Markets have rewarded retirement investors for several years, which can make risk hard to judge

Eric White So wrapping up the third quarter, what were some of your main takeaways as we saw really one of the only down quarters in the TSP fund that we’ve seen all across the board for the past couple of years, but I could be wrong about that. Tell me if I am.

Arthur Stein Eric, the third quarter was pretty tumultuous. We saw a big uptick in inflation, higher interest rates, of course, a growing federal deficit, continued wars in the Middle East, even really political unrest in the United States. So there’s a lot going on. But in terms of returns for the TSP funds, the third-quarter, the C fund, which is the S&P 500 index fund, was very positive, we had negative returns for the S and I fund and a very negative return for the F fund, the bond fund. But even if we just look instead of just at the third quarter, but like the previous nine months year to date, January 1st through September 30th, then we see incredibly strong returns for the stock funds even though, you know, those returns were affected by what happened in the third quarter. I mean, basically, the C, S and I funds were up 12 to 16 percent year to date, which is a great return over a nine-month period. The F fund, on the other hand, definitely is not doing well. This is almost, I would say, completely based upon the increase in interest rates. We saw the same thing happen in 2022. When interest rates went up and the F fund went down and all the bond funds went down the United States, so the G fund of course just always positive. Never has a bad day, never a great day. But it was up 1.2 percent in the third quarter and 3.4 percent year to date. The problem with this is that no matter, you know, the returns increases in the G fund and even the F fund when it’s doing well, they look good on paper, but when we subtract out the effects of taxes on withdrawals and inflation, what we see is the purchasing power of the G fund and the F fund decline over time. I mean, it’s sort of a stealth decline because the value is going up, but the purchasing powers going down. So for people have large amounts of money invested in the bond funds over a long period of time, it can be very surprising when they need that money and they start to take it out and realize it’s just gonna purchase a lot less than they expected. Now, a lot of people are surprised that stock funds continue to do well because of the things that I’ve mentioned, but there are other things going on in the economy, which is one, a big increase in earnings during the first six months of the year, we don’t have the third quarter figures, but like a 30% increase in the earnings for corporations and steady increases in the gross domestic product in the U.S. Economy. Earnings are the key to stock prices. Stock prices basically, over time, reflect expected future earnings and current earnings. And so if earnings are going up, you’re going to see increases in stock prices. For TSP investors, one, you know, I have to say that whatever has happened in the past is past performance, no prediction, no indicator of future performance, but the one thing we know is that historically over longer periods of time, stocks outperform bonds in the TSP. And they had a high enough rate of return to increase purchasing power. So I would urge especially employees to continue investing, you know, whatever allocation they decided on. And of course for retirees, they wanna make sure that they have money put aside either in an emergency fund or by having a higher TSP allocation in the G fund to take care of emergencies and the money that they may need if we do get a stock market crash. And we will get a stop market crash, we just don’t know when.

Eric White Yeah, inflation has been the word of the day when it comes to talking about this stuff. And you mentioned how people are withdrawing money and seeing, ah, geez, the purchasing power just isn’t there with the amount of money that I have taken out. Is there anything that can be done to sort of mitigate the amount of inflation that we are seeing, though there is some dispute on the effect, the overall effect the inflation is actually having on people’s spending? Is there anything that folks can do to mitigate that inflation when people are usually investing in funds and stocks like this to get away from inflation and make sure that they are staying ahead of it?

Arthur Stein Well, historically, stocks have been a good hedge against inflation because when inflation goes up, it means that the price of goods and services sold by corporations that you’re investing in, those prices are going up. And so that they are able to do well even when things are inflationary. Bonds are different. Bonds don’t do well during inflation. Existing bonds. But you can’t protect yourself against inflation. I mean, you can buy less gas. You can, you know, I hate to say it. You can buy less food. Of course, we saw a big increase in health insurance premiums for the federal family. That’s inflation, I think, you now, like 10% increases, something like that. And that’s why, you’re not getting a 10% increase in the G fund to pay for that.

Eric White And I guess I sort of buried the lead there since you did mention a potential stock market crash coming up in our future. As stock, as earnings, you know, you talk about the high earnings, mostly garnered by the Tech sector and the AI investment race. But when you start looking at the numbers, you go, ah, but yeah, there’s not that many customers there. And some of those numbers may be inflated themselves. What else can I get out of you to expand upon that not obviously asking you to tell people exactly when to time things? Because I know what you’re saying on that.

Arthur Stein Yeah, I mean, there’s always a stock market crash in our future. It’s a regular part of the market cycle. People need to be prepared for it psychologically, and it’s also good, you know, if they have a plan. Now, it’s hard to do this in the TSP, but what we do for our clients is when the stock market crashes, the allocation that we’ve chosen for their investments between stock investments and bond investments, they’re going to be low on stock. So we buy, we sell bond funds and buy stock bonds. And when stocks are doing well, we sold stock funds to buy bond funds because we’re trying to keep them to a certain stock bond allocation. Hard to do that in the TSP. Of course, if you’re in an L fund, you can’t do it at all. You could just go to a different L fund, I suppose, but people don’t, you know, the L funds supposed to be set and forget. And the one thing that I worry about is that the L funds now, the ones they’ve come out with recently, very heavily invested in stocks, way more than they used to be in the past. They start out like 99% in the stock funds. So when we get a stock market crash, the L Funds are really gonna feel that. And I hope that people who have invested in the L funds are ready for that.

Eric White We talked a bit about the past and that was a little share of the future. Any other indicators that you think people should keep an eye on, whether or not it makes them take any actual action, but maybe, you know, take a take a look and review things or call their respected money person.

Arthur Stein No, because I, you know, to me, this investing, to a certain extent, should be, you know, start it, continue it, continue investing in the stock funds when the market crashes, continue investing and even the F fund when it goes down. But when we do get stock market crashes or bond market crashes or outperformance in one of those two, then people, you know, need to take advantage of that.