Once and for all we have produced irrefutable proof to the question…
Is it better to stay fully invested in the stock market and forget about your Thrift Savings Plan account? Or is it more beneficial to enter and exit the market utilizing a TSP Investing Strategy based on long term trend analysis?
This question has been debated back and forth for as long as we can remember. We’ve always known the answer but lacked the data to prove it. So we decided to gather the data and present it to you ourselves.
What we found even astonished us!
TSP Case Study Criteria
The first thing we did was create a scenario.
This scenario consisted of 2 federal employees who invested in the Thrift Savings Plan, both members:
- Made $50,000 annually
- Contributed 5% to their TSP portfolios – This equated to a TSP monthly contribution of $416.66 (remember federal employees are matched up to 5%)
- Already had a TSP portfolio balance of $10,000
- TSP monthly contributions of $416.66 were made on the last day of the month
- These monthly contributions totaled $45,000 over the course of 9 years, Jan 2007 – Dec 2015
- For the “Buy & Hold” method we utilized a 100% allocation to the C Fund
- For the “TSP Investing” method we used our proprietary method which consists of 100% allocation to either the G or C Fund
We believe this scenario represents a large number of TSP Members. Unfortunately we recognized from the very beginning service members would not be properly represented in this case study because their TSP contributions are not matched up to 5% like federal employees. Nonetheless, we still believe the overall principle and outcome of this study holds true for service members as well.
Additionally, federal employees are paid on a biweekly basis while service members are paid on the 1st & 15th of each month. In this study we calculated all TSP monthly contributions on the last trading day of each month. We fully understand this does not reflect a truly accurate account of share purchases from the Thrift Savings Plan. In order to 100% accurately account for federal employees and service members we would first have to conduct two separate timetables within the study. Then, account for pay periods based on a 26 week pay schedule for federal employees and 24 pay periods for service members utilizing TSP share prices closest to the 1st & 15th of every month. Again, while our study may seem more simplistic due to the calculation of only one TSP contribution during the month, we believe its findings still hold true.
Monthly TSP Contributions
The first myth we wanted to dispel immediately was the phrase…
“If the market is down then that allows me to purchase even more shares for when the market eventually turns back up!”
In theory this makes perfect sense, why wouldn’t you want to purchase shares when they’re cheaper. But in practice this myth will rob you of considerable wealth. Let us explain…
The first thing you need to remember is financial advisors and/or brokers make money two separate ways:
They must have Assets Under Management (AUM), meaning they must control your retirement account thus generating an annual fee of .8%-1.2% of the overall value. A financial advisor who manages a portfolio of $500,000 will typically charge $4000-$6000 a year, no matter the performance of the portfolio. There are a ton of great financial advisors available and it isn’t our intent to discredit their profession at all, but we believe it is vital for you to understand the entire spectrum. Bottom line, one of the main reasons individuals are told to continue making monthly contributions into the stock market is to keep business flowing into these financial firms.
The same premise holds true for brokers. Brokers earn a commission based on how often you purchase and/or sell a security. If you are making monthly contributions (purchases) into the stock market every month, then that means you are a steady source of income. Think about that.
TSP Portfolio During A Market Crash
The second myth we wanted to eradicate was the thought…
“If I sell all my shares then I’m officially capturing a loss. Instead I should hold on and wait until the market comes back”
Our TSP Advice newsletter is a long term system and you must remember there will be multiple bull/bears markets in the next 20 years. The important factor for TSP members is being on the right side of the trend.
Yes, this means you could move all your money to the sideline in the G Fund then miss a big bounce up. The proprietary method we use has been statistically proven and back tested, therefore we do not believe you will miss a bullish trend opportunity, but at the end of the day that is the nature of investing. Contrary to popular belief not even the greatest investors of our lifetime can predict market movements. The only thing we can do is develop statistically proven systems and adhere to them.
Think about it this way…
You have $100, and due to market performance you now only have $90 would you rather hold on to that $90 and stand on the sidelines? Or stay fully invested in the market because you don’t want to realize a small loss of $10? Meanwhile the market moves lower and your initial $100 is now only worth $50. This now means in order for you to get back to $100, the market must double in price.
Think about that for a moment… the market has to double just for you to break even! That’s insane but people do it time and time again. Don’t take our word for it, look for yourself!
This chart shows the S&P 500’s performance over the last 20 years. Take notice how for 13 years the market never broke above the 1500 price point and during this time period there were two crashes each resulting in approximately a 50% loss.
How in the world can you think this is ok? Believe us when we tell you this isn’t how investing is suppose to work.
There’s No Such Thing As A Free Lunch
This is a very hard lesson to learn in general, it just so happens we’re talking about investing.
We’re not sure when or how but somewhere in history someone developed an investment presentation that convinced potential investors if they deposited a specific amount of money in the stock market on a monthly basis they would end up with a sizable nest egg by retirement age.
We want you to step back and think for a moment…
Now please answer this question: Where else on earth would you even entertain a conversation with someone who told you “All you have to do is deposit X dollars into this account and 30 years later you’ll have a huge sum of money?”
We’re willing to bet you wouldn’t, because here’s the harsh reality that we all know to be true in our hearts…
You don’t get what you expect, you get what you deserve.
There’s no easy or nice way to say this, so we’ll just be blunt.
If you expect or believe you can deposit a portion of your paycheck into a retirement account over the course of a 20,30,40 year career and end up with a sizable retirement account without any effort on your part, then you are setting yourself up for failure. You cannot afford (pun intended) to be lazy with your life savings.
This is why we work tirelessly to educate TSP members in regards to their options with the Thrift Savings Plan.