Managing Money

Bear Markets May Prove To Be an Opportunity

Abear market occurs when an index, such as the S&P 500, has declined 20 percent or more from recent highs. By that definition, the S&P 500 entered official bear market territory June 13, 2022.

Bear markets can invoke many emotions, especially the fear of losing more money, which can cause investors to make emotional mistakes. Unfortunately, through selfdestructive moves such as futile attempts at timing the market, panicked selling after a drop in value, or deviating from a long-term investment strategy, investors have a habit of sabotaging their retirement portfolios.

To that point, I’ve recently spoken with many TSP participants who, fearful of further declines, have reduced or stopped their TSP contributions. No question, it’s unnerving to watch the stock market drop, but reducing or stopping TSP contributions is a mistake.

The Internal Revenue Service (IRS) provides few opportunities to save for retirement in taxadvantaged accounts, and participants who stop TSP contributions are throwing away an opportunity if they reduce or stop contributions. Fortunately, there’s no reason for participants to reduce or stop contributions to avoid losing money, as the TSP allows participants to set two allocations – one allocation for the current balance and a separate allocation for future contributions. Rather than reducing contributions, nervous participants may simply direct contributions to the G fund, which will not decline in value (please note I’m not advocating or suggesting this).

There’s an alternative strategy to consider, however—embracing

BEAR MARKETS CAN INVOKE MANY EMOTIONS, ESPECIALLY THE FEAR OF LOSING MORE MONEY, WHICH CAN CAUSE INVESTORS TO MAKE EMOTIONAL MISTAKES.

the market volatility and directing contributions to the TSP’s stock funds rather than a low-risk, low-return investment like the G fund. Even though you may feel like you’re throwing good money at bad, bear markets can prove to be an opportunity, especially for active participants who are dollar cost averaging into the TSP.

Dollar cost averaging (DCA) is the process of buying a fixed dollar amount of an investment at regular intervals. With DCA, fewer shares are purchased when prices are high and more shares are purchased when prices are low, which can make DCA a good way to invest during periods of market volatility.

For example, consider the 2008 bear market when between October 2007 and March 2009, the S&P 500 declined about 57% before recovering in full by March 20121. As I illustrated in the September 2021 NARFE webinar, “Understanding TSP Funds and How to Diversify for Your Life Stage,” a $54,000 lump sum investment into the TSP’s C Fund on October 1, 2007, would have fallen to about $26,000 by March 2009 before recovering to its original value of $54,000 by March 2012 (assuming no contributions)2 .

By contrast, let’s assume a TSP participant invested $1,000 each month into the C Fund over the entire 54-month period, beginning October 2007 and ending March 2012. In this case, the TSP participant invested a total of $54,000 into the C Fund, but would have had balance of nearly $70,000 by March 20122.

1 JP Morgan Asset Management 2 Source: www.tsp.gov. The performance is hypothetical and for illustrative purposes only. Investor returns may differ from the results shown. This is an illustration of a simulated investment that assumes the initial investment was made on the first day of the period indicated. The performance data represents past performance and is not indicative of future results.

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In other words, over the 54-month period, when the S&P 500 and C Fund delivered a 0% total return, the $1,000 monthly investment would have earned an annualized return of about 11 percent.

The point of this isn’t to say a dollar cost averaging strategy won’t lose money. In this case, there was a point when the value of the C Fund was less than the amount invested. In fact, in March of 2009, the low point for the S&P 500, the monthly investments totaled $17,000 while the value of the C Fund was only about $10,500.

Rather, the point is to illustrate how dollar cost averaging throughout an entire bear market cycle can benefit TSP participants, and to highlight the fact TSP participants can maintain an allocation for their current balance that allows them to sleep at night while allocating their contributions more aggressively to take advantage of market volatility.

MARK A. KEEN, CFP®, PARTNER, KEEN & POCOCK. SECURITIES OFFERED THROUGH THE STRATEGIC FINANCIAL ALLIANCE, INC. (SFA), MEMBER FINRA/SIPC. ADVISORY SERVICES OFFERED THROUGH STRATEGIC BLUEPRINT LLC AND SFA. MARK KEEN IS A REGISTERED PRINCIPAL OF SFA AND AN INVESTMENT ADVISER REPRESENTATIVE OF SFA AND STRATEGIC BLUEPRINT, LLC. SFA AND STRATEGIC BLUEPRINT ARE AFFILIATED THROUGH COMMON OWNERSHIP BUT OTHERWISE UNAFFILIATED WITH KEEN & POCOCK. NEITHER STRATEGIC BLUEPRINT NOR SFA PROVIDE TAX OR LEGAL ADVICE.

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