Myth: In the long-run, stocks outperform all other investments
Reality: It’s true that, in the long-term, the three TSP stock funds (C, S, and I) have outperformed the two non-stock funds (G and F). So, if you had to decide on your TSP allocations just once in your life, it could be argued that the best strategy is to split the money among the stock funds.
Fortunately, that’s not the situation that we are in. We can react to market changes by shifting money in and out of the stock funds. When stocks are performing well, we can have the bulk, or even all, of our money in stocks. When stocks are performing poorly, we can shift into the G or F fund.
I am not talking about attempting to predict what’s going to happen, but about simply reacting to what is actually happening. Typically, stocks don’t collapse overnight. And they didn’t collapse overnight during the current market crash. For example, our Balanced allocation held 100% in the I Fund for all of 2006 and 2007, when the I Fund was performing well. But then the fund’s characteristics began to worsen, so we began shifting out of it. By mid-June of 2008, our Balanced allocation was completely out of all the stock funds, and has stayed this way until now.
How did we do it? Did we predict the stock market crash? Absolutely not. We were simply reacting to what was happening.
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