Don’t “Lock In” Your Losses.

Why you shouldn’t move all of your money to the G Fund during turbulent markets.

We get it. Nobody likes to watch their accounts lose value. Watching your TSP tick lower month after month can test the resolve of even the most seasoned investors.

At some point, many TSP investors decide they’ve had enough and do the only thing that they know will stop the bleeding: they move all of their money into the G Fund.

The G Fund is comprised of government securities and is meant to provide stable value, and slight returns to TSP investors. And during times like this, it can look pretty attractive.

From 01/01/2022 – 06/30/2022, the C Fund (based on the S&P 500 index) is down nearly 20%. The S Fund (which invests in small-cap companies) is down almost 30%. Ouch.

During that same time period, the G Fund is the only TSP option with a positive return, coming in at just over 1%. But hey, 1% looks pretty good when all of the alternatives are negative by double digits.

All of that being said, it’s understandable that investors have been flocking to the G Fund. But I’m about to tell you why that might be a bad idea.  

Okay, so let’s say you have $100k invested in your TSP. Markets start to get turbulent and drop 20%. There seems to be more bad news coming out each week and you’re sick of losing money, so you move the $80k you have left into the G Fund.

Now, that your $80k is in the G Fund, it’s stable and you gain some peace of mind that you’re not losing any more money. Bad news can continue to come out, but you know it’s not going to affect your TSP.

However, historically, the bad news always resolves itself eventually. It may take some time, but the market has always recovered and wound up finding new highs. Just take a look at this chart that shows the market’s returns since the 1950s:

This chart includes multiple recessions, including the Dot-com bubble and the housing market crash in ’08-’09. And after each downturn, the market recovered.

What people tend to tell themselves is that they’ll get back into the market once it starts to recover. That sounds like a good plan, but the execution is extremely difficult.

What tends to happen is that the market starts to bounce back, but you’re pretty sure that the bad news isn’t over, so you stay out and brace for another drop. Well, sometimes that next drop doesn’t come.

Now the market is climbing and it’s higher than where it was when you pulled out. Even at this point, many investors struggle to put their money back in the market because they’re afraid that another pullback will come.

Soon, C, S, I, and F Fund have fully recovered and you’re stuck with $80k in the G Fund when you could have had the $100k that you started with.

So what should you do?

Unless you’re in an extreme case where you absolutely need the money in your TSP within the next year, you should stay invested.

Although it can be painful to watch your accounts move downward, all you’re doing by moving to the G Fund is “locking in” your losses, and not giving them a chance to recover (like they have always done).

If you’ve already moved to the G Fund, it’s not too late to get back into your normal investments. You may have saved yourself a few percent, and you can still get the rebound in the market once it inevitably arrives.

Ultimately, what we’re saying is that a market downturn is historically the worst time to lower the risk of your portfolio. If this downturn has caused you to lose sleep, make sure to remember this feeling and rebalance to a lower risk portfolio AFTER the market has rebounded. That way, instead of locking in losses, you’re locking in gains.

If you’re a client of ours and you want to talk more about this strategy, reach out any time and we’d be happy to set up a call.

If you’re not a client, and would like to learn more about how we may be able to help you, register for a complimentary financial check-up at capitalfinancialplanners.com/register.