One way to make your family appear taller, thinner or smarter is to clip portly uncle Ned, tiny aunt Sally or dunce-cap-wearing brother Bob from the family reunion photo. Your genetic makeup will be unchanged, but your family tree will certainly look different.
The same technique can be used when trying to get a handle on an investment.
Cut out or add a bad month or year here and there, and the performance picture for that investment can be altered dramatically. Even if the data are complete and accurate, they show only what the investment did, not what it is going to do. That's why most experts, including the Federal Retirement Thrift Investment Board, advise people, especially those investing for retirement, to take a long view of their investments and not overreact to short-term changes.
Within the next couple of days, investors in the thrift savings plan, the federal 401(k) plan, will get some really good news if they have money in the C-fund. The C-fund is a stock index fund. It tracks the Standard & Poor's 500, which goes up and down with the stock market.
But the good news for feds will be a snapshot, not necessarily an indicator of where the C-fund, or the stock market, is going. It will only say where the C-fund has been.
What will happen is that the government will update 12-month returns for the C-fund. When last visited, the C-fund was up 20.10 percent for the 12 months that ended in July.
The updated material will show that the C-fund return for the 12 months that ended in August was up dramatically. But the apparent surge in the C-fund could be deceptive if people take it as a sign that the market is booming right now.
In the new 12-month data, August 1999 will replace August 1998, when the C-fund dropped 14.47 percent. Losing that "bad" August will make the C-fund's performance look considerably better. The picture will be accurate, but only if viewed in the context of constantly changing 12-month returns, which can go up sharply when a bad month is dropped or if the market has just had an especially good month.
Nearly 2 million people are invested in the thrift savings plan. Federal workers (and some retirees who had accounts when they left government) have $51.6 billion in the high-risk, high-reward C-fund. They have $29.8 billion in the super-safe G-fund (U.S. Treasury securities) and about $4 billion in the F-fund, a bond index fund. Next year, federal workers will be able to invest in two additional funds, an international stock index and a so-called small cap fund.
Workers who have invested from the beginning exclusively in the C-fund have amassed accounts four to fives times as high as those who invested in the other funds.
If you are confused, welcome to the wonderful world of predicting where you think (or hope) the stock market is going based on where you know it has been. It's a bit like driving to your destination using only the rearview mirror.
Looking back at the 12-month performance of a mutual fund, a stock or the C-fund, though informative, may be meaningless.
On the other hand, 12-month figures do provide some perspective. Jumping in or out of a fund--such as the C-fund--based on short-term returns is tricky, at best, and usually counterproductive. After the C-fund's August 1998 nose dive, many investors pulled out. But by the time they got their money into other funds, the C-fund recovered, returning 6.33 percent in September, 8.19 percent in October, 6.04 percent in November and 5.76 percent in December. It ended 1998 with a good track record, despite some down months.
When a federal worker claims to have mastered the art of timing the stock market, ask where the worker's oceangoing yacht is moored and when you can visit his or her Malibu mansion.
Here are annual returns for the three funds in recent years:
1994: C-fund, 1.33 percent; F-fund, down 2.96 percent; G-fund, 7.22 percent.
1995: C-fund, 37.41 percent; F-fund, 18.31 percent; G-fund, 7.03 percent.
1996: C-fund, 22.85; F-fund, 3.66; G-fund, 6.76 percent.
1997: C-fund, 33.17 percent; F-fund, 9.6 percent; G-fund, 6.77 percent.
1998: C-fund, 28.44 percent; F-fund, 8.7 percent; G-fund, 5.74 percent.
Mike Causey's e-mail address is firstname.lastname@example.org