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TSP investors have had a few years of very good returns on their stock investments. The month of June saw the market take a breather though and many of the TSP stock funds are down for the month. Most of the TSP funds went down during June. The only exception was the I fund which was up a miniscule 0.20% for the month.

Having said that, TSP investors should not get too excited about an occasional down month. You are investing for your retirement future and anyone who is expecting a straight upward line for the stock market is bound to be disappointed. Markets do not work that way and a wise investor will keep an eye on the longer term rewards and not worry too much about what happens in a short time period.

So, despite the laggard performance for one month, take a look at the 12-month returns for the funds. The I fund is again leading the pack with a one-year return of 27.18%. And the C fund is showing its strength as it has a return of 20.63% for the past twelve months.

Here is a quick summary (stated by percentage of gain or loss) of the monthly returns for the TSP funds:

Fund	G	F	C	S	I
June Return	0.42	(0.27)	(1.70)	(1.53)	0.20
12-Month Return	4.90	6.23	20.63	19.47	27.18

The lifecycle funds are on a similar track for the month of June. Here are the results (in percentages) for the L funds in the past month:

Fund	L2010	L2020	L2030	L2040	LIncome
June Return	(0.20)	(0.54)	(0.80)	(0.92)	0.08
12-Month Return	12.15	15.90	17.60	19.49	8.37

As might be expected, the more aggressive L2040 fund is leading the pack for the past 12 months with a return of 19.49%. Of course, during a prolonged bear market, the more aggressive fund is likely to be having the largest loss. But, with the strong market we have seen for the past several years, the more aggressive funds have provided a large return for the future retirement of the TSP investors who have invested in these funds.

It seems that investors can always find a reason to drive stock prices up or down. Stocks have been going up for some time (check out the annual TSP return rates here in the TSP Corner) so a month in which prices fall is not a big surprise.

In the second quarter of this year that ended on June 30th, the S&P 500 index (the index on which the TSP C fund is based) was up 5.8%. It is up 18.4% since June 30, 2006.

This past month, investors and investment publications seemed focused on bond markets and concerns about the sub-prime mortgage market. Investors have been paying attention to the yield of the 10-year Treasury note which has been below 5% since 2002. That is a level it had rarely been below since the 1960s. It has now moved above 5% again. Low interest rates can help to fuel a strong stock market and, if the yield on these investments continues to go up, stock prices could fall. For those with a pessimistic bent, it is possible that the Federal Reserve will raise interest rates and that could hurt future stock prices for 2007. It is also possible that the sagging housing market will continue in a downward trend and hurt stock prices for the rest of this year.

But here is a statistic that may have a bearing on the near-term future of stock prices. The bear market ended in the third quarter of 2002. (This is the year that the C fund went down more than 22%.) Since the end of that quarter, the total return for the U.S. stock market is about 110%. But corporate after-tax earnings are up 134% through the end of March (earnings for the quarter ending in June will be coming out this month). That is an indication that stock market prices are not out of line and may still have some room for advancing.

And there are always optimistic investors. If corporate profits keep going up, and if inflation stays under control and interest rates do not start skyrocketing, and as long as a major world event does not occur to upset the markets, the strength of the global economy may prevent a large drop in stock prices and it is possible that stock prices will be higher at the end of the year than they are now.

As usual, no one can predict the future but anyone investing for retirement will need to be cautious and diversify investments to take advantage of the "up markets" and avoid being hurt too badly in a sudden drop in stock prices.

One final observation: We see comments from readers responding to articles on the TSP that read something like this: "I am retiring in the next year or two and can't afford to lose any money. I am going to keep all of my TSP investments in the G fund to make sure I don't lose money before I retire--and then I can laugh at my colleagues who put their money into risky stock funds."

One advantage of the TSP system is that you can make your own decisions and live with the results. But readers who put all of their money into the G fund on the theory that it is a safe investment and they will not lose money are missing a bigger picture. If you have not invested any money in the TSP stock funds in the past several years because all of your investments are in the G fund, you have lost money.

It is true that the price of the G fund never went down. More importantly though, is that it has not gone up very much either. You can make money and have a more financially secure retirement through stock investments made during your federal career. With the G fund, you will probably stay ahead of inflation but you are not going to make much money and your financial security in retirement is probably not going to be as good as if you had put some of your investments into the TSP stock funds (or lifecycle funds).

In short, it is possible to be too conservative with your money and not taking some risk is likely to cost you more in the long run. Take a look at the annual returns of the various TSP funds and you can see for yourself how you would have fared if you had invested money in the C, S and I funds.

But, it is your money and the impact your decisions have on your financial future will be yours to live with. Good luck with your TSP investments and hope for better returns in July!

© 2007 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.

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