Important Lessons for TSP Participants Resulting from the 2008 Stock Market Downturn
Edward A. Zurndorfer, CFP
Most federal employees invest regularly in the Thrift Savings Plan (TSP). About
this time last year during the fall of 2007, many TSP participants were elated
both at the performance and the size of their TSP accounts. But this past year's
dismal stock performance has resulted in dismay and concern among many TSP
participants.
As a result of the bleak performance of the stock market during 2008, some
employees in fact have delayed or "put on hold" what was to be their anticipated
retirement late this year or in early 2009. Some participants have switched
their TSP fund allocations from the moderately aggressive stock funds to the
conservative bond funds.
Given the present - and perhaps the near future - performance of the stock
market, is it a wise strategy at this time to switch one's TSP fund allocations
from the moderately aggressive stock funds to the more conservative bond funds?
Is there anything that TSP participants can learn from the stock market's dismal
and volatile performance during 2008?
Here are some facts and recommendations for TSP investors to
consider:
No type of market -- whether it is the bond market, the stock market
or the real estate market -- will continue to rise on an indefinite
basis.
For example, during the real estate "boom" between 2003 and 2006, many
first-time homeowners were so certain that housing prices would continue to rise
that they applied for - and in most cases were accepted for - adjustable rate
mortgages (ARMs) with low "teaser" interest rates. In some instances individuals
chose a no down-payment option with an "interest only" mortgage. During 2007,
interest rates rose, home prices fell in many parts of the country, and mortgage
rates were reset higher resulting in unaffordable monthly mortgage payments and
foreclosures in many parts of the country.
Similarly, many investors who purchased technology stocks during the 1990's
were disappointed when their stocks dropped in value starting in March 2000.
They had mistakenly assumed that technology stocks would continue to rise
following the internet boom of the late 1990s.
Advice for investors: Be prepared for a period in which any type of an
investment asset may decline in value, at least for some period of time.
Do not "panic".
If there was even a time to "panic", it was most likely in October 2007 when
the stock market had nearly reached its all-time high. If an investor
wanted to sell his or her stock portfolio, the decision to sell should have been
made at that time. What has transpired in the stock market during 2008 has
occurred before. There was the one day stock market "crash" on Oct. 19, 1987.
Stocks also significantly fell during the savings and loans crisis of the early
1990's and during the Asian markets "meltdown" of 1997-98. While the stock
market went into a downfall on each of these occasions, it ultimately recovered
at least some - if not all - of its losses.
Diversification can help smooth volatile periods.
One reason many portfolios have recently significantly declined in value is
that these portfolios are not diversified. No matter what is happening in the
stock, bond or real estate markets, investors should always include in their
portfolios a mixture of investments that includes stocks, bonds, real estate and
cash/money market accounts.
Take advantage of the "sale."
When the stock market is down - such as now - it is a time to buy rather than
to sell stocks. The downturn in the stock market has stocks looking cheaper now
than they have in recent years. It is today's environment of low stock prices in
which long- term and patient investors may ultimately make their investment
gains.
With the upcoming pay raise in January, use the pay raise to lower
one's debt and to increase one's savings.
Unfortunately, most people do not use their pay increases and
bonuses/promotions to improve their finances and net worth. They are not making
any attempt to get rid of their debt, especially credit card debt. While today's
increasing living costs may be one reason why this is happening, partial blame
lies with what is called Parkinson's Law. This law was named for the English
economist who labeled this tendency for many potential investors. The law simply
states that as the supply of a resource increases, so does the demand for that
resource. Put in another way, "the more we make, the more we spend". Here
are recommendations to help overcome our tendency to spend rather than to save:
- Have a budget and stick to it. A detailed understanding of
one's current expenses and having a plan for remaking where a salary increase is
to be directed can keep one from negating and wasting that salary increase.
- "Crash" financial diets do not work. As with "crash" food
diets, setting an excessive "rigorous" long-term savings course is not only
unfair but it may be counterproductive. Employees should use their salary
increases to first address their immediate financial needs such as paying down
debt and then to help accomplish their long-term savings goals.
- First fund the TSP and then other savings. In advance of
the January 2009 salary increase and because the TSP contribution limits will be
increasing for 2009, employees should consider increasing their contributions to
the TSP for 2009. Every individual should also have a minimum amount of
liquid savings equal to six months of their average monthly expenses. They may
also want to boost their investments in the form of contributions to IRAs and to
non-retirement accounts.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner (CFP) and Enrolled
Agent in Silver Spring, Maryland. He is also a registered representative with
Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also
located in Silver Spring, Maryland
| 
Overview - CSRS
