Coronavirus and Your TSP
This newsletter is actually an email I sent out to subs earlier this week. It was forwarded a lot and I received a lot of emails and calls on it, so I thought I would post it here for those that come to the site but aren’t actually subscribers. Everyone’s got an opinion on the market and the virus. This is just my perspective.
AND JUST LIKE THAT, THE TSP STOPPED BEING FUN….
I've been holding off on this email until things settle down a bit, but it seems Uncle Sam can't stop fiddling with the financial system long enough to let things work themselves out, so here goes. Allow me to give you 4 things that might help put things into perspective.
Even if you love rollercoasters, you probably aren't having much fun on this one. It's stressful, painful, and scary. It's also normal, expected, and useful.
The question on most people's mind right now is "What should I do?" If that's your question, you're getting a little ahead of yourself. The first question should be, "Should I do anything at all?" For many of you the answer is no, you shouldn't.
Thanks to my good friend Ron D. for sharing a very apropos John Bogle quote, “Don’t just do something, STAND THERE!”
But let's take a breath and try to get some perspective without all the emotion. (Just so you know, emotion is a liability to good investing, not an asset).
A lot of you have only started really following your TSP within the last 10 years or so. If that's you, you've experienced the longest bull market in history. The market has essentially done nothing but go up. You have not had a lot of experience with what is on the OTHER side of a bull market. Well, now you do. It generally is not pretty.
So what can we learn from all of this? Besides the obvious: don't eat bats on a stick in China! Well, here are four things:
1. INVESTMENT PLANS ARE YOUR LIFELINE.
I talk to a lot of people who believe their plan is "Make as much money as I can in the market." That's not a plan. That's a wish. A plan has concrete steps, and actions to take when things like this happen.
An even worse plan is "I'm going to beat the market". Why are you trying to beat the market? Wouldn't it be a better goal to build a large nest-egg for a comfortable retirement, even if the market does better than you overall? Trying to beat the market will ALWAYS entail substantial risk. And maybe you are past the age where it is wise for you to take substantial risk.
Here's what an actual plan might look like for someone in retirement: $600k TSP balance, divided like this--$200k in G Fund, $400k in the C Fund. The individual needs to pull $20k a year to make ends meet. If he has $200k in the G, he can pull for 10 years before he has to touch his C Fund. That provides him with a HUGE cushion and peace of mind. Does anyone really think the market won't recover in 10 years? Maybe his plan is that he thinks the market will recover in 5 years, so he moves $100k into the C Fund after the crash to take advantage of a once-in-a-decade buying opportunity.
(You might argue, "Chris you can't pull just from the G Fund!" True, but you can move your C Fund into a low fee Vanguard, Schwab or Fidelity S&P 500 Index fund, then just pull only from your G Fund. If you had a plan, you would know this.)
Here's what the lack of a plan looks like: $900k in TSP and someone who might or might not start pulling money out in 2 years. They want to get a little more conservative, but the easy money has just been too good and they want to ride it out juuuuust a little bit more. Maybe to get to that cool-sounding "Million-dollar Mark." Or some other arbitrary number that they've come up with. That guy loses $350k in February and March, and is now a bundle of nerves. He doesn't know what he's supposed to do. Does he sell? Does he stay with it? It's stressful and he's panicked. Which almost always leads to poor decision making.
2. PRICES SOMETIMES HAVE NOTHING TO DO WITH VALUES.
Stocks are priced based on what a company makes. If they make X number of dollars, generate X in cash flow, have X in sales, etc., then they are worth a certain dollar amount. If one of those things changes, then the price of the stock would be expected to change.
In times of panic, that doesn't happen. The prices of stocks are not being controlled right now due to underlying business fundamentals. Think about it--Are people going to quit drinking Coca-Cola because of the virus? Will people stop going to Walmart? Walmarts around me look more like Black Friday, than quarantined social distancing. I wouldn't be surprised to hear their sales are up. Why has Netflix crashed-it's not THAT kind of virus, people! If anything, people will be in their homes binge-watching like never before. In short, it's my belief that prices are reflective more of emotional panic than math.
There is a disconnect right now between what stocks cost and what they are worth. That is not an opportune time to sell in my opinion. Personally, I think the opposite, which we'll get to.
3. TIMING THE MARKET IS IMPOSSIBLE.
You hear me say this ALL. THE. TIME. In January, it looked like we were headed for another record year. Almost all economic indicators suggested as much. Now, we're down 30+%. Who out there called this crash? Raise your hand.
This is the never-ending myth people tell themselves. "Maybe I didn't time the last one perfectly, but I'll get the next one. I'm going to sell now and buy back in when it settles down." Spoiler alert: You'll miss the bottom just like you missed the top. You may wait so long, you buy back in HIGHER than what you sold at. Meaning, you'd have been better off just doing nothing. Typically, the reversal is very quick at the bottom, so getting in just a few days late makes you miss a pretty big gain.
4. WE'VE BEEN HERE BEFORE.
"It's different this time" is the biggest lie ever told on Wall Street. I was 15 when I saw the market drop 22% in what would come to be called Black Monday. The first crash I remember. But there would be others. Most of you remember 2008. How many of you remember 2000-2002? Now that was brutal. 2000 was -9% for the year, 2001 -11%, 2002 -22%. That meant that if you had $500k on 12/31/99, on 12/31/02 you had $315,000 THREE YEARS LATER! So far, 2020 is nothing compared to that. And the market recovered, crashed, recovered, and hit new highs in the subsequent years.
The crash from 2007-2009 was essentially a 50% hit. What did the panicked do? They sold, then waited to get back in. Some of them waited until early 2020 to get back in, missing a MASSIVE gain. How do I know this? Because I had at least a half dozen conversations with people in early January who were finally coming around to getting back into the market after being so scared of what happened in 2009. Unfortunately for those people, they hurt themselves doubly: missed the gains and suffered the losses. (See #3 above.)
Should you have sold in those years? Or continued to buy in at cheaper prices so that when the recovery happened, you could benefit the most from it.
SUMMARY
So, what should you do?
Get a plan. Don't invest based on what you "feel" is going to happen.
Stop trying to time the market.
Know your investment timeline. Are you investing for the next 4 years, or the next 30?
Be honest with yourself on your risk tolerance. Over the last 4 years or so I've asked this question dozens of times, "If another 2008 happened and you lost 30% of your balance immediately, would you freak out?" The vast majority of them answered, "No, because I know it would go back up again." Well, it DID just happen, and I know some of those people freaked out because they've already sold everything, and told me about it.
Understand diversification. Unless you are 5+ years away from even thinking about pulling out some TSP money, 100% in the C Fund is probably too aggressive. Unless you are 70 years old and need every single dime of TSP to live on, 100% in the G Fund is probably too conservative.
Remember the market AVERAGES 8% a year in the long run. But there are some seriously down years, occasionally.
"Chris, can't you just tell me where to put my money?!" No. Even Warren Buffett doesn't know where the market is going to go in the coming weeks. And if he doesn't know, I CERTAINLY don't know. In the long term, I firmly believe it to go to new highs over and over. But what it will do tomorrow or next week or next month, I have no idea. As I have said, if I did, you'd be getting this email from my yacht moored off the coast of Tortola, or my 10,000 acre Montana ranch.
But I'll do what I can. I'll tell you what I am doing personally. Prior to this crash, I was 70% C, 30% G. I am moving an additional 5% from the G to the C. And on subsequent large drops (if there are more), I will move an additional 5% from G to C. Until I get to 85% C. I will not go over 85% C. I want to protect some in G, no matter what.
In my private accounts, I have been buying stocks with two hands. I will continue to buy as they continue to fall. Will I lose in the short term? Probably. I have pretty awful timing. Will I make more money in the long run than if I did nothing? I firmly believe that to be the case.
Look, this ends one of two ways:
--Either it's the end of the world (read Revelation), or
--We all recover, the economy gets back on track, and the market eventually hits new highs.
Either way, I don't see what it hurts to stock up on quality investments.