Since the stock market downturn in 2022, the Thrift Savings Plan (TSP) has rebounded with strong gains in 2023 and the positive trend is continuing into 2024. In fact, the S&P 500 has increased by 10.2% in the first quarter of 2024. Then again, we all know there’s always the possibility of another downturn.
The Lessons Of The 2008 Recession
During the Great Recession of 2008 and 2009, the TSP C Fund lost over 55% of its peak value and the S Fund lost even more. Many TSP investors shifted their money to the safety of the low-risk G Fund. However, those who stayed the course and refused to panic proved to be right. In fact, when the market rebounded, returns on both the C and S Funds actually exceeded pre-recession values. The moral of the story? It pays to stay calm when there’s a downturn in the stock market.
The Stock Market Always Corrects Itself
The TSP is designed as a tax-efficient, long-term investment that consists of simple index funds and remarkably low fees. Like the 401(k) or an IRA, the TSP grows over time through the magic of compound interest. As a long-term investment, there’s no reason to make major changes to your TSP when there’s a bear market because the market always corrects itself over time. In fact, according to leading economists, the Great Recession of 2008 and 2009 lasted only 17 months.
“When the market rebounded, they missed out on the gains they would’ve made during the recovery.”
A Paper Loss Is Not A Real Loss
When your TSP statement shows your investments have lost money, it’s considered a “paper loss.” A paper loss on a long-term investment is the difference between the current price and the purchase price. However, in reality all of your shares are still intact. A paper loss is not a real loss until you sell low. This is what happened to TSP investors who panicked and sold during the 2008 stock market meltdown. When the market rebounded, they missed out on the gains they would’ve made during the recovery.
When To Rebalance Your TSP
If you’re a few years away from retirement it makes sense to rebalance your TSP funds to minimize risk. Once you’re retired, you won’t be able to make up for losses with more contributions. Consider investing in the TSP’s Lifecycle Funds (L Funds) that adjust automatically to manage risk. The L Funds rebalance every day to maintain a balanced investment allocation. As you get closer to retirement, they’ll reallocate for even less risk to protect your money.
For more information on managing your TSP, connect with an FRC® trained advisor.
