As the stock market closed out its worst six-month stretch to start a year since 1970 when the calendar turned to July, some participants in the federal government’s Thrift Savings Plan are fleeing index-based funds for what they believe is the relative safety of the G Fund.
The conservative G Fund invests in a special non-marketable treasury security issued specifically for the TSP by the U.S. government, and is the only fund in the TSP that guarantees the return of the investor’s principal.
It is also the only TSP fund that is in the black for the first half of 2022, with a modest gain of 1.15%, while the other TSP funds are struggling along with the stock market. The G Fund grew a modest 1.38% in 2021.
The I Fund, based on international stocks, suffered the biggest monthly drop in June, with a -8.21% performance in the month after a positive return of 1.19% in May. For the year, the I Fund is down 18.95% after being up 11.45% in 2021.
That’s still better than the small cap stock index S fund, which had a return of -7.95% in June but is down 27.92% for the year—the worst performance of the five lettered TSP funds. The S Fund grew 12.45% in 2021.
The C Fund, based on common stocks in the S&P 500 index, ended June -6.55%. For the year, the C Fund is down 19.96%, closely mirroring the S&P 500’s 21% decline. The C Fund had an excellent 2021, gaining 28.68%.
The fixed income index F fund posted returns of -1.94% last month and is down 10.08% for the year. The F Fund was the only TSP portfolio in the red in 2021, declining 1.46%.
The TSP’s target-date fund-like Lifecycle funds all had declining monthly returns in June. The biggest monthly decrease was in the L 2055, 2060 and 2065 funds which ended at -7.25% in June. The smallest decline was in the L Income fund, which was -1.60% last month. The L Income fund is the only Lifecycle fund that hasn’t stay in the red since April.
The stock market losses—along with fears of further declines—are also scaring some participants into abandoning the index-based funds for the G Fund, which FedSmith reports is now the largest of all TSP funds with total fund assets of $283.2 billion as of May 2022. Further, 31.3% of TSP participants were invested in the G Fund at the end of May 2022, compared to 30.2% invested in the C Fund ($275 billion in assets).
The amount of money transferred into the G Fund went from about $1.82 billion in April to about $6.35 billion transferred in May—a remarkable 249% increase. FedSmith points out that as a percentage of the approximate $740 billion in the TSP at the end of April, these dollar amounts are still only a small percentage of the total. But that approximate $4.5 billion one-month increase shows a definite trend among TSP participants, and their lack of confidence in the short-term performance of the stock market.
That’s further illustrated by the fact that TSP participants transferred $3.49 billion from the C fund in May, and $745 million from the S Fund.
The danger is that TSP participants might be “buying high and selling low” by moving money into bond funds at what could turn out to be the wrong time. FedSmith recalls that back in 2002, from June through October when stocks were at their lowest level during a market cycle, TSP participants pulled $3.8 billion out of the C Fund and put it in the bond fund. Then the C Fund jumped up 29% in 2003 while the I Fund went up 38% and the S Fund went up 43%.
A similar occurrence happened in 2008-2009, when investors who had transferred money into the G Fund during that downturn lost out on positive returns of almost 27% for the C Fund in 2009 (and returns of more than 30% for the I Fund and nearly 37% for the S Fund.
An oft-repeated statistic from research firm Dalbar Inc. found that while the S&P 500 returned 12.2% annually in the roughly 20 years from 1984 through 2002, the average equity mutual fund investor earned a paltry 2.6%. An updated 2021 Dalbar study of investor behavior found that, over the last 20 years, the individual fund investors captured less than half of the average annual return (+2.9% as opposed to +7.5%) that they would have earned simply by buying and holding the S&P 500 index.
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