As your own investment manager for your Thrift Savings Plan account, you should periodically assess your expectations for the account and how best to manage the account to support those expectations. You should also objectively evaluate your performance as manager.
How have you performed as manager of your personal pension account? Have you determined the benefits that your account will need to produce in the future and then tailored your efforts to fit that need?
Many investors rely on their accounts to produce a predictable stream of spendable income during their lifetimes, yet they erroneously manage their accounts as though they were playing the lottery – exposing their income goal to unacceptable risk in favor of speculating on long-shot bets with the potential for big payoffs.
Managing your account to beat this index or that arbitrary benchmark is an example of this kind of mistake. If what you’ll need the account to produce is reliable income, what difference does it make whether you beat the S&P 500? Beating an index doesn’t guarantee, or even improve the odds, that your account will produce needed income. Similarly, many investors try to manage their accounts to avoid short-term losses, in spite of the fact that achieving this goal may wind up guaranteeing that their account will fail to produce needed income at some time in the future.
As the manager or your TSP account, your first responsibility is to ensure that your investment strategy is designed specifically to support the benefits that the account is expected to produce. I find that one of the biggest and most common problems with retirement investment management, whether a do-it-yourself operation or a professionally run program, is that the management doesn’t fit the investor’s objectives. I see clients favor strategies and tactics that tend to maximize potential gains when maximizing the account’s potential ending value isn’t even mentioned as a goal.
By chasing an objective that is essentially meaningless to them, they are jeopardizing the benefits that they need most – usually their retirement income. If income is most important, then manage the account to support income.
The trick to effective retirement investment management is to figure out what path, after accounting for all of the factors that will affect it, your account’s value must follow over time, if it’s going to support the benefits you expect to produce. This is like plotting a ship’s course from where you are now, to where you want to wind up, after accounting for things such as winds, currents, tides and your boat’s capabilities and characteristics.
Investment management then becomes a matter of navigating your account’s value along this path. In order to do this, you must determine where you are now, relative to where you expected to be at this point, and then correct your heading, as necessary, to put you back on course. If you expected your TSP account’s balance to be $500,000 today and it is $450,000, your account’s planned benefit stream may be underfunded, and you may need to consider shifting to a more aggressive investment allocation to reduce the risk of failing to meet your future income needs. On the other hand, if the balance is $550,000, your account may be overfunded relative to your goals, and you may be able to shift to a more conservative allocation and safely reduce your exposure to market volatility.
Written by Mike Miles
For the Federal Times
Publication November 23, 2009