For investors planning to rely on their invested resources to provide cash flow in retirement, market timing is a bad idea. There is so much wrong with it, that it’s difficult to know where to begin or end, but I’ll try to hit the high points in the limited space I have, here.
Market timing in a TSP account is electing to deviate from the optimum asset allocation scheme for a period of time. The optimum TSP allocation scheme is the asset allocation scheme that will support your lifetime financial goals with the minimum possible risk. The optimum allocation scheme takes into account all known risks, including the risk of changes in fund share prices.
If determined and used properly, the optimum allocation scheme will reliably support your cash flow needs in retirement without the need to predict, or react to, sudden market moves. Combined with your spending plan, it should anticipate, and leave a “cushion” sufficient to absorb, these moves.
The reason for taking this approach – that is, building a cushion into your investment plan from the start – is that it’s impossible to reliably predict the future of fund share prices, or to compensate for unpredicted changes after they have occurred. Market timing is unreliable because it relies on this kind of prediction and reaction, and pretends to be able to accomplish it.
If owning a particular combination of TSP Funds will produce a particular return over a period of time, then the only reason to deviate from that scheme would be to try to improve on that return. When you deviate, however, there are two possible outcomes: The resulting return will be either better, or worse, than the return for the original allocation scheme. The problem is that there is no way to know which of these is more likely. No one has found a way to reliably beat the optimum allocation in your TSP account, when risk is taken into account. Trying to do so using market timing is a speculative endeavor. It’s a bet against the odds at worst, and a blind bet at best.
Various systems for timing your TSP investments are being promoted as the solution to a problem. They include a variety of methods, but all share in common some way of providing you with a signal to change your asset allocation scheme that is unrelated to your specific circumstances. Without exception, they are being promoted by sources that are either unscrupulous or ignorant, and they are part of the problem faced by TSP investors, rather than a solution. Believing that there exists some systematic way to predictably beat a market, without exposing yourself to greater risk, demonstrates a profound lack of understanding about how the TSP’s funds, and the markets they represent, work. Even if this logic doesn’t convince you that such systems are nothing more than 21st century snake oil, it should be obvious that the promoters of these strategies have absolutely no understanding of your circumstances, goals or resources – they know nothing about you – and, therefore aren’t in any position to advise you in how you manage your money.
Timing strategies typically use either flawed logic or back-testing to try to convince you that they will work to your advantage. The logic is always flawed for the reasons that I have just mentioned: They ignore risk; they ignore the way markets work; or they ignore your particular goals, resources and constraints. Back-testing, which is taking a sample of historical market data and seeing how the strategy would have performed, had you used it over that period, is a ridiculous basis for choosing an investment strategy. It pretends that because the strategy worked on one of an infinite number of possible scenarios, that it should be expected to work in the different scenario you will face. From such a tiny sample of the possibilities, it is impossible to know how likely, or unlikely, a strategy is to succeed in the future.
If, like most TSP investors, you are relying on your TSP account to provide you with predictable income in retirement, you owe it to yourself to give your account the diligence and care it deserves. Trusting your account to “advice” from someone who doesn’t know you, hasn’t done the work to understand your situation, and who won’t take responsibility for the outcomes you enjoy, or endure, is never a good idea.
Written by Mike Miles
For the Federal Times
Publication August 8, 2016