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