By: Lyn Alden

The TSP equity funds have had an extremely volatile and poor-performing two-week period. It hasn’t been this bad since we had a similar correction in late 2011. The C, S, and I funds are all down about 8-10% from their January highs.

Markets have had such a strong year that even this correction brings us back only to late November for the S&P 500, which was already high:

Source: S&P 500, Google Finance

Investors that keep putting new money into their TSP each paycheck, or that are diversified into the G Fund or F Fund, are set back even less. A hypothetical 20% correction from the S&P 500 high would still only erase one year’s worth of gains at this point.

Investors have been spoiled with unprecedented low volatility over the last year. In fact, the S&P 500 set a record for the longest period ever without a 3% or more drop in one day.

Correction relieves pressure, serves as reminder of risk

Believe it or not, I consider this correction a good thing. Setting new records of low volatility or valuations feels great while it lasts, but the more out-of-hand it gets, the more it hurts when it falls back to earth. This correction let out some pressure and reminded investors that the market carries risk.

And thanks to a long period of low interest rates and easy money policy by the Federal Reserve, the U.S. stock market is still highly-valued even after this correction so far.

The cyclically-adjusted price-to-earnings ratio, market-capitalization-to-GDP ratio, price-to-book ratio, price-to-sales ratio, and net-worth-to-disposable-income ratio, are all at least the second-highest they’ve ever been. And the S&P 500 average dividend yield is the second lowest it has ever been.

The good news is that recession indicators are still giving us a green light in the immediate-term, so this sell-off has more to do with changing interest rates and high valuations than it does with any short-term economic problems.

Check Your Diversification and Financial Strength

It’s a useful exercise at this point to do a portfolio and net worth review, including your TSP, your other investment accounts, and your financial situation in general.

Rebalancing – Have you been re-balancing your portfolio back to your target allocations on a regular basis, or investing in funds (like the TSP Lifecycle funds) that rebalance themselves? If not, this is a smart time to make sure your exposure to equities is right for your age and goals.

Cash Savings – Imagine the following scenario: You miss a paycheck or two due to a multi-week shutdown and furlough, your car breaks down and needs an immediate $1,000 repair, you or a family member has a health issue resulting in a $500 medical bill, and you have a big unexpected home expense like a busted water heater that needs to be replaced. Could you pay all of this without much thought? Your cash savings should be sufficient to pay for several months’ worth of expenses including unforeseen problems, and exactly how much you should have depends on several factors like how large your family is, whether you live in a one-income or two-income household, and whether you’re a homeowner or not.

Debt Levels – The time to pay down debt is when money is flowing and times are good. Debt levels rise dramatically during recessions because many people are not ready for job losses, pay freezes, or other setbacks. Use this time to make sure your debt levels are appropriate, and that you are only using low-interest debt like mortgage loans, student loans, or similar types of financing.

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.