There’s been widespread panic over the coronavirus. Whether it’s people wearing face masks or buying hand sanitizer and water in bulk, there’s growing concern throughout the country as the number of cases in the U.S. increases.
There’s also panic on Wall Street. The stock market is falling fast. Many Thrift Savings Plan (TSP) investors have seen their accounts dwindle in value in just a few days. Is this the time to sell your TSP stock funds?
In this article, I’ll discuss the top 5 things you should know about the coronavirus and your TSP.
1. Fear and greed drive the stock market.
We all know that fear and greed drive the market. We’ve heard that our whole lives, and if you listen to most news outlets right now, it’s absolute hysteria.
The only legitimate reason to panic right now is if you honestly believe that this is the end. Meaning, all of the investments that you have (like the C, S, & I funds within the TSP) – that you legitimately believe their value will never return. Do you believe that the American economy is doomed and it will never return? Do you believe that all of the companies that you are invested in within your individual investment portfolio, that they’re all going under? That would be a legitimate reason to panic, but we don’t believe that. I don’t think anybody that I’ve heard from legitimately believes that.
When the market fluctuates up and down, we haven’t actually experienced a loss or a gain—yet. It’s not until we actually sell those shares that we find out if we made a good deal. Did we buy low and did we sell high (at least relative to how we’re investing and the timeline)? You’ve probably heard this referred to as a “paper loss,” meaning you’ve got a statement that shows you’ve “lost money,” but in fact, all of your shares are intact and when the market recovers, the value of all of those shares goes up. That’s why it’s called a paper loss. It’s not a real loss yet.
2. Knee-jerk reactions rarely favor the investor.
When you watch what is happening in the market, everything is getting so blown out of proportion from an investing standpoint. Investors are in somewhat of a scary position where they’re hearing that this “doom and gloom” because of the coronavirus. It causes people to be very nervous of what they’re doing and then they start making knee-jerk reactions.
The thing I want to share and really drive home is that knee-jerk reactions—in a good or a bad market—rarely favor the investor. Most often when people are scrambling to make a fast move in a down market, they end up regretting it because it wasn’t something that was rational for them to do. Again, the world is not ending, the U.S. stock market is not ending, and so as long as you don’t need the money right now, you’ve suffered a paper loss and, if we look historically, the market will rebound.
3. It’s important to determine your risk tolerance.
There are two different parts of “risk tolerance.” The first is how much you can financially handle to lose with the idea that you want the upswing when it happens. The second is how much your stomach can handle to lose – that’s just your gut reaction to loss.
Sometimes we’re in a position where financially we can handle to lose a little bit for the hope of a bigger gain, but our gut just doesn’t let us get there. We’re worried, we’re anxious, we’re panicking, and that’s no place to be. Even though we could financially handle to put a little bit of money at risk, our gut just doesn’t let us tolerate that well. If you want a true risk tolerance assessment, I would encourage you to consult with a financial professional who works with federal employees and understands the challenges that you might have in the Thrift Savings Plan. I would also encourage you to make sure that once things level out in the market, that the risk tolerance that you actually have is what is reflected in your TSP — and that you’re not overly aggressive or overly conservative based on that risk tolerance.
If you’re looking at your investment choices in TSP and you feel like, “Gosh, these are out of whack,” or, “It makes me crazy to see this volatility,” then make the changes to get you on track. But again, wait for the stabilization of the market to avoid those knee-jerk reactions and all the regret that typically comes from hasty decisions.
4. There is a weakness exposed in the Thrift Savings Plan when we have a volatile market.
The TSP has made great changes at the end of 2019 that allowed investors to be able to have more accessibility to their money when they retire and even partially while they’re working. So, I commend the TSP for making those changes and modernizing what it is that they allowed their participants to do with their own money.
However, there are several things that the TSP did not fix with that Modernization Act and one of them has to do with our topic today. There are some weaknesses in the TSP when you need the money and there’s a downturn in the market. The volatility in the market, whether it’s a 2008 scenario or a coronavirus scenario, exposes this very serious weakness in the TSP — the fact that you can’t choose which fund you take your money from.
Let me give you an example. Let’s assume that you have half of your money in the G fund and half of your money in the C fund and we are in a relatively down market). If you had a choice, you would likely want to take your money from the G fund. Keep in mind that this is money you’re going to spend (you’re retired and you’re ready to start using some of your money). You would want to take money from the G fund because the G fund did not suffer a loss. Ironically, it also didn’t suffer any gains either in the upmarket.
With this particular situation where we’ve experienced a decline in the value of the shares, we ideally wouldn’t want to take the money from the C fund. Instead, we’d rather take it from the G, because in the C fund, we want to buy low and sell high. Now again, all of this is relative.
The challenge and the weakness that is really exposing the TSP in this situation is that the TSP does not allow you to have that choice. If you need $10,000 you can’t say, “Give it to me from the G fund only,” it must come out proportionally from the funds in which you are invested. So, in this scenario, half of it would have to come from the G fund and half of it would have to come from the C fund. Obviously, this is not an ideal scenario if you have to withdraw money during a down market.
5. Your TSP is a long-term retirement account.
People invest in an account like the Thrift Savings Plan (or a 401k or an IRA) because these are long-term retirement vehicles. There will be highs and lows, but you should think of these investments in the “long-term” and try not to panic when faced with a down market. As we’ve seen time and time again, the market will eventually correct itself.
If you’re not close to retiring, time is definitely on your side. Most likely, you can easily wait this out.
If you’re close to retirement or already retired and this was too big of a market swing for you, this is your wake-up call that you were not properly invested to begin with. Remember what this moment feels like when it’s time to make the corrections. Wait until the market stabilizes, then be honest with yourself about the adjustments that need to be made in your fund choices — so that the next time this happens, you’re not in a position where you start to panic or jump ship.
So I encourage everyone, if you’re thinking about rebalancing/reallocating your TSP (not only the money you’re putting in and where it goes, but all of the existing money that’s in the TSP), I would encourage you to think strongly about weathering the storm a bit. Let things get back to normal and be honest with yourself about how scary this roller coaster ride has been for you. Later, you can realign your investment choices with your actual risk tolerance.
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ABOUT THE AUTHOR:
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed Federal Retirement Impact Workshops, she and her team empowers employees to make confident decisions as they plan for the days when they no longer have to work.
As the developer of dozens of highly-regarded retirement planning materials for federal employees and the creator of the FedImpact Webinar and the FedImpact Podcast, Chris has also analyzed the challenging retirement scenarios for thousands of federal employees – helping them to avoid costly mistakes, and highlighting opportunities for them to gain greater financial security in their retirement years.
Chris’ candid and straightforward nature allows employees to get the answers they need, and to understand the impact these decisions have on their retirement. After all, if what you thought was true wasn’t, when would you like to know?