Some observers of the investment markets have deemed 2000 through 2009 a “lost decade” since the most widely recognized gauges of stock market performance – the Dow Jones Industrial Average and the Standard & Poor’s 500 Index – produced losses over the period. The Thrift Savings Plan’s proxy for the S&P 500 Index, the C Fund, produced a loss of about 10 percent between its closing values at the ends of 1999 and 2009.

This decade is characterized to have caused the ruin of, or at least a significant setback to, the retirement plans of scores of workers, including many TSP participants. But this characterization is, in some ways, misleading. The truth offers an important lesson to TSP investors about how to properly manage their accounts.

I regularly receive questions about how to invest TSP assets. These questions almost invariably come from participants who believe they should invest in one, two or three of the basic funds, depending on the funds’ recent performance or expectations about future performance. My answer always includes a reminder that, in most cases, a TSP account, if considered outside the context of additional investments, should contain all five of the TSP’s basic funds at all times. The “lost decade” demonstrates the reason this is prudent.

I’ve already pointed out that during the past decade the C Fund lost about 10 percent of its value. If you invested $10,000 at the beginning of the decade, you ended the decade with about $9,000 – a very unpleasant reward for 10 years of patience and worry.

Interestingly, the most aggressive, or volatile, TSP funds, the S and I funds, produced total gains of about 18 percent and 11 percent respectively. While less than what could have been reasonably expected over 10 years, these results are at least a move in the right direction. The most impressive gain was delivered by the F Fund, which represents a wide range of government and commercial bonds and gained 85 percent.

The best overall performer, however, was the most conservative, or least volatile, of the TSP’s five basic funds – the G Fund. It offers a stable share value, like a money market fund, but with rates of return based on riskier Treasury securities. If you had invested $10,000 in the G Fund on the last day of 1999 and left it there, at the end of 2009 its value would have grown to about $15,000. That’s a 50 percent gain over 10 years – with no risk of loss. There’s a lesson within the lesson here: Don’t judge investment results based on gains alone. It’s the return and the risk that matter. When considering the potential returns and the risk involved, there is no better investment than the G Fund.

So what does this teach us about investment management? The value of diversification. Successful investing for retirement income is not about return as much as it is about controlling downside risk. Big losses wreck retirement plans, and avoiding big losses is more valuable than an opportunity for big gains. Too many investors believe that investment management should be about picking the security that will perform the best over some period. Unfortunately, it’s an unreliable exercise. Since you’re not sure which of the five funds will do the best next month, next year or next 10 years, the smart play is to own all five
basic funds all the time.

Even if you had invested your money during the past decade in the most conservative asset allocation model my firm recommends – 20 percent in the C Fund, 7.5 percent in the S Fund, 2.5 percent in the I Fund, 10 percent in the G Fund and 60 percent in the F Fund – you would have enjoyed a gain of about 55 percent with low volatility. A more aggressive allocation of 40 percent C Fund, 15 percent S Fund, 5 percent I Fund, 3 percent G Fund and 37 percent F Fund would have yielded a gain of about 23 percent. In fact, all of our recommended asset allocation models, even the most aggressive, contain all five TSP basic funds and would have produced gains during the “lost decade.”

Written by Mike Miles
For the Federal Times
Publication February 8, 2010