With the third quarter of 2023 wrapped up, TSP returns did not look quite as solid. To get a sense of what that means and what investors should consider, Federal Drive with Tom Temin got an update from certified financial planner Art Stein.

Interview Transcript: 

Tom Temin And Arthur, what looked like a good market in the earlier part of the year seems to have slipped a little bit in the third quarter just concluded for the TSP returns?

Art Stein Yeah, for the stock funds, Tom, it was, you know, third quarter was bad. All three of the TSP stock funds declined, 3 To 5%. Which is, you know a lot for just a three month period. But over longer periods of time, of course we still have very mixed performance. But year to date the stock funds have been good, they’re positive, have very good returns. If you want to look since January of 2022, then the stock funds are negative. But since January 2020, which to me is the COVID period. You know, it was January start up before COVID hit the United States and affected us financially, economically, and of course, personally. But the C funds up 40% since then. The S fund, 19%, the I Fund 10%. So in that very tumultuous period, stocks have done well. Now, the problem has been the bond fund, the F fund, not the G Fund, which is short term bonds, but the F fund, which is corporate and government bonds, is negative over all those periods. Like it’s down 9% since January of 2020. And of course, that is probably the worst bond market performance maybe ever. You know, to have bonds be negative. They’re negative this year, then they’ve had negative returns three years in a row. I think that I’m correct in saying that that is unprecedented. It never happened before.

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Tom Temin But government bonds are one thing. Corporate bonds are something else entirely in a sense.

Art Stein But we’re not talking remember about the G Fund, which is all short term government bonds. And really, Tom, it’s more like a savings account, you know, because even short term government bonds normally in the private sector fluctuate value. But the G Fund does not, the F fund does. It’s down because the Federal Reserve has been raising interest rates. But those bonds, you know, even the corporate bonds, it doesn’t mean they’re not going to pay off. And it certainly doesn’t mean that they’re not paying interest, which they continue to do. And as the price of the bonds goes down, the dollar amount of the interest does not go down. So they become quite an attractive investment. So right now the interest being paid by the bonds in the F fund is about 3% of the total value of the F fund. It’s what we call a 3% yield. And it means that people who are buying the F fund now, you know, are getting a very good return for something that has a potential to increase in value quite a bit if interest rates stabilize and especially if interest rates go down. So this is the kind of problem that all investors have. Which is “gee stocks have historically the best return, but they’re very volatile. They go up and down. And now bonds, which historically are much less volatile, which tend to not go down very much and certainly not for very long periods of time, all of a sudden, you know, they’re not doing as well. To me, that’s the kind of time when you want to be investing in these investments.

Tom Temin Yeah. So to deal with the volatility, in some ways it’s the eternal lesson you have to balance cash, bonds and stocks. Right? And nothing essentially new here.

Art Stein So, you know, since January of 2020, as I mentioned, the F fund, the intermediate term bond fund, is down 9%. Well, a lot of people will look towards the G Fund, which is up 9% over the same period. And, you know, that looks pretty good. But I would also point out that inflation over that same time period is up about 19%. So for people who invested in the G Fund, they’ve lost a lot of purchasing power, even though the G Fund increased in value and that’s not even taking into account taxes. So yeah, the G Fund looks better than the F fund right now. But as a long term investment, historically, when you factor in taxes and inflation, the purchasing power of the G Fund has gone down quite a bit and even the F fund has lost purchasing power.  It’s really only the stock funds, especially the C Fund and even the S Fund that have done well enough to increase purchasing power over that period of time for investors who are willing to put up with the fluctuations in value.

Tom Temin We’re speaking with certified financial planner Arthur Stein of Arthur Stein Financial. So then again, an eternal lesson is the sheer return. Raw number doesn’t give you everything you need to know to decide whether for retirement you are doing the best for yourself financially. You have to take into account the tax rates, the yields.

Art Stein The inflation rate. And you know what, historically has been the best long term investment. But then you need to think about, you know, how much money you need to spend in the short term and in the long term. I mean for someone who’s a retiree. You know, if they’re taking out $50,000 a year to live on to supplement say their FERS annuity, having money in the G Fund that they don’t have to worry about, say, $100,000, two years’ worth of expenses. I mean, that would certainly make sense because you don’t want to have to worry about how you’re going to get money out for those short term needs. But for your long term needs, someone retires at 65, they could easily live 30 years in retirement. So they also need to think about, well, where am I going to get the money ten years from now and 20 years from now and 30 years from now that I need to supplement my FERS annuity and Social Security? Of course. If that money’s been invested in the G Fund, the purchasing power would have declined dramatically if it was invested in stocks, you know, based upon historical performance. They have a very good chance of having seen an increase in purchasing power.

Tom Temin Right. So then your overall advice for people that are worried about all of this volatility and, you know, interest rates, we don’t know what’s going to happen. You know, there are issues in the world, too, that could be affecting stocks and bonds and, you know, investor confidence and so forth. What should people be doing now?

Art Stein Well, I think, you know, if you’re working you should be continuing to invest. And if you’re worried about say, the bond markets being down or the future of the economy, maybe continue to work a few more years than you planned on. I mean, people don’t mention it, but one of the great advantages of working for the government is there is no forced retirement for most positions. There is, I realize for some positions, but not for most positions. But you also need to think about what is a good long term investment. And, you know, I see people who panic and they pull all their money out of the stock funds and stick it all into the G Fund and then just leave it there forever. And then do another mistake, which is that their biweekly investments are going to the G Fund, too. Well, don’t do that. You can be much more aggressive with your biweekly investments than your current allocation. And if you are investing like that biweekly and the markets go down, that’s a good thing for you because you’re buying. And of course, you’re just putting in a much smaller amount of money every two weeks. So, you know, if that decline, I mean, you’re just much better off. But being too conservative, having too high a percentage of your investments in either or both of the bond funds really makes it much harder to generate the amount of assets that many of us are going to need for retirement.

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