A slightly-past-mid-year review of your Thrift Savings Plan investment returns

For Thrift Savings Plan investors, 2023, so far, has brought a partial climb back out of the depths of 2022. It's a good time to separate the patient investors ...

For Thrift Savings Plan investors, 2023, so far, has brought a partial climb back out of the depths of 2022. It’s a good time to separate the patient investors over here, and the would-be market-timers over there. For more,  Federal Drive host Tom Temin  spoke with Certified Financial Planner Art Stein.

Interview Transcript: 

Tom Temin How are they doing relative to where they were and how are they doing relative to the market in general?

Arthur Stein Year to date, rates of return for all the TSP funds have been very good and for the stock funds they’ve really been great. The C funds up 17% this year. The S fund 13%, the I fund 12%. Those are really big rates of return for a six month period. F funds up 2% and the G funds up 2% too. These are all rounded to 1%, of course. So a very good year now. A lot of contrast to last year, which was an unusually bad year because both the bond, the F fund, the the intermediate term bond fund and all the three stock funds were down by double digits. And, you know, a certain number of people are, during those kinds of decline, are tempted to pull their money out of the stock funds and probably the bond fund, too, and put it in the G Fund, which has an advantage that it never fluctuates in value. It’s never going to go down. It’s never going to go up very much either. But people like that safety and that hurts them because then they’re not invested in the stock funds when the stocks start to go up. And for employees, what I find maybe even more disturbing is the people that do this, Tom, tend to then start making their biweekly investments into the G Fund, too, instead of, you know, concentrating those into the funds that have gone down in value, which gives them the opportunity to buy shares when they’re cheap, which is a lot of leverage when they start going up. It’s really an emotional reaction can very much hurt people. Another thing to keep in mind is that really bad years, you know, historically have been followed by lots of very good years. And overall, you know, if you look long periods of time, the TSP funds, the stock funds have way outperformed the bond funds over the last 15 years. The average annual return per year for the C fund was 11%, 9% for S, And, you know, compare that with 2.9% for the F fund and 2.3% for the G Fund. It’s a big difference.

Tom Temin In other words, you should have your strategy in place and be patient with it, even when it gets a little wavy and you get a little bit of queasiness.

Arthur Stein Yeah, investors need to anticipate these types of market declines. You know, there’s always a potential and, you know, the worst thing that someone can do is to try and time it in advance. So, you know, people were pulling out in anticipation of a recession this year, which has been heavily forecasted and has never happened. And, you know, and it doesn’t look like it’s going to happen any time soon unless we you know, there’s some kind of terrible event happens to cause it, Which, you know, I mean, if you look at COVID, you look at the war in Ukraine. Lots of other things. I mean, that’s possible. But to invest for that doesn’t make sense.

Tom Temin And sometimes the economy and markets will surprise you. I mean, everyone anticipated with these rising rates of interest, okay, the inflation was tamped down, but it didn’t really have the recessionary effects that people remember vestigial from the 1980s.

Arthur Stein Absolutely. I mean, the reason the Fed raised interest rates was to reduce inflation, even if it meant that we would have a recession and they were willing to make that sacrifice. They’ve done it before. And, you know, as painful as it is, it make sense. But the recession has not happened. And the most striking thing is that employment is, you know, the employment numbers are great. Unemployment is very low. And that is really counterintuitive to a time when interest rates have increased so much.

Tom Temin Well, that’s right. I mean, it could be that we are on a verge of a structural change in the economy and the way it operates. I mean, this happens from time to time, you know, every 50 years or so. You know, the so-called service economy, I don’t know what the next economy is, but it seems like all of that was accelerated to some degree, maybe by the pandemic.

Arthur Stein That could be. But it could also be Tom, that just economists are not very good at forecasting the effects of things like higher interest rates. I mean, they can look back and say, you know, looking at all the historical examples, most of the time this happened, if we did this. But it’s never all the time. And the exceptions can put a permanent dent in someone’s investments if they make the wrong move. I mean, what we do for clients in my firm is we don’t do anything in advance. We don’t try and forecast the market. But when the market goes down a lot, we sell bond funds to put money into stock funds and we take advantage of the decline in the markets. Now, when the markets are way up, then we’re selling stock funds. Don’t put money into bond funds. Take advantage of the big increases in stocks that way we’re not forecasting. We’re reacting to what has actually happened. I think that’s better. What I would suggest for TSP investors is that they keep in mind there’s always a stock market crash coming up. It’s just we don’t have any idea when it’s going to happen. The next one could be 11 years from now. For all I know, Tom, it could be 11 days from now. But you need to have a plan as to what you’re going to do. And pulling money out in advance is not a good plan.

Tom Temin Right. And so how do you balance what you do with your plan versus that idea of sticking with your strategy and not trying to time the market? There’s some kind of middle ground there that makes sense for individual investors.

Arthur Stein I just think don’t try and manage your investments, move money around and then in anticipation of what you think might happen or even what you read in all the papers and hear on CNBC what they think is going to happen no matter how many people think it’s going to happen. And but if something does happen, well, then maybe you just continue to invest. You continue with the same allocation you have before, or maybe you move money into what’s gone down in value because selling high and buying low and then maybe selling high later, that’s the way to make a profit. But if you’re it’s too tempting to sell once things start going down and the markets crash and people get scared and disgust and then they’re selling low and it’s very hard to get back into the market emotionally.

Tom Temin Right. And so you have to kind of filter out a lot of the news stream and the consensus forecasts and all of this information. It’s almost hard to avoid hearing it day in, day out and.

Arthur Stein Reading it, too. And I mean, keep in mind and, you know, you know this a lot better than I do. If you’re on CNBC five days a week or you’re writing an article for the Wall Street Journal five days a week, you have to come up with some hook five days a week. So it’s easy to, like, overanalyze the market and say the market is telling us this or the market’s unhappy about that. This makes the market nervous. And the market is not a person and it doesn’t react that way. It is the sum total of millions of decisions being made every day by I don’t know how many numbers of people. And the net result of that is that the market is going to go up or down.

Tom Temin Yeah, people treat the market the same way they treat Twitter or something or social media. You know, you see these headlines, Twitter goes crazy over X, Y, Z. You know, my answer always is so what that means absolutely nothing in reality.

Arthur Stein Yeah. And a lot of the analysis shows see, if you look closely, you frequently see the words the market may crash this year. Well, yeah, that could happen at or it may go up. I mean, that’s not really a forecast. That’s just stating the obvious. It could go up or down. It’s like we could have rain this year. Yeah. And you know, that’ll happen. You need to ignore a lot of that and just look at the historical trends. Past performance, no guarantee of future performance. But historically, stocks have outperformed bonds in well-diversified, well-managed portfolios by significant amounts long term, but have way underperformed for months or in some cases years. Well for most people, the TSP is a long term investment and they need to invest accordingly.

Tom Temin Yeah, this would seem like a good time to stick with the plan because the market is up again and we don’t know what it’s going to do in the second half of the year. But the fundamentals such as they are, have driven this market and nothing has fundamentally changed. The inflation seems to be under control. Now they’re talking about wage inflation, but that’s kind of a hard thing to be against. I guess, if your wages are going up, You know.

Arthur Stein I mean, wage inflation, for most people, that’s a good thing because their wages are going up. And it’s not like the price of a chicken goes up for no reason at all. I mean, the chicken doesn’t get anything out of that, as we know. And we want to see wages go up more quickly than inflation and, you know, historically more efficient use of resources and things like computers and maybe AI have allowed for wages to go up much more quickly than inflation.

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