Are you feeling the financial pain yet?

With falling stock prices and, of course, the decline in the value of stock funds in the Thrift Savings Plan, some readers are wondering how much further the market will fall. From comments sent in by readers, some TSP plan participants have seen their gains from last year wiped out in the past few days and probably see retirement as being further into the future than they did a few months ago.

A bear market (a market that is going down) is often defined as a decline of 20% or more in the market index. The C fund is based on the S&P 500 stock market index. It is now down about 16% from its high point last Fall. If this decline is typical, the market may hit a bottom soon--possible after declining several percentage points from its current position.

Of course, this may not be a typical market decline. The S&P 500 went down almost 50% between March 2000 and October 2002. A losing streak that goes on for more than a year is rare. According to the Wall Street Journal, "Since year-end 1925, we have only had four such losing streaks, 1929-32, 1939-41, 1973-74 and 2000-02."

Here is something to keep in mind when you look at the balance in your portfolio. So far in 2008, the C fund is down about 10%. The G and F funds are up so if you have a classic split in stocks and bonds in your TSP, many readers have probably lost about 6%  or less in 2008. That doesn't make anyone happy but put the loss into perspective.

Since the market tanked late in 2002, the S&P 500 index is up about 69%--even with the recent decline in the stock market.

No one knows if the decline will continue for days, weeks or months. If you are investing for retirement, you have hopefully spread your money between stocks and bonds or put your money into the appropriate lifecycle fund so that the current decline (which always happens in stock investment) does not hit you with its full force.

The market has been volatile for the past few months. (See, for example, the article from last June entitled "TSP Gives Investors Good Returns: Is This Bull on Its Last Legs?") It was common knowledge that the volatility in stock prices made stock investments more of a risk. But, of course, knowing when--not if--the market would fall is always a matter of rank speculation. Now that the market has gone down dramatically, there is a tendency for people to panic and some will, or already have, sold or transferred their stock funds into the welcoming environment of the G or F funds.

Perhaps that is a wise move. But also ask yourself if investing in stocks today is more or less risky than it was six months ago? Even with a dramatic decline, prices could continue to fall. On the other hand, now that stock value are down 10% for the year, and stock prices are down about 16% from their high point last Fall, are stocks a better value today than they were in October?

Many investors try to rebalance their investment allocations several times during the year so they have a set percentage of their money in stock funds and a set percentage in bonds without regard to whether the market is going up or down. If you do this, you now have a larger percentage in bond funds and a smaller percentage in stocks (even though your dollar amount is down, look at the percentage of your total investments--not just the dollar amount.) When it is time to rebalance your portfolio, you will reverse what you have been doing for the past several years by increasing the amount in stock funds.

No one can tell you how to invest your retirement money. No doubt, those that have put 100% of their investments in the G and F funds are sleeping well at night because the are not losing money. Keep in mind though that those who have had all their money in these investments also missed out on the large increase in the value of stocks over the past five years.

Before you decide what action, if any, to take with your TSP investments, take a deep breath and consider how your investments have done over the past five or 10 years to get a better perspective of your retirement future. If you do this before you make investment decisions, rather than reacting to the latest blip in the stock charts,  you are more likely to choose a wiser course of action necessary to meet your particular financial goals.

© 2008 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.

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