Last month 166,000 TSP investors pulled billions out of their stock market fund investments and put it into the super-safe treasury securities G-fund. Was that a good move, or are they locking in losses?
Financial planner Arthur Stein says most people who fled from the market are likely making a mistake. Like many investment pros he is not a fan of timing the market. And like many pros he says missing a handful of the “best” days of the stock market in a one year period can be costly.
Here’s what he says:
The economy is in bad shape and there is no sign that it will improve soon.
That is a bad situation. An example of making it worse are federal employees and retirees who transferred $3.466 billion from the stock-indexed C, S and I funds into the Treasury securities G-fund in September.
Not a good idea for anyone still working and investing. A declining market is good for those people because it allows them to buy stocks when they are cheap. It is a time to increase investments, not decrease them.
This is especially true for federal employees. They have job security and the ability to postpone retirement, a 5% TSP match and subsidized health insurance. If anyone can survive and prosper during a downtown, it is current federal employees.
Anyone smart enough to time the market would have pulled out of stocks and would be buying now. Selling now is locking in losses that are currently just paper losses.
The attached report from Invesco Aim mutual fund company shows one of the dangers (pdf). During the period 1997 to 2007, missing the 10 best days in the stock market reduced a 5.8% average annual rate of return to 1%.
The stock market overcame the great depression, the 1987 crash and 9/11. Why do so many think it won’t survive current economic problems?
A Look at the Figures
According to Invesco, “while you’re sitting on the sidelines, some of the market’s best single-day performances could slip right past you.”
Invesco invites you to suppose you had $10,000 invested in the S&P 500 from 12/31/1997 through 12/31/2007. Your $10,000 would have grown to $17,572, with an average annual return of 5.80%.
But suppose during that 10-year period there were times when you decided to get out of the market, and, as a result, you missed the market’s 10 best single-day performances. In that case, your 5.80% return would have fallen to 1.02%. If you had missed the market’s 20 best days, that 5.80% return would have dropped to -2.64%. Of course, past performance cannot guarantee comparable future results.
The Penalty for Missing the Market
Trying to time the market can cost you a bundle. Here’s Invesco’s chart illustrating a hypothetical $10,000 investment in the S&P 500 index from Dec. 31, 1997 to Dec. 31, 2007.
Period of investment
Average annual total return
Growth of $10,000
Miss the Best 10 Days
Miss the Best 20 Days
Miss the Best 30 Days
Miss the Best 40 Days
Miss the Best 60 Days
The chart, reminds Invesco Aim, “is for illustrative purposes only and does not reflect the performance of any AIM fund.”
Questions About Market-Timing?
Arthur Stein will be our guest Wednesday, Oct. 22, on the Your Turn show. You can listen live (and call in or e-mail questions) at AM 1500 in the Washington area or anywhere, over the internet, at www.federalnewsradio.com