I’ve noticed a little more confidence in the voices of Thrift Savings Plan investors lately. And, why not? Between the time they reached their recent lows March 9 and the time I write this July 21, TSP’s stock-based C, S and I funds have risen in value by more than 40 percent, based on the funds’ reported daily share prices. That’s a gain of more than 40 percent in less than five months. There’s nothing like a big jump in your account’s value to reconstitute some hope that retirement may actually be in your future.

But, wait a minute. Let’s not get too excited quite yet. While the stock markets have made impressive moves recently, they have recovered only something in the neighborhood of one-third of the value they lost during the preceding 17 months. And, in the midst of this increase in confidence, the markets increasingly “climb a wall of worry,” as the saying goes.

If you pay much attention to the financial media – a habit that will spoil your retirement just as efficiently as a world-class market meltdown – you’ve noticed quite a bit of disagreement about the direction we’re surely headed.

The discussion focuses on a variety of discrete points – the world economy, the domestic economy, politics, the investment markets, social issues – but the result is the same: disagreement.

Turn on the TV and within minutes you can find a split screen with two equally impressive experts predicting different paths for this or that going forward. If you sit on the sidelines, half of the experts will tell you that you’ll likely miss out on an important opportunity. The other half will tell you that if you invest, you’ll wind up riding the next big drop to a new low.

Who’s right? They’re both right because they’re both simply pointing out that investing is risk

If there is anything that investors should learn from their experiences in recent years, it should include the simple lesson that no one knows with certainty what’s going to happen in the future. More specifically, no one knows where the markets are headed. Even if you could predict where the economy is headed, stock prices are not just a function of the state of the economy.

They’re a function of investors’ expectations about the future of the economy. That’s why it’s not
uncommon for good news to be followed by a drop in stock prices, or bad news to be greeted by rising prices.

This is why gambling heavily with your retirement investments on specific bets is so risky. There is always a high probability that you will be wrong. Or, that – even if your reasoning proves correct – consumer demand will weaken over the next six months or inflation will rise early next year, for example. You’ll still lose your bet and your money.

How do you play your TSP cards right to put the odds in your favor? The answer is simple: diversification. If your TSP account is your only retirement investment account and you may have more than a few years to live, your account should probably contain all five of the basic funds at any given time.

Which fund will be the best and worst performers next month? Next year? Over the next 20 years? No one knows, for sure. That’s why you should spread your bets around – because when it comes to investing for retirement, it’s always better to lose a small bet than a large one.

Written by Mike Miles
For the Federal Times
Publication July 27, 2009