TSP accounts: After the declines, how long to recover?

Yet seasoned investors know that stock market declines are inevitable. Only two questions come to mind when a decline begins: How deep will it be? How long will...

The coronavirus has hit world populations and the world economy hard. Some of the best minds are working to find treatments or even a vaccine, but until one is found, stock markets around the globe have continued to fall at historic speeds.

Yet seasoned investors know that stock market declines are inevitable. Only two questions come to mind when a decline begins: How deep will it be? How long will it last?

It goes without saying that we never know when declines will occur, or why. Some decades never experience a meaningful decline in U.S. or world equities, and some decades experience multiple major declines. In the 1990s, for example, the decade began with a minor decline of just over 10% that ended in January 1991, after a shallow recession and just ahead of the culmination of military operations in Iraq as part of Operation Desert Storm. The next couple of downturns did not occur until 1997 and 1998, and they too were very short in duration and not very significant. Prior to this, 1987 witnessed the sharpest one-day drop in U.S. stock market history to that point, of 22%. This was only three months before the C Fund became operational, but a $250,000 portfolio invested in the S&P 500 stock index fund (on which the C Fund is based) after that day would have been slashed to about $193,000. Overnight. During those late months of 1987, the markets dropped by about one-third in total.

Investors in the 2000s, as many readers remember, experienced multiple downturns. The first started in 2000 and continued for three years straight, which was historically one of the longest such downturns. It followed an historic bubble in stock market values – the S&P 500 and the C Fund returned at least 20% in each of the five prior years in the late 1990s – and we also experienced the 9/11 terrorist attacks and a recession during that time too. The second decline in 2008-9 happened relatively quickly, but it was among the worst drops in U.S. and world stock markets since the Great Depression in the 1930s.

Using market return data from those years, we can see how an average investor would have fared during those major declines and after. Not only did intrepid investors survive those downturns, they flourished in the years afterward.

In the just-released book, TSP Investing Strategies: Building Wealth While Working for Uncle Sam, 2nd Edition, I examined every 20-, 30-, 35-, and 40-year period between 1900 and 2019, to examine how average investors would have fared in a variety of market conditions during those timeframes. Each of these periods have their own characteristics, but it’s important to observe that investments in broad U.S. stock indexes (similar to the C and S Funds) declined significantly at certain points during every period examined, and they also recovered and went higher given enough time. Indeed, I found that in every 30-year period examined since 1900, an all-U.S. stock index portfolio (C Fund) outperformed the all-government bond portfolio (G Fund), usually by substantial margins. The one exception was in 1903 to 1932, when the two ended almost even during the depths of the Depression (the stock fund recovered somewhat in the next several years, however).

By knowing this in advance, and by seeing how an average investor fared during and after these declines with a given investment approach, we can be mentally – if not emotionally – prepared for the declines as they happen and weather them.

To see this cycle in action, let’s examine the 35-year period from January 1983 to December 2017. As you’ll see in the chart below, this period includes the quick, sharp drop in 1987, the bubble years of the late 1990s, the lengthy decline in the U.S. stock market over three consecutive years in the early 2000s, and the major drop in the U.S. equities of over 50% in 2008 and early 2009.

Let’s start the period as a new employee contributing 5% of an entry-level salary of $30,000. With the government match, this would equal $250 in monthly contributions in the first year (monthly contributions are used for ease of calculation). Let’s also assume that the annual salary – and therefore regular contributions – increase by 5% a year. Contributions total about $271,000 over those 35 years, and assuming half of those contributions are government matches, that means the TSP participant in this example would have invested less than $136,000 of his or her own money over the 35-year period.

For this example, I tested four portfolios. The first invests all contributions monthly in the S&P 500 (with dividends reinvested), which represents the C Fund. The second invests all contributions monthly in an account that returns the 10-year U.S. Government Bond interest rate, which closely matches the G Fund. A third portfolio invests about two-thirds (65%) in the S&P 500 and one-third (35%) of contributions in the 10-year bond, without rebalancing over time. The fourth portfolio invests in the same mix (65-35) but rebalances at the end of each year back to the 65-35 mix to account for portfolio drift over time.

Here, then, is the outcome for our investor who invested monthly from January 1983 to December 2017:

As you can see, the C Fund has ended the 35-year period with the highest value, but during each market decline it also suffered the steepest declines in account value, relative to the other funds. Compared with the balanced funds, it also took longer to recover after each downturn, depending on how we define “recover.”

If we define “recover” as the time from the month of peak value before the decline to the month when the account surpassed that same value, the all-C Fund account took almost exactly five years to recover after the three-year declines of the early 2000s, while the 65-35 C-G Fund account took just over four years and the 65-35 annually rebalanced account took 3½ years to recover to their original values.

The 2008-9 decline was both shorter and sharper, so that that the all-C Fund account took just over three years to recover its value, while the 65-35 account took three years and the annually rebalanced 65-35 account took 29 months to recover.

While it is not visible in the chart, the fastest recovery during this period came after the major declines in the late-1987 period. Even the all-C Fund account recovered to its original value in just over a year, and the other funds recovered more quickly. This is because U.S. equities recovered relatively quickly despite the drop in value of about one-third.

And while the 10-Year Government Bond account never declined in value – the G Fund is the only fund in the TSP to have never experienced a decline – it ended the 35-year period last in terms of total returns.

These are just a few examples from the previous 100+ years of U.S. stock and government bond index history. In all but the most severe cases, the total value of a portfolio that consists mainly or entirely of U.S. stock indexes (such as the C Fund) fully recovers after a significant decline within one to three years. The severest and lengthiest of declines can take another year or at most two from which to recover, while accounts can recover relatively more quickly following short-term drops, even when the drops are significant. This assumes that the TSP participant does not sell his or her stock fund(s) and continues to invest on a regular basis in them. There are other structured approaches that can be employed as well during downturns, detailed in TSP Investing Strategies, but the buy-and-hold approach is the easiest over long periods of time.

Over time, we will find a way to recover from the coronavirus, and the U.S. and world markets will subsequently recover after these dramatic downturns eventually too.  By remaining invested and continuing to invest during these difficult times, TSP accounts will recover as well.  These are challenging times, but one way to lessen anxiety — at least as it relates to investing — is to focus on the long term.  May you all stay safe and healthy as we await a global recovery.


For more 30- and 35-year charts, data, and more background on the study, see the project’s GitHub repository at www.github.com/TSPstrategies/2ndEdition; adjusted salaries and inflation can be added as additional variables in the main script used for these calculations in the GitHub repo.  Follow the project at https://tspstrategies.com, at facebook.com/tspstrategies, or @TSPstrategies on Twitter.

TSP Investing Strategies: Building Wealth While Working for Uncle Sam, 2nd Edition, is available on Amazon at https://www.amazon.com/dp/B085R72HX3. A Kindle version will be available soon.

Lee Radcliffe is a data analyst with the Federal Government with 20+ years of both civilian and military experience. He has an MA in International Policy Studies from Middlebury Institute of International Studies and a graduate certificate in data analytics from George Washington University.

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