TIP: What Happened in October?

Did a market downturn that was going to happen around 2020 actually start in October 2018?

The answer is maybe. Not what you wanted to hear but there can be a variety of interpretations about what happened to the Stock Market in October. One theory is that this was part of a normal Stock Market correction. The Stock Market was just bringing stock prices down to where they should be. The actual loss to most people was you lost all the gains you made in 2018 for year to date. This is not the end of the world. It was painful and depressing, but you are just back to December 2017 levels. Actually this sounds about right but some people think otherwise.

Another theory says the downturn in 2020 is already starting. This is also a reasonable possibility but the economy is just doing too well right now for that to be realistic explanation. The reason year 2020 is getting singled out in the first place is that the economy is humming along at 4.3% growth and is expected to slow down gradually each 6 months to 3.5%, then 3.0%, and finally to 2.0% or lower around the end of 2020. That’s when the tax benefits from the new tax rates are expected to start slowing down the economy.

Right now the economy is being super charged by the new tax rates, something that is also in question and is being debated as unnecessary. You could start a whole new debate on the tax situation alone but that is for another time. The main take away from this theory is that the downturn is coming around 2020 but we are getting a preview from new tariffs, etc.

So this brings us to an important dilemma! This will be one of the few times in history where we know a Stock Market decline is coming and we know approximately when it will happen. We just don’t know two major pieces of information about this situation:

1. We don’t know how bad the market downturn will be?

2. We don’t know exactly when it will happen?

So we could have a mild downturn if the government is ready to adjust interest rates to handle inflation or adjust the money supply or if unemployment is down. Businesses could be ready by not borrowing too much, keeping extra amounts of cash to handle any drops in production or keeping stock prices close to their breakeven values to prevent any sudden drops in stock value. Individuals could keep their debt down and save more and put their investments and retirement plans in more conservative funds. All these things could help but I wouldn’t plan on it.

Too many people think that these great rate of returns are going to last forever, so they don’t put their money in a safer investment. Businesses don’t always act prudent or long term, and governments just do the minimum because politicians need to be re-elected and the people do not want to hear any financial doom or gloom from their elected officials.

Also, think about this: No one knows exactly when this will happen, so it could happen earlier than we expect, like in 2019, or it could happen later, like 2021 or 2022. This could really affect your planning. Some people may panic and keep their Thrift Savings Plan (TSP) accounts in the G Fund for a longer period than necessary, thereby losing out on possible gains if the downturn happens in 2022. Some people may keep their TSP funds in a higher risk investment, since they think they have until 2020 to start worrying about any market downturns, thereby taking a huge risk with timing if the downturn happens in 2019.

Since we know a downturn is coming around 2020, we should not underestimate the severity of this event. There are some corrective adjustments we can do now. Right now. Don’t wait until this event is almost upon us to start trying to hedge with your funds. When it does come, no one will ever see it coming in time. NO ONE. So preparation is the best policy. Get off TSP funds that are higher risk now and start getting to a place that will keep you safer if a downturn comes, big or small.

There are still some people who will go to the end of the limit and think they can time the hedge to their advantage. There are willing to risk they could get off the higher risk TSP funds in time, before the market downturn happens. There is nothing wrong if you are one of these people, but just remember, many people who try this strategy will lose a lot of money when the market downturns. Not all, but a lot of people. If the market does a hard downturn, don’t be surprised if you see 20%, 30% or 40% losses.

The same is true for those people who want to live in fear and put their money in the G Fund for the next 2 – 4 years. Again, we don’t know exactly when this will happen but you don’t want to be waiting unnecessarily for a long time to lose out on making a reasonable amount of gain from your TSP. You can be in a place that still protects you from large losses and still gets you a reasonable rate of return.

So my final idea is to try to get your TSP to funds that put you at about 5% - 7% for pre-retirement and 4% - 6% for post-retirement. The idea being that your TSP won’t get hit too hard either way. If we have a mild downturn, then you still make money. If we have a hard downturn, you don’t actually loose as much. These rates of return keep you in the average, so by definition, you don’t sway too much either way.

You can find these rates in an assortment of L Funds, depending on where you are in your retirement planning. If you still have a few years before retirement, the L 2020, or L 2030 is still appropriate. If you are ready to retire or just retired, you can be in the L 2020 or the L Income fund.

The main difference between the non-retired people and the retired people is that the non-retired people are (or should be) still contributing (hopefully to the max) to their TSP. This gives them an extra hedge against any market downturns.

The retired people are in a more delicate position. They are not making contributions into the TSP any longer, so they have to make sure they do not get hit with any severe market downturns. The only way to do this is to stay in a more conservative fund like the L 2020 or L Income fund. It could be a long time (or possibly never) before the retired people can build up their funds to where it is now if a severe market downturn happens and your funds were over exposed in a higher risk fund.

Remember, by this time in your new retired life (or very close to it), it’s not about making more money. It’s about protecting the money you have earned. You will still make money for the rest of your natural life, so that is not the issue.

Statistically, a market downturn is going to happen about every 5 to 10 years, so the idea is not to panic or worry about this. The idea is to keep yourself protected so that no matter how often or how bad these situations turn out, you are still in a good place for your retirement.

Good Luck!