The C Fund at 35: Investing in the TSP? Trust the Long-Term Data

The C and F Funds of the Thrift Savings Plan, which began accepting contributions in January 1988, will turn 35 in January. The funds, which were based on indexes of the S&P 500 (roughly 500 of the largest companies listed in the United States) and U.S. investment-grade bonds, followed closely after the initial launch of the U.S. government bond-based G Fund in April 1987.

Over the years, the three original funds have grown at varying rates, with the C and F Funds occasionally experiencing steep declines in value. When the economy is strong and the markets are expanding, it is simple to enjoy fund growth. However, during protracted and severe market declines, investors frequently wonder what to do with their TSP investments.

While a portion of the solution depends on one’s investment time horizon and tolerance for market gyrations, for those who have money invested in TSP stock funds, the long-term data from U.S. market history offers insightful lessons, especially for the C Fund.

First: Avoid selling during drops.

Second: Keep putting money into the stock funds on a regular basis through payroll deductions.

Third: Don’t get too caught up in the daily headlines about market performance..

Here are some statistics that illustrate why.

First, look at the S&P 500/C Fund’s 35-year earnings and dividend growth. This period includes a brief recession in the early 1990s, the “irrational exuberance” of the late 1990s, significant declines in the early 2000s, and the “Great Recession” of 2007 to 2009.

According to S&P data, over the long term, S&P earnings increased from a little over $5 in the first quarter of 1988 to a high of over $50 per share at the end of 2021. Dividends, a particularly reliable indicator of the health of companies, increased steadily from $2 in 1988 to more than $16 this year.  Here are graphs showing quarterly earnings and dividend growth through mid-2022:

Despite some sizable declines, the U.S. free market economy consistently demonstrated its dynamism and returned to long-term growth following each difficult period.

What does this look like for regular investors?

Here is how an investor’s investment in the funds would have grown from their initial $100 investment in January 1988 through November 2022 using actual TSP data from the beginning of 1988, when the C and F Funds first opened for contributions:

There were sporadic dips as well as some significant declines. But maintaining a consistent investment strategy, without selling or attempting to time market fluctuations, produced nice returns, particularly in the C Fund.

Over the past 120 years, broad U.S. equity indices have followed this pattern. Although the outcomes vary, buy-and-hold investors who invest in broad index funds over the course of 30 or more years (“dollar-cost averaging”) can achieve astounding returns. This is covered in detail in TSP Investing Strategies.

Consider how a typical investor would have fared in a similar past period of rapid inflation, high energy prices, a shaky housing market, and a Russian invasion of a nearby nation. Namely, during the 1970s and early 1980s?

Several scenarios were tested using actual market data for an investor over a 35-year career who made investments in the S&P 500 or a stable value fund equal to the monthly interest rate on a 10-year bond issued in the United States (representing the G Fund). A more balanced portfolio was also considered, with 60% of contributions going to the S&P 500 and 40% to the stable fund.

For the simulations, the fictitious investor began making monthly investments of $250, which are equal to a 5% contribution for a TSP participant making $30,000 annually and a 5% government match. Each year, there was a 5% increase in the overall contribution rate.

The C Fund and the balanced portfolios both experience significant drops in total fund value, particularly later on in the investing process.

But in each instance, after the period of low returns, market dynamism returned to the American economy in the 1980s and again in the 1990s, and investors who stuck with it earned sizable profits.

The lesson, is crystal clear: Have faith in the long-term dynamism of the American free-market economy. For those who have long time horizons, continue investing, especially in stock funds, even when the market is down. The long-term effects will astound you, even though there will occasionally be value declines.