Markets have felt shaky for months, but the returns tell a very different story

Guest:	Art Stein
Title:	Certified financial planner, Arthur Stein Financial
Summary:	Markets have been noisy for months. But when you look past daily swings, many TSP funds are firmly in positive territory, highlighting the gap between headline volatility and how markets actually price information.

The Federal Drive with Terry Gerton provides expert insights on current events in the federal community. Read more interviews to keep up with daily news and analysis that affect the federal workforce. Reach out to Terry and the Federal Drive producers with feedback and story ideas at FederalDrive@federalnewsnetwork.com.

Interview transcript

Terry Gerton All right, it feels like we have been talking for months about market volatility, whether it’s engendered by concerns about war or interest rates or other sorts of uncertainty. And yet when you actually look at TSP returns, both stocks and bonds are up this year. So let me start with a basic question many federal investors might be asking. How is that possible?

Art Stein Okay, well, how it’s possible is a lot harder to say than the fact that it happened. The market goes up and down for a lot of different reasons and on a short-term basis, it may go up and down because of current events. And one thing I would say to TSP investors is if they look at returns for the first quarter through March 31st, which is what they’ll see on the TSP website, they’re like totally different than the returns they would see as of last Friday, which It’s just about two weeks or two and a half weeks later. At the end of the first quarter, the C fund was down 4.3%. As of April 17th, it was up 4.5%. You know, that’s a total turnaround. Same kind of turnaround with the S fund. It was down in the first corner. Now it’s up 8.5% for the year, the I Fund has been a little more consistent and then it was up 2% in the first quarter, but it’s now up 12% for the year. And we all saw a similar turnaround in the F Fund, which was pretty much flat in the 1st quarter. Now it’s up 0.9%. So it’s been a lot of movement. And I was, you know, when I was sort of getting ready for today’s interview, I was going through all these changes and everything that happened. And then I thought, you know, all of this just happened in a three and a half month period. I’m looking at this thing, well, you know, it’s just, I’m looking at like a year or two year’s worth of changes and events, but it wasn’t, it was just [what] happened in a three and a half month period, and so obviously we’re going to see some ups and downs in the financial markets. One of my clients said, you know, the market looks like it’s going crazy. And I, you know, went through my standard spiel that like historically the volatility is actually not that high this year. I mean, there’ve been a lot of years where it was more volatile during the first three and a half months. And then I read a great quote by Jason Zweig in the Wall Street Journal. He said, the biggest danger isn’t that the markets can go crazy, but that they’ll make you go crazy. And I just thought that was perfect. I just, I love that quote. And I’m not gonna get it tattooed on my forearm, but I am going to use it again. That’s it. This has been a good example of patient investors who don’t react to, you know, current events, really, and just stick with their investments, especially in the stock funds have done way better than people who tried to move in and out in order to either protect themselves or to make a greater profit or anything like that.

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Terry Gerton Art we often associate market volatility with losses, losing money? The backside of that is you and I have also talked about a technique called dollar cost averaging. Maybe walk us through that a little bit and how that can help people not go crazy, right, when the market is moving around so much.

Art Stein Well, this is the advantage that employees have over retirees. Employees are investing every two weeks. You know, there’s a certain amount of funds from their paychecks go into the TSP and that’s dollar cost averaging. And they can afford, one because a small amount is going in every two weeks, but also because they’re younger and have some number of years until retirement, to be much more aggressive with those bi-weekly investments than the overall allocation of their TSP portfolio. And I certainly encourage people that way, like maybe you have half your funds, maybe your current funds are 50% in the bond funds and 50% in the stock funds. But your new money going in every two weeks, why not make that 80% into the stock funds and 20% into the bond funds? The market crashes, it’s good for you because you’re investing at a lower rate and it’s gonna increase your overall return as a result.

Terry Gerton I’m speaking with certified financial planner Art Stein of Arthur Stein Financial. Art, let’s come back to the movement in the overall market indicators and the TSP performance. Some people are saying that the markets priced in their expectations about, say, oil prices before some of the recent events hit. Is that what’s happening here? Is there market information that’s being transmitted through these prices?

Art Stein Well, a lot of times there will be a major event and the market will move in a different way than people expect. And that’s because a lot of major events such as a change in the Federal Reserve’s interest rate policy are anticipated and in many cases, pretty well known. And so the stock and bond markets react to what is expected to happen. And when it happens, you know, you don’t get much of a reaction or you get the opposite reaction, anything like that. I would say that a lot of what’s happened so far this year does not fall into that category. You know, I think a lot of people thought we might bomb Iran, but I don’t think they knew that we were going to do it. And then you had a ceasefire. Oh, well, and then you have the blockade of the Straight of Hormuz, which I think should have been anticipated, but, you know, many people didn’t, certainly the administration, I think. And then the fact that Iran started bombing other countries in the gulf and their oil facilities. And that’s, you know, going to reduce oil production for years. I’m not sure how anticipated that was. And then we had a truce and then we didn’t have a truce. And, I’m sorry, I don’t think that even sophisticated investors would have known that was going to happen. Now, maybe there are some insiders who knew that, but this is just not a typical series of — a typical situation what we’re seeing now. I mean, the administration’s foreign policy has been around.

Terry Gerton Art, if volatility like we’re talking about in the market is unavoidable and you’ve sort of described it, it’s going to happen. We may not know exactly why, but the market’s going move. But in cases like this, positive returns are still possible. What should long-term TSP investors actually be paying attention to instead?

Art Stein I think that they should be paying attention to when they’re expected to be withdrawing funds from the TSP and how much they’re going to need each year and then base part of their allocation on that. I mean, if you’re, say, a year away from starting withdrawals from the TSP, you might take it, just figure out how much you’re going to withdraw per year. You know, estimate it roughly, and maybe take five years of withdrawals and put that in the G Fund. So you don’t have to worry about any volatility at all in that. And maybe take another five years of withdrawals, and put that in F Fund, which is a bond fund, which does fluctuate in value, but not a lot compared to the stock funds. This is called a bucket strategy. So you have buckets, different buckets for your needs, you know, your needs in the next five years and five to 10 years, but then for the money that you need to spend in the next 10, 20 and 30 years, I think you need to concentrate that into the stock funds. I mean, historically it was only the stock funds that increased purchasing power over long periods of time, taking into account taxes and inflation. If you’re retiring at 65, I mean, please assume that you’re going to be retired about 30 years. Not everybody will be, but lots of us are going to live to 95 or above. Because we don’t know which one of us is going to, we all need to prepare for that. And, you know, if you die with money in the bank, you’re not going to worry about that. But if you live without any money, you know, if you’re still alive when your TSP funds and other investments are exhausted, you are a miserable person.

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