocks, mainly when the market is down for a few weeks or months, FedSmith receives emails with requests for assistance along the lines of: “Should I sell my stocks now and put everything into the G Fund? I am about to retire and do not want to lose my investment now.”

The questions are reasonable. The answer is always that we cannot predict the stock market’s future performance.

The actions an investor should take depend on a number of factors, including a person’s retirement status, financial situation, willingness to deal with risk, etc. A certified financial planner will provide advice for an individual considering these and other factors.

When the market is up, investors often pour money into stocks. When the market is up for a period of time, we forget what a bear market feels like. A bear market (a drop of 20% or more from a recent high in the market) is a negative emotional experience. Losing money is painful. People deal with that in their own way.

As a stock market decline continues, we do know that many TSP investors will sell their stock funds and put money into the G Fund. The anecdotal experience is a rationale that “I cannot afford to lose any more money in stocks.”

How TSP Investors Changed Investments in Bear Markets

Here are two examples.

In December 1999, TSP participants placed $427 million into the C fund. At the same time, they withdrew $427 million from their bond funds.

In January 2000, another $728 million was moved into TSP stock funds. This was roughly the stock market’s peak before it started going down in a bear market. To put this into perspective, the TSP had about 2.6 million participants and held about $100.6 billion in Net Assets Available for Benefits as of December 31, 2001.

As of March 31, 2022, the TSP had more than $782 billion in assets and more than $6.5 million TSP participants.

From June through October 2002, when stocks were at their lowest levels, TSP participants pulled $3.8 billion out of the C fund and put their money into bond funds. They sold their stock funds at the lowest levels just before the C fund jumped up almost 29% in 2003 (the I fund went up also 38% and the S fund went up about 43% in 2003).

Here is another example. In 2008, there was a significant decline in the stock market. The C Fund was down almost 37% and the S and I Funds went down even more than that. In 2009, there was a dramatic turnaround with the C Fund up almost 27%.

Throughout 2008, TSP investors transferred more than $7 billion from the C Fund. Money was transferred from the C Fund every month.

In 2008, TSP investors in FERS increased their investments in the G Fund every month. They also reduced their allocations in the stock funds during the year. This is how TSP participants in FERS had allocated their investments:

FundFERS allocations
FERS Allocations

In effect, as the stock market declined, TSP investors sold their stock funds and put more money into the G Fund.

Thrift Savings Plan investors are not unique in this regard. Most stock market investors did the same thing. This means that these TSP investors often sold their stock investments when stocks were down (or “on sale”) and bought back into stocks after the market went up. They lost money when selling and reduced their future returns by buying stocks after the prices went back up.

It is easy to criticize these investment decisions, but as noted above, losing money is an emotional proposition.

When will stocks stop going down and start going back up again? How much financial pain will you absorb before deciding “to hell with this” and sell your stock investments? No one knows the answer to this until having experienced the financial pain of a bear market.

A Lost Decade for Stocks?

Stocks can go up consistently for a decade as the last 10 years have demonstrated.

And, while no one likes a pessimist, investors should be aware of the same possibility for stocks going in the opposite direction. In 1973, 2000, and 2007, the bear markets began a steep and lasting decline of more than 40%. 

Here is a quote from the Wall Street Journal in an article published this week:

As sour as the mood has seemed lately, the S&P 500 would drop by another 45% or so if both margins and price/earnings multiples reverted to their long-run averages…taking the benchmark back to a level it first crossed five years ago.

That sounds alarmist, but stocks’ level in 2031 could be the same whether Mr. Grantham (a prominent value investor) is correct or not about a sharp bear market. The alternative could be milder selloffs and recoveries along the lines of what we have experienced recently that lead stocks exactly nowhere. It isn’t the journey, it’s the destination.

What will happen to stocks by the end of 2022? Hopefully, the market will reverse, raging inflation will be under control (remember President Biden’s prediction of “transitory inflation” in the Fall of 2021?) and we will avoid going into a recession. Welcome to stock market volatility and watching your future retirement investments going through a volatile stock market.

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