Some financial planners say it is useful, maybe even necessary, for each generation of stock market investors to be mauled at least once before they get it.
The “it,” in this case, is the reality of investing long term in the stock market.
If being mauled early is a good thing, March 5 may be called “Black Monday” in the history of the world’s biggest 401(k): the federal Thrift Savings Plan (TSP). That was when the ripple effect of an Asian stock market crisis reached the United States and when federal/military investors who have never experienced a market crisis learned that long-term investing can be painful sometimes.
After a weekend of stewing, more than 34,000 nervous feds came to work and yanked a record $1.7 billion from their C, S and I stock index funds and put virtually all of the money into the Treasury securities fund.
Ironically, all of the funds that track the U.S. and international stock markets roared back with big gains in March, April and May. A week after experiencing stock shock, investors raced back to the C, S and I funds, putting back much of the money they had taken out.
“The lesson there is don’t try to time the market,” said a financial planner with a mostly federal clientele. “They got out when the funds were down and they came back in when they went back up. That’s calling buying high and selling low.”
The markets reached all-time highs just as pullout investors were returning. Then the markets — driven by fears of a financial meltdown and often overzealous reporting — headed south again. This time, TSP officials say, they see no sign of the kind of panic that took hold in March.
In the first week of this month, investors pulled $822 million out of the stock index funds and put the money into the G Fund of Treasury securities. In one day, 16,000 transfers were made from the stock funds to the Treasury fund. Although that represents a big dollar figure in anybody’s book, TSP officials point out that it represents just 0.69 percent of the money in the TSP.
So are investors tougher, wiser, shellshocked or what?
As one TSP watcher said, “I suspect those folks who pulled out on March 5 missed the gains that followed. As you frequently point out (and it always bears repeating), you’ve really got to be right not once, but twice,” when trying to time the market.
The observer, who is a TSP investor and fan of the Lifecycle L funds, said, “I hope some of those who moved in March learned from the experience and sat tight this time.”
But there is another possibility: “Maybe they were on vacation or just too hot to request an [interfund transfer.] In any event, the smaller numbers [for the first week in August] mean something: I’m just not sure what.”
COLA loses some fizz
This time last month, federal/military/Social Security retirees were due a January cost-of-living adjustment (COLA) of 2.4 percent. Now that projected amount is down to 2.3 percent. So what happened? Can we blame it on the stock market, oil prices or what?
What happened is that the cost of living — as measured by the Bureau of Labor Statistics’ Consumer Price Index — dropped last month. That dragged down the raise due retirees next year. But there are still two months (August and September) to go in the retiree COLA countdown.
If living costs continue to drop, then so will the amount of the 2008 COLA. If the price index rises, the COLA will go up. The final numbers won’t be known until mid-October.
Two bits of good news: Low inflation is generally good for everybody, especially retirees, and the federal COLA law is carefully written to protect benefit levels. Even if the country went through a period of deflation — as it did in the 1930s — the benefits of federal retirees, military retirees and Social Security recipients would not be cut. The inflation escalator for retirees goes only in one direction: up.
• Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey@federalnewsradio.com.
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