TSP Tumult

No matter how young or how well-heeled you are, nobody likes checking their retirement account and finding that their hard-earned savings have evaporated due to events beyond their control. So it's not surprising that many Thrift Savings Plan participants are worried -- even angry -- about recent upheaval in the stock market.

"As a [Federal Employees Retirement System] employee, I am furious," wrote one Government Executive reader under the handle What a Rip-Off. "In the past few days my TSP account has lost over $50K. I fell for those lies about working hard and playing by the rules. I have contributed to my TSP over the past decades only to get ripped off by the mortgage swindlers."

In other messages, readers blamed the Federal Retirement Thrift Investment Board's decision to limit interfund transfers to two per month for exacerbating the situation, saying the restriction prevented them from reallocating their savings often enough to avoid losses.

Those who think they could produce better investment results if they were allowed to make as many trades as they wanted might be interested in a 2005 study by three business school professors of individual investors who made 25 or more trades a month.

Joshua Coval of Harvard University, David Hirshleifer of Ohio State University and Tyler Shumway of the University of Michigan set out to examine the conventional wisdom that individual traders are "at best uninformed, at worst fools." What they found was that some frequent traders did, in fact, outperform the market and demonstrated some level of skill and knowledge when picking stocks. But many consistently lost money. The professors concluded that the value of frequent trading lies in the ability to teach investors more about themselves.

"If traders vary widely in terms of their ability to select investments, and if they learn about and develop this ability through trading, it may in fact be rational for some investors to trade frequently and at a loss, in the hope of future gains," Coval, Hirshleifer and Shumway wrote.

But there are a few things TSP investors should remember.

First, markets go up gradually. As terrible as the past few weeks have been, they're unlikely to herald years of steady decline. Second, the TSP really isn't set up to offer the best range of options for frequent traders. The authors of the 2005 study noted that one of the keys to successful trading is knowledge, though not insider information, about individual stocks and companies. But the TSP's offerings are index funds that track overall market performance, so investors aren't likely to make a windfall by a canny prediction.

"There are good times and there are bad times," said Bob Leins, a certified public accountant who advises federal employees. "People who have been in it for a fair number of years have enjoyed an unprecedented ride, and now they're paying some of it back…. My feeling is you just kind of ride it out because you are in an insulated environment within the TSP."

It also might be reassuring for TSP investors to know that even though Barclays, which manages the TSP funds, is purchasing certain assets of the failed firm Lehman Brothers, those purchases won't affect how plan funds are managed or who manages them, said Tom Trabucco, the TSP's director of external affairs. In an uncertain time, that's one constant.