When the stock market took a 14.7 percent nose dive a year ago, thousands of formerly happy, suddenly nervous federal workers pulled money out of the high-risk C-fund (stock index) of the federal 401(k) plan.

The August 1998 downturn followed a smaller dip the month before, and the two bad months were too much for some civil servants, who had grown accustomed to years of unnaturally high returns from the C-fund, ranging from 20 percent to 37 percent. Their investments in the C-fund, and the earnings on those investments, are largely responsible for pushing the value of the thrift savings plan to more than $85 billion. Most of that money is in the C-fund.

But during panic time last summer, a relatively small number of federal workers pulled millions of dollars out of the C-fund, which tracks the Standard & Poor's 500. Most moved it into the much safer, if less rewarding, G-fund, which is invested in guaranteed U.S. Treasury securities. (The G-fund return in August 1998 was 0.49 percent, while the F-fund (bond index) returned 1.66 percent.)

Most found that their attempts to time the market (that is, guess when it has hit a high or low) wound up costing them money.

Market timing is tough even for experts who can move money quickly. It is almost impossible to guess right in the savings plan because of the time lag in moving funds. It can take anywhere from two to six weeks.

Because of that lag, which will be eliminated next year, the C-fund had started climbing again by the time workers got out of it. Those who jumped ship in August 1998 and then climbed back on board in September or October wound up selling low and buying high. That is not recommended.

Moving retirement funds--which are supposed to be a long-haul investments--based on short-term market highs and lows is considered a no-no by most professionals. Financial planner Paul Yurachek, an expert on the federal 401(k) program, says a portfolio "matched to your life goals is an investment . . . but a portfolio matched to current market conditions is mere speculation."

Market timers "must be right over 90 percent of the time, both in and out in order, to beat a buy-and-hold-strategy," he said. "This is especially true with an index-type fund" like the C-fund, he said.

The Federal Thrift Retirement Investment Board, which runs the savings plan, puts out regular warnings to investors not to try to time the market. Although it will make daily transactions available next year, board officials hope employees won't jump in and out of funds--based on daily ups and downs of the market--just because they can.

It is significant that most federal investors didn't flinch because of the July and August downturns last year. They didn't know or didn't care. Or they realized that reacting to daily or monthly tics in the market can raise the blood pressure. In any case, the stay-put types did the right thing. The C-fund rebounded quickly and recouped its losses in a matter of months. And those who invested in the fund while it was down got a bargain.

On the other hand, investors who thought they spotted the start of a long-running losing streak for the C-fund turned out to be wrong. The fund had a great year and continues to do well.

In September, the C-fund rebounded, going up 6.33 percent. In October, it gained an additional 8.19 percent. In November, it returned 6.04 percent and in December, 5.76 percent. In other words, it quickly recovered its losses, then forged ahead. For 1998, the C-fund return was 28.44 percent (including bad months and good), compared with 8.70 for the F-fund (bond index) and 5.74 percent for the G-fund.

Market Prediction Investors who follow 12-month returns for the thrift savings plan are likely to be in for good news--and good numbers--next month. That's when the 12-month return for the period ending in August 1999 will be announced. Those returns will not include the August 1998 loss of 14.7 percent.

Even with the August 1998 downturn, the 12-month performance of the C-fund for the period ending in July was 20.10 percent. Dropping the August 1998 figures from the equation should mean--unless the market really tanks this month--a better return for the next 12-month period.

G-Fund Rates The G-fund is the second most popular investment vehicle in the federal 401(k) plan. It is super-safe, because its rate is set monthly and guaranteed by the Treasury Department. Low inflation has pushed down the G-fund rate. The average rate was 8.87 percent in 1990. The average rate had dropped to 5.77 percent by last year. So far in 1999, the average rate has been 5.72 percent.

Mike Causey's e-mail address is causeym@washpost.com

Wednesday, Aug. 25, 1999