What 2022 returns on TSP funds say about the year ahead

By nearly all measures, 2022 was a terrible year for the average investor. Inflation and a host of badly received public policies sent both stock and bond markets in bear territory. For a review and some things to think about for the the year ahead, the Federal Drive with Tom Temin  spoke with certified financial adviser Art Stein.

Art Stein
Well, it’s actually, Tom, good news for people who are still working and still investing because, as they make a contribution from their biweekly paycheck, they’re buying shares at lower and lower prices. And that’s an advantage to them, because it will be years, presumably before they need to spend that money. And they’ll probably have an even higher rate of return for the shares they bought, when everything was down. People who are in the worst situation would be like a [Federal Employees Retirement System] retiree, who needs to withdraw funds from the [Thrift Savings Plan] to supplement his pension or her pension and Social Security, because then they are forced to sell funds when they’re down. Now, of course, the G Fund wasn’t down for the year, but everything else was.

What was really unique about last year 2022, was that the F Fund had the worst decline in its history. And it was the only time that it is had a negative rate of return for two straight years. So it’s really been bad for bonds. But of course, one thing that I would say is it makes bonds a pretty good investment right now, because the yield, the rate of return that they’re getting from interest payments is now higher than it was. But it’s still small consolidation to many people, because they worry about the losses that they see in their quarterly and annual reports. And they were major. Now the other thing I would say, although the bond fund returns were the worst ever. That’s definitely not true of the stock funds. I mean, last year, the C Fund was down 18%. I’m not saying that’s great. But the average decline for the C Fund, in the years that it declined is greater than that. So it was not like 2008, where the decline was pretty much record setting. A tough year, but again, if you’re employed take advantage of it and continue to invest in those funds and just hold on until they’ve gone back up in value.

Tom Temin
Right, presuming they will that we’ll have some kind of a normal economy. I mean, it’s already showing signs of life. There have been some sparks of upticks in several of the markets. But that idea of buying dollar cost averaging basis, that’s still pretty much a cardinal rule, isn’t it?

Art Stein
Absolutely. Now, past performers is no guarantee of future performance, I don’t know anyone who’s saying that having gone down, the market is going to stay down forever. We’ve seen these in the past. And in the past, the markets are always recovered. And I would expect that would happen at some point in the future. Now, we don’t know when it’s not necessarily going to happen this year. The stock funds and the F Fund are up quite a bit in the first two weeks of the year. But that’s really not very meaningful. Stock funds were up a lot in the first couple of months of 2020. And then they went down 35%. It’s a long-term investment. It’s a long-term time horizon. And that’s what it’s there for. And if you’re basically saving this money for retirement, and your retirement could last easily 30 years. And it means that some of the money that you have in the TSP, you’re going to need 10, 20, 30 years after you retire. That’s a long-term investment.

Tom Temin
We’re speaking with certified financial advisor Art Stein. And I don’t recall that both the stock and the bond markets were down this significantly in the same year, because traditionally, most small investor strategies have been to balance with bonds when the stock market is going down, and vice versa. Usually they’re countercyclical. That’s not the case this time. So therefore, I guess my question is, do you go back to that balance that you had of stocks and bonds funds that you might have had before this?

Art Stein
Well, first of all Tom, you are correct. This is the first time the stock and bond markets have both been down more than 10% in a calendar year, since the 1960s. And of course, that was before there were TSP funds. So we’ve never seen that in the TSP fund. It’s unusual, but it can happen again, but it’s not a reason not to invest. And it’s very clear why the bond funds are down so much. It’s because the Federal Reserve wanted interest rates go up. And they’ve orchestrated a campaign of interest rate increases to see that happens. And higher interest rates mean that the value of existing bonds go down, which is what happened to the F Fund, that the bonds owned by the F Fund have gone down in value. Bonds can go back up again in value if interest rates start to go down. And even if interest rates stabilize, you’re eventually see increases in the value of the bond.

Tom Temin
So again, that gets to the question of timing, if you had a 60-40, or 70-30, with securities versus bonds, before all of this, should people think about going back to that now or what? Because I know none of us recommend trying to time markets here.

Art Stein
If you thought that investor in the TSP or just an investor in general, thought that 60% in stock funds and 40% of bond funds was an appropriate allocation, I wouldn’t change it because stocks have gone down in value or bonds or both. You just need to stick with it. And during years where say stocks go down and bonds don’t, that’s really an opportunity for people to transfer money from their bond funds into their stock funds to maintain their 60-40 portfolio.

Tom Temin
Right and for people retired that are on the required minimum distribution, then Congress move that age out yet. But for people for whom that’s too late, are there any mitigating strategies that they can do, from not just a stock bond standpoint, from a financial family management standpoint, to somehow offset what might be happening because of required minimum withdrawals, when your instinct if you had a lot of other cash would be to leave everything in there till there is recovery?

Art Stein
Yeah, so with required minimum distributions, once you take the money out, of course, you’re going to withhold taxes, and you want that to happen. And the money that’s left over, you could reinvest, and you could put it back in the stock and the bond markets. Not in the TSP, obviously, but in a mutual funds that you couldn’t get in the private sector. But it is a good time, if you have an emergency fund, and you need additional amounts from the TSP. Then you should think about maybe using some of the emergency fund, instead of selling when stocks and bond funds are down in value.

Tom Temin
Right. So that goes back to the general idea that we harp on is to have that rainy day fund, because in fact, it has been raining.

Art Stein
Yeah, absolutely. In my firm, we really emphasize to our clients that they should have an emergency fund. And not just three months of expenses, but maybe six months or even 12 months, because there are times when you don’t want to take money from your investments. Now, if it was 2021, when everything had gone up so much. Well, we wouldn’t recommend that you take money from your emergency fund instead of from your investments, because that was a time when you could sell investments at a profit. The markets were very high, and so why not lock in some gains and take advantage of that. Now, the other thing that people can try and do, although it’s not easy with the TSP, is to take money out of the G fund, instead of any of the other funds because the G Fund hasn’t gone down in value. The rules are with the TSP when you take money out, and it comes from a portion only from all the funds you’re invested in. So really it’s like a two or three step process where you take the money out, and then you re-balance in a way that sort of gets you back to what would have happened if you did just take it out of the G Fund. And you can tell even just explaining it’s a little complicated, but people can try and do that.

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