The U.S. stock markets are in the ninth year of an uninterrupted bull run and the TSP’s C and S Funds are at or near record price levels. The I Fund, which is invested in the stock of foreign corporations, is hovering near it’s highest share value since 2008. Bond interest rates remain stubbornly near their modern historical lows, as the F Fund’s share value continues to remain relatively high. In general, the TSP’s four risky investment options have come a long way since the 2008 crash and are all at or near their highest levels in the past decade, or longer.
With market, and TSP account balances, at record levels, what’s an intelligent TSP investor to do?
First: Identify and clearly understand all of the various risks you face. When investing for retirement income, there is more than one kind of risk to consider. While it’s tempting to focus heavily, or even exclusively, on avoiding the risk of suffering a temporary loss in value, there’s more to it than that. There is the risk of failing to achieve your long-term goals. There are also less obvious, but not less important risks, like execution error, irrational bias and emotional influence.
Second: Prioritize the various risks you face and pay the most attention and effort to managing the most critical risks. Although, many investors are most concerned about suffering a loss in value, when it comes to investing for retirement income, the most critical risk is usually that of running short of resources later in life. Market downturns are predictable, have always been temporary, and should not be devastating to a robust retirement plan. Failing to adequately fund your spending needs later in life, however, is a mistake that is both devastating and irreversible.
Third: Formulate your investment decisions to balance your exposure to risk. There’s nothing wrong with trying to avoid suffering temporary losses in your account’s value, but not to the extent that you risk failing to achieve your long-term goals. Too much risk and you’ll suffer a bumpy ride. Not enough risk and you may fail to reach your destination. Ideally, you’ll always take just enough risk to get you where you want to go.
Finally: Strive for indifference. Before you settle on an investment strategy, consider how you will feel after you have implemented it. If you’re betting heavily on the markets moving one way, or the other, you may want to reconsider. Ideally, you’ll be indifferent to way the markets move, since you’ll always have some exposure to the best performing fund.
Written by Mike Miles
For the Federal Times
Publication November 2017