In other words, anyone with money
in the G fund knows that the money they have in the fund is very
safe. But it is also not going to grow very much. During a bear
market, preservation of capital is highly desirable because your
fund balance does not go down. But, over time, G fund investors
have historically had a significantly lower return over what
they would have made by having money in TSP's stock funds such
as the C fund.
Many TSP participants are very afraid of losing money. That
is understandable, especially as a person gets closer to
retirement and wants to know the money invested will be there
when it is needed because that is a major source of retirement
income. That is probably the rationale for most people to put a
considerable amount of their money into the G fund.
With the introduction of the lifecycle funds, or the L funds,
conservative investors have other options. The L Income fund is
the most conservative of the lifecycle funds. Take a look
at the monthly returns of the L Income fund vs. the G fund
for 2007. One item you may want to note: Most of the time the L
Income fund has a higher return than the G fund. For 2006, the
first year of existence for the L funds, the L Income fund had a
return of 7.93%. The G fund had a return of 4.93%.
The math gets tricky but there is little doubt that investors
have "lost" a great deal of money over the past couple of years
by not taking advantage of the higher returns in the L Income
fund for the most conservative allocation of their TSP balance..
The reality is the TSP investors are catching on though. The
number of people investing in the L funds is growing every
month. And, according to the folks at the TSP, L fund investment
balances grew by 5.4% just during the month of September 2007.
The stock market funds have done very well during 2007. But,
as most readers have noticed, there are days when their stock
funds went down as the market went up or down by triple digits
according to the leading stock market indicator. TSP
participants who did not get excited and left their money in the
stock funds have done very well. The reality is that billions of
dollars have been exiting the C fund. About $1.1 billion was
transferred from the C fund in August and another $391 million
left in September (Another billion left the I fund during August
as well.). Despite the fluctuation, the C fund went up 1.54% in
August and another 3.76% in September. The money that went into
the G fund went up 0.33% and 0.41% for the same two months.
Sometimes percentages do not seem as vivid as putting an
example into real dollars. Many readers (including the author)
may not be a whiz at math. But most of understand how a
difference in actual dollars can impact our lifestyle or
spending habits. Here is an approximation of the difference you
can have in your TSP account.
If you had $100,000 in the G fund, at the end of August, you
would have $100,330 if you did not add any more to your account.
At the end of September, you would have $100,741 with the
additional interest for that month.
But, if you had $100,000 in the C fund on August 1st, you
would have $101,540 at the end of the month. And, by the end of
September, your account would have grown to $105,357. All
figures assume no additional money was added to your account
during that time.
The total difference in your account between having invested
in the C fund and the G fund during this two month period:
$4616. Part of the difference is because of the "compound
interest" factor. Over the time you are working in your federal
career, this factor can make a significant difference in the
amount of money you will have for your retirement years.
Remember this is a hypothetical approximation and not a real
return but it is based on the actual posted returns for the TSP
funds for August and September.
The bottom line: If you make investment
decisions based on your emotional reaction to what the market
has done in a short time, you are likely to make a bad
investment decision. TSP investors who reacted to the short-term
market drops in August by putting more money into the C or I
funds would have made a substantial profit. But, with more than
two billion exiting those funds in that money, most investors
reacted to a short-term market drop and lost money.
If you are uncomfortable watching the daily market returns,
and cannot control your reaction to the fluctuation, consider
putting your money in a lifecycle fund. You are likely to be
better off than putting all of your assets into the G fund
which, at best, will keep your money safe and secure and come
close to matching the rate of inflation. Your assets are not
likely to grow and you may need that money that growth would
have provided in your later retirement years.
© 2007 FedSmith Inc. All rights reserved. This article may not
be reproduced without express written consent of FedSmith Inc.
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