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Most readers have money in the Thrift
Savings Plan and many readers watch the daily performance of their
TSP funds.
That can be a dangerous habit. Some
readers undoubtedly try to time the market by selling their TSP
stock funds just before they take a dive and buying back their
shares just before they head back up. That plan sounds simple. In
practice, it is probably about the same as heading back to Vegas for
one more chance to win back the money you lost the last time you
tried to win money there.
Unfortunately, as we have pointed out
before, TSP investors have behaved like many stock market investors.
They buy high and sell low. When the market takes a big dip, some
who own TSP stocks decide it is time to sell and move their money
into safer assets--usually the G fund. That is not a guess; there is
plenty of statistical evidence to demonstrate that TSP investors
have been moved to sell their retirement assets after watching the
stock market go down (See, for example, "Your TSP Stocks Dropped in
February: Did You Learn Anything?")
But, while federal employees are
generally not skilled in the art of investing in the stock market,
they are generally intelligent, well-educated people and can learn
quickly--especially when not learning can cost a great deal of
money.
This month, the stock market has been
on a roller coaster ride. Headlines in financial articles have been
screaming about triple digit losses for the Dow Jones Industrial
Average. Other articles portray Americans losing their homes because
of rising rates with adjustable mortgages. Foreign stocks followed a
similar pattern with major concerns about funds losing large amounts
of money as a result of a credit crunch and losses in the housing
market. Check out the daily return rates for the TSP stock funds and
you will see some days with big a big drop in the value of some
funds. The I fund was down for six of the nine trading days so far
in August.
With all the panic and fear spreading
through some quarters of the markets, one might expect that federal
employees would again be cashing in their TSP funds and loading up
on the super-safe G fund to ride out the storm that was (and still
is) enveloping the market.
But that didn't happen. There were
investors who took money out of the TSP stock funds. But, by way of
comparison, way back on March 5th, 2007, TSP investors took $1.7
billion out of the three TSP equity funds (the C fund, the S fund
and the I fund) in one day. The TSP folks processed 34,000 interfund
transfers in that one day.
The reason is simple. The stock
market was falling fast. Investors panicked. The I fund dropped 21
cents on March 1st. It went down another 28 cents on March 2nd. It
fell another 41 cents on Monday, March 5th. Obviously, many TSP
investors saw their retirement plans swiftly disappearing along with
their TSP fund balance and they decided to save what was left of
their money and put it into the bond funds.
Despite the turmoil, and the rash of
redemptions, the I fund, as an example, closed out the month of
February at $22.55. But, at the end of March, it was still up to
$23.13. Despite the panic, the hoopla, and the dramatic drops, the I
fund finished up ahead of where it was at the end of February.
This time around, TSP investors did
not act as quickly to sell their stock funds. Last week, according
to the experts at the TSP, a total of $822 million was transferred
out of the three equity funds. While $822 million is a big number,
it amounts to less than 1% (.69%) of these funds. Moreover, the
largest daily number of interfund transfers last week was about
16,000.
So what does the future hold? As
always, no one knows. But keep in mind that volatility such as we
have seen recently is not that unusual as a bull market advances in
its later stages. The stock market hit a hit of 14,000 (the Dow
Jones Industrial Average) in mid-July. A 10% drop is not unusual
with a market that has been going up for awhile. The current bull
market started back in 2002. It has gone down at least 10% only once
since that time (in 2003). It is likely that there will be a drop to
a lower level, based on what often happens with stock markets in the
past, but the valuation of stock prices are becoming more
attractive.
Those TSP investors who decide to try
and time the market to buy at low prices and sell at high prices are
apt to find the task is not easy--just as it is not easy to beat the
odds for the gaming tables in Las Vegas or Atlantic City or Biloxi.
Generally, those investors that diversify their portfolios and keep
a balance between stocks and bonds will do better over the long run
than those that try to buy and sell in anticipation of a market
rising or falling. (See, for example, "The Emotional Investor")
But it's your retirement money and
your future and your decision as to how to invest your hard-earned
dollars. Enjoy the ride.
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