FEDweek

Don’t Count on TSP History Repeating

A common disclaimer accompanying investment information is that “past performance does not guarantee future results,” and that holds true for the TSP as well.

Take the following statement from the TSP: “The S Fund led all TSP funds in return over the ten-year period that ended on December 31, 2016, earning a compound average annual return of 8.13%”. This does not mean that the S Fund will continue to lead the TSP funds in return, either in one given year or in any future ten-year period of years. It does not mean that the S Fund is the “best” fund for TSP investors, and it does not mean that another fund might be more suitable than the S Fund. It just means that’s what the S Fund did in the past, under different set of circumstances and chance occurrences.

When it comes to finance it’s easy to look at data as inherently predictive, but don’t take it for granted, in particular when considering how to allocate your funds or when weighing alternative investments. For example, a financial advisor pitching a “fixed indexed annuity” with downside protection might point out that the C Fund lost 36.99% in the year 2008 as an example of risk. That’s true, but it doesn’t tell you what the C Fund would go on to do. In fact, it returned 26.68% in 2009 and 32.45% in 2013, ending up with a ten-year compound annual return of 7%.