In late spring each year, I start getting emails and message board questions asking why I don’t sell my TSP stock funds and move to the TSP F (or G) Fund for the summer. After all, “everyone knows” that all the stockbrokers go to the Hamptons, volume goes way down, and the stock market loses ground during that period every year.
There are a number of variations on the adage, but they all revolve around selling near Memorial Day and buying back into the stock market after Labor Day. It’s a cute theory, but how has that actually played out?
From 1970 to 2015 (so let’s call that the modern stock market), the S&P 500 has been up 30 times during the summer months, and declined 15 times. So two years out of three the market is up during that dreaded period.
To be fair, stocks were up 5.6% during the up years, and down 8% during the down years, so that evens things out a bit in terms of total return. But on average the S&P 500 has gained 1% during each of those 45 summers.
Now 1% doesn’t sound like very much money – that’s only a penny per dollar invested. It sounds like such a negligible sum that it might be worth sitting out the summer months just so you don’t have to worry about it.
And that brings us back to fun with math. What if I told you that in a very realistic scenario, 1% a year could turn into a half million dollars in your Thrift Savings Plan by the time you were ready to spend it?
To work those numbers, let’s go to our Investor.gov compound interest calculator at: https://www.investor.gov/tools/calculators/compound-interest-calculator
Once we get there we will start with $1 in current principal (to simulate being a brand new employee), $1500 monthly addition (which is probably a little high for a new employee), 30 years to grow (which reflects a nice long government career), an interest rate of 8% (which is fully 2% under the S&P 500’s average return during the period 1928-2014), and we will compound that 12 times per year. That gets our TSP balance to $2,235,550 after 30 years. Not bad.
Now just make one little change – turn the 8% into 9%. That results in a Thrift Savings Plan balance of $2,746,129 – a difference of $510,579. And roughly 19% more than the guy who didn’t do the math.
And that is why my money doesn’t go on vacation during the summer.