Yesterday I came across a shocking article about TSP investors. With the recent bear market (of the past 6-8 months), TSP investors have been transferring their investments to the G Fund. This is exactly the kind of panic selling that I warned about in a recent post. Moving all your TSP investments from the S or C Funds to the G Fund right now is bad. If you are feeling the overwhelming urge to do so, it’s a clear sign that you aren’t practicing good investment risk management.
Why the G Fund Kind of Stinks
The G Fund is a made up of short term US government securities. The TSP website recommends the G Fund if you want the funds in it “completely protected from loss.” Yes, it’s true that your G Fund investment will be protected from the whims of the market. But your funds are far from being completely protected from loss. With annual returns less than 2% over the past 10 years, the G Fund is going to generate returns that are less than inflation. The Federal Reserve wants an annual inflation rate of 2%. So at best, the G Fund will just about keep up with inflation. Far from the safest investment, the G Fund will ensure that your money won’t grow over time. No risk, no reward.
Buy High, Sell Low?
Folks that are moving their funds from the C Fund to the G Fund are timing the market in the worst way. Over the past few years, those folks have been diligently buying into the C Fund as it’s gone up. Now that it’s down big since late last year, those same people are selling when it’s down. This locks in those losses. That money is going to sit in the G Fund for the rest of the bear market. Sure, they might avoid some more losses in the immediate future, which will make them feel like geniuses. But when the market finally turns back around and makes a rally, chances are they’ll miss it. Timing the market is almost impossible. When the G Fund people finally make the decision to jump back into the stock funds, they’ll be beginning the process again of buying high and selling low.
Defending the Stock funds While They're Down
I am sticking to the stock funds, even though they’re down. My TSP contributions haven’t slowed at all. If you need some reassurance for why you should stay in the stock funds right now, I’ll give two reasons. The first is the “buy the dip” part. This seems to be ubiquitous advice that isn’t always prudent. With individual stocks, meme coins, and other kinds of investments, buying the dip is very risky. Companies fail and meme coins are recognized for the scams that they usually are. But with the TSP stock funds, you’re buying into an index fund. You don’t need a single company to do well, you just need some of the many companies in the index to succeed. It’s a much less riskier bet. Also, when you continue to contribute to these funds, you’re buying more shares for the same contributions. Any contributions to the C fund are buying 20% more shares than they were in December. Buying in on the way down will make your account grow faster when it does turn around.
My second defense for the C Fund takes the long view. By only looking at the year to date or 1 year returns of a fund, you’re limiting yourself to short term volatility in the market. Over the long term, the stock funds are going to generate way higher returns for your TSP. Those higher returns come with the side effect of having bear markets sometimes. Let’s zoom out and look at those returns. As of June 1st, the C Fund generated annual returns over the past 10 years of 14.19%. Even though the C Fund was down 14.25% YTD, it still had generated 14.19% annually over the previous 10 years. The G Fund generated annual returns of 1.95% over the same period. Let’s look at the math.
There are two investors that put in $10,000. One puts their money into the C Fund and the other puts theirs into the G Fund. After 10 years of generating 14%, the C Fund investor has $37,072. After dropping 14%, she still has $31,881. Contrast this with the G Fund investor. After 10 years at 1.95%, he only has $12,130. Despite losing 14% of her portfolio in the last 6 months, the C Fund investor still has almost $20k more than the G Fund investor. Don’t believe me? Go to your favorite compound interest calculator and try it out for yourself.
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