Happy holidays! We’ll all soon be heading to the malls, being careful not to be enticed by marketing campaigns and cute reindeer that seem to magically make our money fly out of our pockets. If your family is like mine, you exchange presents, enjoy favorite foods and swap stories designed to embarrass certain relatives.
Just as we know family stories often are more myth than reality, and we know reindeer can’t really fly, it’s important we are aware of some myths about investing. There are many misunderstandings that plague both lay people and professionals and lead to poor decision making.
- Myth: Dollar cost averaging is preferable to lump-sum investing.
Dollar cost averaging spreads a lump-sum investment out over time — making small, regularly occurring deposits rather than one big initial investment. The idea is that in fluctuating markets, some of your investments will be made when prices are relatively low, which will lower the average cost you pay for your shares in the end.
Truth: This strategy works in your favor when markets are falling and works against you when they are rising. Since investment markets over the long term tend to rise, the odds are that more often than not, dollar cost averaging will actually lower your investment returns compared with an initial lump-sum investment. Plans like the Thrift Savings Plan give you no choice but to invest regularly over time — at least from year to year. But you can improve your odds by investing as much as possible as early as possible during any given year.
- Myth: The specific day on which you retire is important.
Truth: In most cases, it’s not important. I’ve worked with hundreds of federal employees preparing for retirement and, when considered in the context of a 20- or 30-year retirement plan, whether they’ve retired on the 15th or the 31st day of the month has had little or no impact. The exception is when a few days make the difference in eligibility for benefits. Finding the best day to retire is worth considering, but not worth losing sleep over.
- Myth: You or someone out there can reliably beat the investment markets.
Truth: You can’t. Notice that I said “reliably.” There are plenty of examples of market-beating investment management. The problem is that you can’t predict in advance which companies or funds are going to be winners and when. Financial markets are highly competitive, and the odds are against you.
Consider the source
You may understand how a lay person could be confused by the growing number of investment choices — but many so-called professionals are confused as well. We are all bombarded with supply-side propaganda. Much of what the public and many professionals believe about investing was learned from marketing material. This material is developed to further the interests of the investment industry rather than the investor. It is no different than all of the holiday catalogs that stream into our homes and show pictures of children playing with amazing toys that appear to fly, talk and practically put themselves away.
On the heels of this marketing material are unreliable sources. Much of the information distributed through the media, even from sources with the best intentions, is incomplete or inaccurate. It is often impossible to fully explain a complex financial concept in a sound bite or 1,000 words.
And because financial concepts are complicated, problems arise when lay people and professionals have inadequate math and statistical skills. Competent investment decisions require a strong working knowledge of applied algebra, statistics, logic and psychology. Without these skills or someone to explain them, it’s difficult to evaluate the many options.
The biggest pitfall comes from conflicts of interest. Investors frequently follow sales pitches disguised as advice that conflicts with their own interests.
For TSP investors, one of the best sources of trustworthy information is the TSP. The L Fund portfolios go a long way toward providing you with model asset allocation strategies that can be applied to your TSP account and replicated elsewhere using exchange-traded funds that invest in indexes similar to those represented by the TSP’s funds.
Have a plan
Your best bet when it comes to investing is to devote the bulk of your effort and expense to the planning phase. Figure out which investment strategy best meets your needs — and then use a simple, low-cost, index investment program to support your plan. The TSP supports this type of investment program better than any other account I’ve seen.
It’s OK to believe reindeer can fly and your uncle really caught a 25-pound sea bass with a piece of fruit cake. But remember, when it comes to your money and your retirement, don’t believe everything you’ve been told.
Here’s to your health and a profitable New Year!
Written by Mike Miles
For the Federal Times
Publication November 27, 2006