TIP: Emotional Rescue for Your TSP
Now that the Stock Market looks like it is doing better than the last 3 months of 2018, I suspect everyone is going to go back to their old routines. Perhaps that involves getting out of the G Fund, or starting to get more aggressive and taking a bigger position in the C and S funds. Everything looks fine so why not. Why worry. After all, the next market downdraft is another year or two away, so maybe people will start to cash in on the positive returns for awhile. Yet unfortunately, there will be another market downdraft or recession, and when it comes it will be the same story all over again. Nobody will see it coming.
I said in one of my blogs about not getting emotional over business decisions. It seems like emotions are playing a bigger and bigger part of people's decision making and this is dangerous. Good decisions are not made under emotional decisions, whether good or bad conditions exist. In fact, there is a very good chance you will do yourself more harm if you operate this way. But it is a very human reaction to deal with TSP decisions through emotional eye glasses and no one is immune.
So lets talk about some emotional rescue from this condition. The first thing that needs to be outlined is how this comes about and how it is related to your TSP decisions. The Stock Market goes through a number of economic cycles that affect different companies and industries in different ways. With each economic cycle comes a different high or low of business growth or decline, based on each specific industry. As each economic cycle phases in or out, so do our emotions. If you can control yourself and keep your decisions as objective as possible, you will not only feel better but your TSP will grow better. You have to be able to sleep at night with your TSP investment decisions in order for you go to work, help your family thrive and enjoy your life.
A while back, I read an excellent article in Kiplinger Magazine (January 2019) that was written by Anne Kates Smith and titled, "How Market Cycles Drive Emotions." I think this article explains this vicious cycle in very realistic terms. Basically, people start at the beginning of a Bull Market with extreme caution, tired of getting burned by previous Bear Markets that wreaked havoc on their TSP funds. They are living in fear and it becomes hard to get back in the Stock Market and take advantage of opportunities the last Bear Market has opened up. But soon, the bad feelings start to fade and people want to jump on the band wagon of great returns being generated by the Stock Market. Especially if they hear their friends are doing well in the C and S Funds and the conversation in the break room makes it clear you are losing out on some big money by playing it safe in the L Funds.
So people will start a group behavior known as "following the herd." Everybody thinks the last Stock Market downturn is a thing of the past and everything is now under control. But over-confidence kills. Greed starts to take over and long-term risk management is a forgotten concept.
The Stock Market is doing so well that people don't see what happens next. First, people think the most recent market top is the only investment target that is acceptable. Any decline or market adjustment in that figure starts to make people nervous. As the Stock Market starts to go down, a phenomenon known as "Anchoring" makes it very difficult to let go of poor performing stocks and when people finally realize the Stock Market is plunging, everybody starts to sell off their stocks and a find a place to hide, like the G Fund for us TSP people.
Then the cycle starts all over again. Now you have lost a big chunk of your TSP from the downturn because you waited too long to get out and you didn't take advantage of the upturn, when you first had a chance to do that when the Bull Market started to come back.
The truth is you never had a chance. By the time you decide to get to
the G Fund to get out the Stock Market downturn or try to jump in to
the C and S funds to get in on those Stock Market eye popping returns, it's too late. All the unscrupulous Stock Market traders with inside information along with the rest of the Stock Market professionals have taken almost all the gains or dumped their stocks by the time the common people figure it out. Nothing good comes from trying to run and hide or make a killing.
The main point here is to smooth out this roller coaster of emotions to keep your TSP growing without the ups and downs from the economic cycles. You need to find that balance. I talked about this before. Your going to have market downturns every 5 to 10 years. We know this. This isn't a secret. So maybe, instead of trying to max out those returns at 15%, 20%, 30%. Maybe, you should think about returns that still get you to your target investment goals but keep you from losing huge amounts in the process, especially if you are close to retirement. By close I mean about 5 years or less.
Warren Buffet has reported that long term retirement returns should be reasonably 6% to 7%. The key words here are LONG TERM. That is what the TSP is. It's not playing the Stock Market. It is a hybrid form of investment based on many years of growing consistent contributions and time, with a diversified portfolio to spread the risk. That is what gets you to your target goals.
Take the emotion out of your decisions and try not to worry whatever the direction of the Stock Market. Once you get to your retirement date, you will be okay. You will have plenty of money for your retirement. Don't let yourself be taken for a ride on a Stock Market roller coaster unless that is what you want. You can control this process to some extent. The main thing is don't let other people or market conditions make you do things you normally wouldn't do.
That's the problem when dealing with money. Lots of money. It makes you do things you normally wouldn't do.
Think about that.