Last month’s Brexit vote certainly caused some volatility in the stock market, and led many casual investors to question whether they should sell off shares of various companies or buy more while the price was right. That speculation spread to TSP account holders, who watched some of their investments dwindle (albeit slightly). For example, the TSP I fund closed on June 24 – the day after UK voters elected to leave the EU – at $22.66, down from $23.95 on June 1.
To help allay any panic, TSP sent a message to its investors that, while not specifically referencing Brexit, stated, “Once you’ve established your retirement goals and a savings strategy that fits your needs, you’ll have the best results if you stick to your plan. Don’t get sidelined by distractions. Make adjustments to your strategy only after careful consideration.”
The advice from TSP is sound. Regardless of whether there are large fluctuations in the stock market, it is best for investors not to act too hastily. There will always be short-term ups and downs in the market, and your ability to handle them is largely based off your proximity to your planned retirement date. If you’re young, you can withstand cyclical volatility in the stock market. But if you’re only a few years from retirement, you’re a bit less resilient because you’ll be relying on any investments you have sooner rather than later.
While no one should make investment decisions without careful research (or, if you’re so inclined, speaking with a financial advisor) here are some tips to get you started when thinking about how to handle your TSP funds and avoid panic.
1. Choose the TSP fund mix that is right for you: You have the opportunity to choose from one of five funds: C, F, G, S, and I. The C, S, and I funds are all invested in domestic and international stocks, while the F fund is invested in bonds. These four funds have a higher potential return on investment than the G fund, which has the lowest risk and is invested in U.S. government securities. However, the C, S, I, and F funds also have higher potential risk. The I fund, which is invested in international stocks, has the highest risk, and is best for those who intend to remain in the workforce for many years, while the G fund is best for those nearing retirement who don’t want to take on much risk. You can choose to allocate your TSP into any or all of these funds. If you prefer an automatic diversification in your investments, you can choose one of the L funds, which allocates your investments across all TSP funds based on your target retirement date (current L funds are 2020, 2030, 2040, and 2050). No matter which decision you make when allocating your TSP investment, you need to be personally comfortable with it. Not comfortable because a book or a coworker or your Uncle Johnny told you that you can withstand plenty of risk. You want to make the decision that gives you peace of mind and allows you to leave your account on autopilot for a while.
2. Reduce risk through diversification: The best investment strategy is not to put all of your TSP money into one fund, because then you’re entirely dependent on the performance of that fund. Instead, either choose the L fund if you’re unsure of the proper allocation, or choose a variety of funds in which to invest. Also, remember that past performance is no guarantee of future performance, so your diversification should be based on your risk tolerance.
3. Don’t panic: Stop checking your investments daily so that you avoid making any irrational decisions based on market gains or losses. Really, there is no need to check in that regularly. Instead, choose one or two set times during the year to look at your portfolio and consider whether it still reflects your ability to withstand that level of risk.
4. Make an interfund transfer (IFT) only when truly necessary: The IFT allows you to rebalance the money in your TSP account. Each calendar month, you are permitted to make two IFTs to all or any of the TSP funds. After those first two, you can only move money into the G fund. These IFTs should only be done when you need to rebalance your risk based on your proximity to retirement.
5. Remember that the TSP is not the stock market: You truly have no control over buying low and selling high, because your investments are based off of the stocks contained in the fund or funds you choose. You don’t get to pick and choose the individual stocks. If you decide to move your money from one fund to the next, you’ll still have the same amount of money (say, $10,000) but its potential earnings will either increase or decrease depending on how risky the fund.
If you’d like more information on the TSP and its associated funds, here are some websites to check out:
• TSP’s YouTube channel features a number of videos on understanding your benefits and investments
• TSPFundTracker.com updates each evening between 9:00pm and 11:00pm and graphically displays the performance of each fund
• The TSP website has a summary of fund options (last updated in April 2016)
• The TSP website also features general information on the plan
Nice blog–very informative.