When should you consider making a trade, or interfund transfer as the Thrift Savings Plan refers to it, in your TSP account? The answer is simple: when it’s required to rebalance your account to the investment allocation you’ve selected. And this is the only valid reason I can think of to do it.
The idea is to have a plan that is designed to get you where you want to go, financially speaking, and then to regularly check your progress along the route and make adjustments, as needed, to stay on course. The planning comes first and the investment decisions – moving among the various TSP funds – are made solely to support the plan. Plan the work, and work the plan.
An interfund transfer should be directed by your financial or retirement plan, not some reaction to current events or ignorant recommendation. Anyone who suggests that you trade your account without fully understanding the details of your circumstances, constraints and objectives – your plan – should not be trusted for advice. The motive behind this kind of advice is often contrary to your interests. It’s not uncommon for published recommendations to be designed to maximize risk in exchange for a small increase in upside potential.
Maximizing returns, as an objective in and of itself, is counterproductive for most investors during much of their lives and with much of their wealth.
Wanting to go in one direction and driving in another is foolish. If your objectives include estate maximization, or speculation on commodities, or collecting fine art, or spending every last dime you can get your hands on, fine. Include this in your plan and make sure that your investment decisions are moving you in the right direction.
That’s smart. What isn’t smart is rolling the dice without knowing the odds and how those odds might affect your ability to achieve your goals. This is typified by those who insist on trying to outwit the investment markets by trading in their accounts with no clear reason for doing so. They want more return, but have no idea if they need it or how likely they are to get it.
Chasing return through market timing and security selection brings with it additional risk that may hurt such financial objectives as retiring at some point, having enough money to spend in retirement or leaving anything behind for those who survive you. If your only financial objective is to be able to say that you beat this or that market over some period of time, trading will give you a chance to achieve your goal. Unfortunately, it may also bring a much higher chance of failing. If you’d also like some financial security, you’re going in the wrong direction.
If you don’t have a plan, you should probably get one. It’s never too early, but it can certainly be too late. You must first figure out what investment asset allocation is appropriate to meet your needs. You use the planning process – identifying and understanding your goals, resources and constraints – to do this. Once you’ve identified the allocation to use, implement this allocation in your account. Then at least once per year, review the plan, confirm or select a new investment allocation, and then rebalance your account to this allocation. As your goals and resources change, so may your allocation. It’s also a good idea to allow a 10 percent to 20 percent deviation from the target for each fund before making a trade to avoid
rebalancing too frequently. You’re expecting the funds to rise and fall through time, and you don’t want cut a fund’s upward swing short by selling it too soon as it’s rising.
Investment decision making is not the end, but the means to an end. It is intimately connected and subordinate to your goals and circumstances.
Of course, it’s difficult and stressful to decide which way and when to turn the wheel if you don’t know how to get where you’re going. You’re just blindly guessing and hoping if you keep turning randomly you’ll get lucky in the end. Not likely. It’s much easier to decide what to do next if you’ve mapped out the way.
Written by Mike Miles
For the Federal Times
Publication March 24, 2008