Fort Knox Financial Readiness Program specialist offers advice to understand market dips and ways to protect a TSP
FORT KNOX, Ky. — Does the direction of the stock market concern you? It seems like there have been more downturns than growth recently, which has some investors worried and others feeling anxious. But don’t panic!
Although somewhat scary, stock market ups and downs are inevitable. Let’s dig a little deeper into the issue.
A recent financial resource wrote that the “market downturns happen for a number of reasons: rising interest rates, political events, war and other occurrences in a negative manner.” It is no secret that recent dips have been influenced by the COVID-19 pandemic to include Omicron outbreaks and all the new variants, vaccinations, restrictions, high inflation, energy price increases, non-deliverable goods, and occurrences in our political world, just to name a few.
When you think about it, these influences are all reasons for dips in the stock market. Do you hear your friends and neighbors begging for normalcy?
What occurs when a downturn happens?
According to Acorns.com, market downturns can lead to a recession lasting for days, weeks, months, and even longer. Stock prices are always connected to supply and demand, meaning when people want to buy stocks, the prices go up; and when people lose interest in buying stocks, prices go down.
Research indicates the bear market drop will bounce back if you are patient. The S&P 500 was up 20% until Dec. 1, 2021, averaging an 11% return.
First Trust advisors indicate there have been eight bear markets from 1926 to 2009, ranging from six months to 2.8 years long. For those of questioning what a bear market is, it amounts to a period of negative returns where prices fall 20% or more due to declining economic changes. That leads to more volatility in the stock market, leading to a recession.
Of course, inflation (the rising cost of goods and services we purchase) negates our purchasing power. Costs go up, and wages remain the same; buying power for home and car purchases are impacted, energy costs increase as well as a huge increase in food costs.
Has your grocery bill increased over the last year?
Answering the call in the past decade to keep inflation at bay, the Federal Reserve Board set interest rates at or near historic lows, allowing stocks to grow and making borrowing less costly. The result of the Fed’s efforts led to more consumer confidence in the housing market. But inflation rates are now soaring at near 40-year highs.
The recent skyrocketing inflation led reporter Sean Williams to declare in a Dec. 4, 2021 Motley Fool article that the Fed will likely have no choice but to raise interest rates and slow bond-buying because “investors have been spoiled with a long stretch of historically low lending rates.”
What do the Fed’s decisions mean for your wallet?
Financial experts believe more and more consumers living paycheck to paycheck are beginning to feel the heat from their wallets. People are watching prices increase, burning through their disposable income. Many feel changes are necessary to help stabilize the economy.
It is no secret that losses in the stock market leave us all vulnerable. Will history repeat itself? Will we bounce back from this bear market with all its bumps and bruises? What do you think?
Long-term investors have noted that our gross domestic product, or GDP, has grown by 3.5%. The value of GDP is considered a picture of a nation’s economic health, including its growth rate. So financial analysts consider our economy healthy, even though the stock market has been volatile and dropping.
Continued declines could influence downturns in GDP, but that may not necessarily lead to market crashes or even depression. It’s important to remember that the market historically tends to rebound in time. In other words, history repeats itself repeatedly.
People invest in the Thrift Savings Plan or other investments because they are investing in long-term retirement vehicles. So I am often asked how the market’s downturn will affect a TSP or other investment.
First of all, take note that we are not in a doom-and-gloom investing situation. There are always going to be lows and highs when investing, but a TSP account encourages investors to keep their money in place to avoid the irrational reactionary investing of speculators, who can lose a lot of money over time.
Should a recession occur, the first thing speculators want to do is sell because of fears due to falling prices. However, when the market goes back up, they miss out on the recovery. TSP experts say, “You will kill your TSP growth if you do this.”
Out of an abundance of caution, others will put all their money in the G Fund to be safe; but did you know the G Fund barely keeps up with inflation? With this strategic approach, you minimize volatility, but you might not see the growth needed to meet retirement needs.
Instead, take advantage of the stabilization of the market to avoid poor decisions and hold on for the roller coaster ride. The TSP consists of simple index funds with the lowest fees you will find anywhere, and it is very tax efficient.
How can I protect myself?
1) Don’t overreact. Avoid fast moves and stay in control. Be rational! You tend to make mistakes when you’re fearful.
2) Revert to the “buying high and selling low” methodology. Historically, this is a great plan. Recognize that there will be a rebound in the future.
3) Make sure your portfolio is diversified. You want to have a mixture of stocks, bonds, alternative assets and, above all else, cash. Divide your assets to protect yourself.
4) Consider your risk tolerance. Ask yourself, “What can I lose for a bigger gain?” Are you willing to weather changes to avoid risks? I would hope your risk tolerance is reflected in your TSP and or other investments. Avoid being overly aggressive or overly conservative.
5) Some financial gurus state the best markets to invest in while in a bear market are bond funds, health conglomerates, drug manufacturers, biochemical companies and ETFs to name a few.
NOTE: ETFs are exchange-traded funds or index funds. ETFs go up when prices decline and are a “basket of investments” — like stocks or bonds — that allows you to invest in a lot of securities all at once. They have lower fees and can be traded easily. They offer better tax-efficiency than mutual funds. With mutual funds, you may have to pay capital gains taxes — the profit from the sale of an asset through the life of the investment. Most ETFs only incur capital gains when you sell the investment. You will pay less tax overall. They offer simplicity and are relatively inexpensive. They also offer diversification that helps safeguard your portfolio against market volatility, giving you more balance in your portfolio.
6) Pay attention to your long-term goals and determine when adjustments are needed.
7) Avoid taking on new debt; liquidate what you owe.
8) With the economic uncertainty, pay attention and track your spending.
Now, take a big breath. Plan your financial strategy. If you do not know something, seek advice from a financial counselor. Do your homework. Do not make decisions based on what a friend has done, because your friend might steer you the wrong direction before they’ve experienced the outcome of their decisions.
Army Community Service’s Financial Readiness Program has professional financial counselors available to educate you in making informed decisions. To schedule an in-person or virtual appointment, call 502-624-5989.
