Despite Market Jitters, Returns Paint a Surprisingly Strong Picture

Terry Gerton It seems like we’ve been discussing market fluctuations for months now, whether driven by worries over war, interest rates, or various other uncertainties. Yet when you actually examine TSP performance, both stocks and bonds have gained this year. So let me pose a fundamental question that many federal investors might have. How does that happen?

Art Stein Well, explaining how it happens is far more difficult than acknowledging that it did. The market rises and falls for numerous reasons, and in the short term, it may fluctuate due to current events. And one thing I’d tell TSP investors is that if they check the returns for the first quarter through March 31st, which is what appears on the TSP website, those numbers look completely different from what they would see as of last Friday, which is roughly two to two and a half weeks later. At the close of the first quarter, the C Fund had dropped 4.3%. By April 17th, it had climbed 4.5%. That’s a complete reversal. A similar turnaround occurred with the S Fund. It was down in the first quarter. Now it’s up 8.5% for the year. The I Fund has been somewhat more steady — it was up 2% in the first quarter, but it’s now up 12% for the year. And we all witnessed a comparable reversal in the F Fund, which was essentially flat in the first quarter. Now it’s up 0.9%. So there’s been a great deal of movement. And I was, you know, when I was preparing for today’s interview, I was reviewing all these shifts and everything that took place. And then I realized, all of this occurred within just a three-and-a-half-month window. I was looking at this thinking, well, this looks like a year or two worth of changes and events, but it wasn’t — it was simply what unfolded in a three-and-a-half-month span. And naturally, we’re going to experience some ups and downs in the financial markets. One of my clients remarked, you know, the market seems like it’s going haywire. And I went through my usual explanation that historically, the volatility isn’t actually that elevated this year. I mean, there have been plenty of years where it was more volatile during the first three and a half months. And then I came across a wonderful quote by Jason Zweig in the Wall Street Journal. He said, the greatest danger isn’t that the markets can go haywire, but that they’ll drive you haywire. And I thought that was absolutely perfect. I just love that quote. I’m not going to get it tattooed on my forearm, but I am going to use it again. This has been a great illustration of patient investors who don’t react to current events and simply stay the course with their investments, especially in the stock funds — they’ve performed far better than people who attempted to move in and out in an effort to either protect themselves or generate a larger profit or anything of that nature.

Terry Gerton Art, we frequently link market volatility with losses, with losing money. On the flip side, you and I have also discussed a strategy called dollar-cost averaging. Perhaps you could walk us through that a bit and explain how it can help people stay level-headed when the market is swinging so dramatically.

Art Stein Well, this is the edge that employees have over retirees. Employees are putting money in every two weeks. A set portion of their paychecks flows into the TSP, and that’s dollar-cost averaging. They can afford to be more aggressive — partly because a modest amount is going in every two weeks, but also because they’re younger and have a number of years before retirement — with those bi-weekly contributions than with the overall allocation of their TSP portfolio. And I certainly encourage people to think that way. For instance, maybe half of their existing funds are in bond funds and half are in stock funds. But their new contributions every two weeks — why not allocate 80% of that to stock funds and 20% to bond funds? If the market drops, that actually works in your favor because you’re buying at a lower price, and it’s going to boost your overall return as a result.

Terry Gerton I’m speaking with certified financial planner Art Stein of Arthur Stein Financial. Art, let’s return to the movement in the broader market indicators and TSP performance. Some people are suggesting that the markets already factored in their expectations about, say, oil prices before some of the recent events unfolded. Is that what’s going on here? Is market information being communicated through these prices?

Art Stein Well, many times a major event will occur and the market will move in a direction that catches people off guard. That’s because many major events, such as a shift in the Federal Reserve’s interest rate policy, are anticipated and in many cases fairly well understood. So the stock and bond markets respond to what is expected to happen. And when it actually occurs, you don’t get much of a reaction, or you get the opposite reaction. I would say that much of what has transpired so far this year doesn’t really fit into that category. I think a lot of people assumed we might strike Iran, but I don’t think they knew it was actually going to happen. And then there was a ceasefire. And then came the blockade of the Strait of Hormuz, which I think should have been anticipated, but many people didn’t see it coming — certainly the administration, I believe. And then Iran began attacking other countries in the Gulf and their oil facilities. That’s going to reduce oil production for years. I’m不确定 how expected that was. And then we had a truce, and then we didn’t have a truce. I’m sorry, but I don’t think even sophisticated investors would have predicted that sequence of events. Now, perhaps some insiders had advance knowledge, but this is simply not a typical situation — not a typical chain of events compared to what we’re witnessing now. I mean, the administration’s foreign policy has been unpredictable.

Terry Gerton Art, if the kind of volatility we’re discussing in the market is inevitable — and you’ve described it as something that’s going to happen — we may not know exactly why, but the market is going to move. Yet in situations like this, positive returns are still achievable. What should long-term TSP investors actually be focusing on instead?

Art Stein I think they should be focusing on when they expect to start withdrawing money from the TSP and how much they’re going to need each year, and then base part of their allocation on that. For example, if you’re about a year away from beginning withdrawals from the TSP, figure out how much you’ll withdraw annually. Estimate it roughly, and perhaps set aside five years’ worth of withdrawals in the G Fund. That way, you don’t have to worry about any volatility at all in that portion. And maybe take another five years’ worth of withdrawals and place that in the F Fund, which is a bond fund — it does fluctuate in value, but not nearly as much as the stock funds. This is known as a bucket strategy. You have different buckets for your needs — your needs over the next five years, five to ten years — but then for the money you won’t need to spend for another 10, 20, or 30 years, I think you should concentrate that in the stock funds. Historically, only the stock funds have increased purchasing power over long periods of time, accounting for taxes and inflation. If you’re retiring at 65, please assume you’re going to be retired for about 30 years. Not everyone will be, but many of us are going to live to 95 or beyond. Since we don’t know which of us will, we all need to plan for that possibility. And if you pass away with money in the bank, that won’t be a concern. But if you’re still alive when your TSP funds and other investments run out, you’re going to be in a very difficult position.