TIP: Don't Live in Fear. Don't Live in Greed.
The first rule of business is don't get emotional! That is easier said than done. Most people start to panic if they hear the Stock Market is starting to waiver. Others get a sense of panic when they hear the Stock Market is doing really well and they are not riding the wave of high gains and profits.
The truth is somewhere in between. The idea is to be in a place where market losses and gains don't affect your TSP as much. Keep in mind my last blog: The average Stock Market growth for almost the last 100 years is 6%. That means that instead of trying to max out your gains or completely protect yourself from losses, try to find a moderate position to ride out whatever is happening in the Stock Market. Remember, the TSP is set for long term growth. Not fast money schemes or get rich quick strategies. You have to have a long term plan and stick to that plan to max out your TSP. You need to be strong and have confidence in your decisions.
Let's be clear. When there are gains to be made or losses to be avoided, there is a certain pecking order to how the Stock Market funds get adjusted. First are the inside traders. Basically they are using inside information to make illegal stock purchases or sales from advance knowledge of Stock Market events and will come out on top. There is nothing you can do with these people. They are always present in the industry and by definition, they are an insidious. They make the big money.
Next comes the rest of the stockbrokers, investment bankers and mutual fund managers in the industry. They spend 90 hours a week looking at stock information and analyzing financial data.
They will take the rest of the gains or minimize the losses the inside traders did not identify.
Finally, the last people on the list are you and I. The regular civil servants and U.S. population who are tied to the Stock Market with TSP, 401K and 457 plans, and deferred compensation. Anything you do at this point is almost futile and irrelevant. You will not gain any advantage by trying to time the Stock Market. It's too late. You will probably hurt your TSP from moving funds around during this period. So what is to be done by the regular people?
Keep in mind that the idea is not to have no risk in your TSP investments. That is living in fear. That doesn't mean you have to take extreme risk either. That could be too random. That is living in greed. What you need is to find investments that put you in a good place to ride out any major fluctuations from the Stock Market. The way you identify these investments starts with finding out who your are?
When I provide a consultation with my clients I ask them: What kind of person are you when dealing with risk?
There is no right answer. You have to decide where you belong in one of these 3 categories. It's even possible that as time goes by, your risk posture may change from aggressive to moderate or even passive, depending on your age or if you started a family. It is even possible that your risk posture could also overlap. You could be aggressive/moderate or passive/moderate. You have to be honest with yourself and identify these traits first, before making any TSP investment decisions. Then start identifying the funds that make you sleep better at night.
Some people want funds to be on auto pilot, like the L Funds. That is exactly what these funds are for. They go from aggressive to moderate to passive over time, so that you don't have to worry about doing the adjusting. The L Funds are made up of all the other funds and gives you diversification and protects you from large losses. It also keeps you from large gains. But you can successfully ride out any fluctuations with the L Funds and still max out your TSP. I would call this the Moderate group.
Then maybe you are one of those people that likes to manipulate your TSP funds every quarter. You have done your own research or been provided information from other TSP related web sites that give you ideas on how to manipulate the TSP for the highest gains. This would include the C, S, and I funds. These are higher growth funds that can help you max out your TSP. If you feel that you need to be in this posture, then you should do that. It's your money. You have to do what makes you feel good about what your decisions. Just remember the risk exposure. That is a very real threat. I would call this the Aggressive group.
Finally, you could be one of those people that want to play it safe. Little or no risk. No reals gain either. All the money is in the G fund. But that's okay. You money stays safe. I would call this the Passive group.
All these categories have pros and cons. No investment strategy is fool proof or a magic formula to maxing out your TSP. You still have to make consistent and growing contributions over time to your TSP for any of these risk postures to work and for your TSP to grow to possibly seven figures.
One final thought: You will not lose your TSP if there is a market loss. You may lose some funds, or even a significant amount, but you will not be broke. With time and regular contributions, you will get back to your current position. As long as you protect yourself you can minimize these losses. Stock Market fluctuations that cause gains or losses are inevitable. You can't have all gains and not be affected by the losses. They are a package deal.
One more thing: We are now riding a wave of high gains and profits. Take advantage of it. But remember this: When the Stock Market does go down. When the Stock Market starts to take big losses. You probably won't see this coming. It always catches people by surprise. Always. Lots of people. That's the problem with being in aggressive investments. You need to be protected BEFORE the Stock Market starts to go down. You just won't see it coming.
In the end, it's not about making more money because you will. If you are in the TSP for 20 - 30 years before retirement and then another 40 years after retirement, you will make money. Lots of money. It's about protecting the funds you already have.
Don't get emotional.
Don't live in fear.
Don't live in greed.
Find your balance.
Next time I will discuss some different strategies on how to max out your contributions to TSP. Nothing radical or extreme, just reasonable.