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Many FedSmith readers are wondering about their financial security
when they retire. With the large market drop in 2008, and the numerous
news items about the miserable stock market returns for the S&P 500
(think of your C fund in the Thrift Savings Plan which is based on the
S&P 500), readers who are concerned about their financial future in
retirement should be described as cautious, not paranoid.
Frequent questions we get from readers are along these lines: "What will the
stock market do this year? Should I continue to put my money into stocks in 2010
even though the stock market was up substantially in 2009?"
These are good questions. To find out what professional investors think about
the stock market for the coming year, I attended "The Money Show" in Orlando,
Florida recently. If you like to invest, or feel the necessity of investing for
your financial future, an event such as this makes for an interesting week. Some
8000 investors with 242 experts from seven countries descend on a large hotel in
Orlando to discuss investing for fun and, hopefully, for future profit.
For those who think attending four days of sessions on earnings predictions,
the rate of return on Treasury bonds, and the future of the dollar compared to
the Swiss Franc is the equivalent of purgatory or a descent straight into hell,
the hotel also offers golf courses, a spa and numerous restaurants with
Disneyland being about 10 minutes away to take your mind off of stocks, bonds
and investing in gold or other precious metals.
The reality, of course, is that no one can predict the future with certainty.
But, with a number of experts who have spent their careers watching and
investing in stocks and bonds, one approach is to look for a common theme or
consensus from these analysts.
Many people are afraid to invest in stocks after the C fund was up almost 27%
in 2009. (Here
are the historical annual returns for all TSP funds.)
But here is a ray of optimism that may give some a better perspective.
Sam Stovall is the Chief Investment Strategist for Standard and Poor's and
writes frequently on investing and market history. His perspective is broad and
extensive.
He notes that in the first year of a bull market, stocks initially go up
about 30%. The market then generally drops about 7% before heading back up. In
the second year of a bull market, there is historically a 15% total return in
stocks and as much as a 36% rise in earnings for S&P 500 companies in 2010.
2010 is the second year of what may prove to be a bull market after the
dramatic fall in stocks in 2008. While the average 15% gain in stocks for 2010
may be high, there seems to be a consensus among many professional investors
that an increase of 10% - 11% for 2010 is reasonable—with considerable
volatility throughout the year.
Several speakers at the event predict that the first part of the year will be
the best for the stock market and that the market will pull back in the latter
part of 2010.
Market sectors also often provide different returns. In the first year of a
bull market, small company stocks often go up more than larger companies. And,
in fact, last year the TSP's S fund went up almost 35% while the C fund went up
about 27%. In the second year, the larger companies tend to perform better than
the smaller companies.
Most Thrift Savings Plan investors are not planning on trying to frequently
move their assets from one fund to another to try and anticipate the next major
move in the market.
The TSP offers a range of funds to enable you to diversify your investments
so that while you may not get as big a return when the stock market moves up
quickly, you also do not lose all of your money when the stock market drops.
Stovall points out that a 60% - 40% diversification between stocks and bonds
can make a huge difference in your overall return. He notes that an investor
with 60% invested in the S&P 500 and 40% in long-term U.S Treasury bills
experienced a 13.1% decline in 2008. That is actually a smaller decline than
investors experienced in several serious market declines.
And, while no one wants to see your investments drop by 13% in a single year,
that cushion offered by the Treasury bills (think of the G fund) prevented a
much bigger loss if all of your money was in one of the stock funds offered by
the TSP.
Putting all of your money into a safe investment such as the G fund will
preserve your money. It will also mean that all of your money in a safe
investment will lower your long term return on your investment. The 60% - 40%
split described by Mr. Stovall was used for illustrative purposes and a person
who is retiring this year may conclude that 60% in the TSP stock funds is too
high.
The advantage of the Thrift Savings Plan is that you can invest to suit your
personal situation and personality with the gains (or losses) that result from
your decisions.
I will follow up with other observations from professional investors at the
Orlando Money Show in the next few days in hopes it will help you make the right
investment decisions.
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