What should you be doing with your Thrift Savings Plan account right now? With markets on the rise, many are considering shifting to a more aggressive stance by increasing their exposure to the C, S and I stock funds at the expense of the F and G funds. This is probably the opposite of what you should be doing. Instead, you should be evaluating whether you can afford to be more conservative, given the recent rise in stock prices.
The investment markets, and the interaction of factors that drive securities prices, are incredibly complex. We’ve figured out how to get a man to the moon and back, but we can’t figure out how to accurately predict where the C Fund will end the next day, week, month or year. And, while no prudent person would seriously try to build his own rocket and send himself to the moon, lots of you, with little or no fundamental knowledge, will try to build your own investment portfolio and navigate through many years of turbulent future – with enormous consequences of failure on the line.
Successfully navigating a lifetime in the investment markets requires one or more of the following: living far below your means, extraordinary luck and skillful investment management.
For most people, No. 1 is not an attractive alternative. Sure, you can make sure that you never run out of money by not spending any, but this usually defeats the point of having the money in the first place.
No. 2 is unreliable, unlikely and, often, unrecoverable if it fails. Unfortunately, it’s also the most commonly used. It’s not only a favorite of do-it-yourselfers, but far too many professional investment managers sell it to their clients at a hefty fee. The most common characteristics of the luck approach are that they attempt to beat an irrelevant investment market index, such as the S&P 500, and that they make little attempt to support the specific goals of the investor.
No. 3 is obviously the best solution if you want to maximize your chances of getting the most from your TSP account. Making investment decisions based on their ability to support your specific financial goals, while accepting a minimum of risk, is what prudent investment management is all about.
So, how do you tell competent, prudent investment management from reliance on luck? During the roller coaster ride that the investment markets have provided since the late 1990s, I’ve witnessed countless examples of incompetent management – pure speculation. Speculators are constantly guessing which way things are going and reacting to their feelings of confidence and fear. During the past 10 years, they were most confident when the risk was highest – 1999 and 2007 – and most fearful when it was lowest – 2002 and 2008. They made counterproductive investment moves because their decisions lacked the proper context. If you don’t know how your decisions are likely to affect your ability to achieve your goals, how can you have any idea which way to go? It’s like driving without knowing where you are on the map.
What did competent investment management look like during the same period? As markets rose, the competent manager checked the portfolio’s rising balance against that needed to safely fund the financial goals in the future. If the portfolio’s value rose sufficiently to allow it – most likely in 1999 or 2007, when speculators were buying more stocks and more risk – the prudent manager sold stocks and reduced the portfolio’s risk in favor of less risky assets. This was accomplished by shifting to the most conservative investment allocation that would safely support the investor’s financial goals with the benefit of the portfolio’s greater value. More money now means that less return – and risk – is required to support the same goals in the future.
When markets fell sufficiently – most likely in 2002 and 2008 or 2009 – the competent manager
recognized that lower portfolio values today might require higher rates of return later if they are going to continue to support the same goal package. This resulted in a shift to a more aggressive asset allocation – increasing the portfolio’s exposure to return and risk.
I urge you to compare your TSP account’s history with this benchmark. Is your account benefiting from competent investment management, or being victimized by speculation?
Written by Mike Miles
For the Federal Times
Publication October 26, 2009