Could the TSP Be Greatly Affected in The Next Crash? By Richard Brenner
Could the TSP Be Greatly Affected in The Next Crash? By Richard Brenner
Since the Index Funds were created over four decades ago, it has become about five times bigger after the most recent crash.
Many investors and fund managers are concerned due to how devastating this would be to the markets if there were to be another recession. And this event would affect TSP account holders as the investments are tied into index funds.
The most recent figure in the media to touch on this is Michael Burry, a fund manager that made his name by betting against the housing market, which fell in 2008.
Though communications with Bloomberg, he expressed that due to the imbalance of weight that certain stocks carry, there can be an overvaluation of stocks, along with smaller securities being overlooked with Index Funds having more say in buying and selling against Fund Managers.
For instance:
Let’s say that Kyle, aged 35, a small business owner, decides to invest his money into the C or I funds, the fund he puts his money in will then purchase shares in accordance to the rate used as the measure for that particular fund. So, for example, if Big Company A has 4.7 percent of the index, and Big Company B has 3.2 percent of the index, Kyle’s investment would go there.
So who exactly makes decisions on how much each share represents the index they are in? The decisions are made depending on market capitalization.
Well, in the past, when the C fund was fairly adolescent, many investors like actively managed mutual funds were making calls about major companies in the fund. Investors would research data to discern a stock and then possibly change the market capitalization of the company by purchasing or selling the shares.
Now during these times, the analysts and fund managers were not 100% correct all the time, but as a whole, they set the stock’s value.
However, currently, index funds have outperformed active fund managers that they have a large control over the choices of purchasing and selling. The fund managers that still do an analysis of individual stocks generally have less sway on the value of a stock compared to the index.
Because most of the money is flowing into the bigger stocks, not much money is being filtered toward the smaller stocks that may be worth more. People that are purchasing indexes using the same measurement, such as the S&P 500 or DOW, are purchasing the same shares of big companies without really reviewing each security and bypassing smaller shares.
Another thing that Burry claims is that if there is a sharp market decline, a majority of shareholders may sell all at once, which can cause the prices of shares to be so low that there are more people selling rather than purchasing.
Whether this happens or not, we will not know until it happens, really, but it is something to think about.
About Richard Brenner
As an independent licensed financial professional, Richard Brenner specializes in the retirement solutions federal employees need most. Rich lives in Mount Laurel, NJ, and graduated from Lafayette College with a B.A. in Economics and Business and has been assisting families with wealth preservation strategies since 2000.
Richard Brenner can be reached at;
609-605-0291
