The C Fund, which has done very well in the first few weeks of 2017, is closing in on the solid gains posted by the S Fund in recent months, which may mean that the historically long bull market we have been in is in a late stage. Investors would do well to avoid chasing past performance. Maintaining a diversified, balanced portfolio is wise in all market conditions.
Statistically, people tend to become confident in the market after a long bull market, when the price-to-earnings ratios of companies are at their highs, and that’s when they start shifting more into equities. Likewise, fearful investors often pull their money out at exactly the worst time- during a market bottom.
This is the worst approach that investors can take. Those that are excited about the current performance should evaluate their current TSP fund balance and be as dispassionate as possible when making allocation decisions. With broad market valuations approaching bubble territory, a lot must go well over the coming year for current stock prices to be justified without a market correction. For starters, the promised corporate tax cuts would have to materialize, which would increase corporate net earnings and help bring price-to-earnings ratios down to a level more in line with their historic averages.
After an unusually strong ride upward, this may be a good time to take a little bit of money off the table, and shift a small percentage of assets towards the G Fund. Alternatively, the simplest route is to just maintain a hands-off rebalanced portfolio through all market conditions, either with a lifecycle fund or a static, unchanging allocation to certain funds.
Either way, chasing equity performance at this stage by shifting more into the S Fund and C Fund due to excitement about their recent surges would likely not be prudent. Nobody can predict for sure what markets will do next in the near-term, but chasing past performance is rarely the way wealth is built.
As Warren Buffett’s famous saying goes, “Be greedy when others are fearful. Be fearful when others are greedy.”
Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.