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With the stock market in turmoil and investors still wondering when
the next show will drop on government bailouts, ponzi schemes or just
continuing negative economic news, it is not surprising that TSP
investors are still moving money into the G fund.
For the month of November, another $937 million went into the
government's G fund.
TSP investors are not the only ones looking for safety and security.
Here is a quote from the Wall Street
Journal published on December 10th: "The Treasury sold four-week
notes at a 0% yield for the first time, with investors in effect giving
their cash to the government for safe-keeping until 2009. This rush to
safety occurred last year, too, when investors wanted only to own the
very safest, most liquid investments when they closed their books at the
end of the year."
In fact, some investors turned their money over to the federal
government knowing they would get a negative return. As the
Journal noted: "[I]nvestors were willing
to pay $100, knowing they would get $99.99 in return, in the belief that
a small but guaranteed loss was preferable to investing in stocks,
corporate bonds or other securities. Treasurys have been flirting with
0% yields since the Lehman Brothers bankruptcy nearly three months ago."
In other words, some investors are willing to pay the government to
take their money knowing they will get back less than they invested.
That seems extreme but, if the markets have taught us anything in the
past few months, it seems as though one cannot be too cautious.
Federal employees, by comparison, are getting a great deal. The G
fund has securities only available to the TSP. The rate of return for
the past month wasn't negative and it wasn't the 0.02% that the 3-month
Treasury bill has been paying. So far in 2008, the
G fund has returned 3.50%.
The number of interfund transfers declined sharply in November,
perhaps because some investors are now of the mind that the market is at
or close to a bottom and may provide good returns in 2009.
On the other hand, the monthly TSP contributions dropped
substantially in November. The total monthly contributions to the TSP in
November was under 1.6 billion, down from 2.1 billion in November.
The current bear market has been grinding down all investors, Between
its peak on October 9, 2007, and its low on November 20, 2008, the
Standard & Poor's 500-stock index (which is the index on which the TSP's
C fund is based) has dropped 52%. That makes this bear market the worst
since the Great Depression (through December 15, the S&P was 44% below
its high).
Many investors see continuing economic problems throughout 2009.
There is little doubt there will be plenty of bad news to come and some
of the news is likely to be as bad as any news that has already come out
with increasing unemployment figures, increasing jobless rate, and more
company failures.
TSP investors are reacting rationally to a continuing dramatic drop
in the value of their TSP funds. If you have withdrawn all or a
substantial portion of your money from the stock funds, when will you
reinvest it? Most of us have trouble making a decision to buy stocks
when the financial news all around is gloomy.
But keep in mind that there is risk in not making a decision as well.
If the stock market does go up 30% or so in the next year, you will have
missed a significant gain in the value of your portfolio. While you are
guaranteed not to lose money in the G fund, some readers have been
shifting money out of their stock funds and into the G fund and taking a
substantial loss in the process. While that has proven to be a good move
in the past 13 months, anyone planning on using the TSP as a substantial
source of retirement funds needs to objectively consider the risk of
staying out of the market for an extended time--as well as the risk of
absorbing future losses.
One other item to consider: You may live longer than you think. The
number of people living to be 100 is going up. if you are a 60-year old
man, your average life expectancy is another 20.36 and many people will
live much longer. If you are a 60-year old female, you can anticipate
living an average of 23.53 years--and perhaps another decade or so
longer.
If you are a long-term investor, it may pay to keep in mind that bear
markets do end and the stock market tends to go up ahead of positive
economic news. Mutual fund company T. Rowe Price calculated returns of
the S&P 500 following each decline in the market of at least 20%. In
those six instances (not including the current bear market), the S&P has
been up an average of 31% in the subsequent year.
While 31% seems wildly optimistic from our current perspective,
stocks do go up a few months before the economy turns up. We have
already seen some signs of this occurring as the stock market has gone
up when the economic news has been bad, including days when new jobless
figures were announced and the news broke about a huge fraud involving
as much as $50 billion by a well-known Wall Street investor.
Your retirement money will have to last as long as you do. While
Social Security and a federal annuity is about as safe a future income
as you may be able to get, the money from your TSP can go quickly and
many federal retirees will need the extra income that stocks are likely
to provide over the safe and secure G fund.
© 2008 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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