Your TSP account: Surviving the coming correction

Anthony RinaldiYou know it’s coming. A major stock market correction is well overdue, according to historical averages. That’s something to keep in mind whether your Thrift Savings Plan account is in stocks, such as the C, S and I funds, or bonds, such as the F Fund. Or it could be in the G Fund composed of special Treasury securities, or in any of the automatically adjusting lifecycle L Funds.

It’s your money. A major portion of your retirement nest egg which, if you are under the Federal Employees Retirement System, will provide one third to one half of all the cash you have to spend in retirement.

If the stock market keeps humming along through the month of August, that will be the longest period in history it has not suffered a “correction” of 20 percent or more, otherwise known as a “bear” market. Although such corrections happened, on average, every 3-and-a-half years, the last correction ended in March 2009.

When/if the 20-plus percent correction hits, how will it hit you? Will it be a financial body blow that sends you running to the safety of the Treasury securities G Fund, as so many did during the Great Recession of 2008, or will you take it in stride? Will you treat it as a bump in the financial road? Continue to buy the C, S and I funds which will be on sale? That’s assuming they start growing again.

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Nobody knows when the correction will hit, when it does, how jolting it will be or how long it will last. It could be weeks, months, years or more. But just about anybody who knows the historical trends of the market knows that it is coming — sooner or later. So are you mentally and financially prepared?

Financial planner Arthur Stein says that “declines are part of the market cycle.” In fact, he counted a historical average of 5 percent declines about three times a year.

The last time it happened, he said, was late-March of this year. The last time the market had a correction of 10 percent or greater was Feb. 8, which Stein said happened on average about once a year.

Stein adds that past performance is no guarantee of future performance. A majority of his investment clients are either current or retired feds, and all had TSP accounts. After decades of investing in the federal 401(k) plan, several are TSP millionaires.

During the Great Recession, tens of thousands of TSP account holders transferred some or all of their money into the G Fund. They stopped buying shares in the C, S and I funds because they were, as it turns out, on sale — big time.  They felt it was safe to park everything in the G Fund until it was the “right time” to return to the stock market.

But Stein warns that because of the low rate of return of the G Fund, it means that over time inflation and taxes can drastically reduce the purchasing power of G Fund investments. It begs the question: If nobody, including you, knows when the next correction/crash is coming how will you know, if you flee the stock market funds, it is the “right” time to return?

Nearly Useless Factoid

By Amelia Brust

Babies are born with about 300 bones, most of which are cartilage. As they age, some of the bones fuse together and by adulthood humans have 206 bones in their skeleton.

Source: BBC