By now, I’ll bet that most Thrift Savings Plan investors have figured out that actively trading TSP funds, either for short-term profits or to avoid short-term losses, is an unreliable way to fund their retirement standard of living. But if speculating on short-term moves in share prices is the wrong way to try to build wealth, then what is the right way?
Buy and hold? There is no shortage of advocates for the proposition that simply buying quality investments and then holding them indefinitely will lead to superior investment results.
I’m sorry to say it’s not that easy. For starters, the research, analysis and logic behind this advocacy uniformly ignores individual circumstances and goals, and instead focuses on long-term average rates of return absent the effects of things such as cash flows into and out of the portfolio. Like any one-size-fits-all investing solution, buy and hold is unlikely, or at least not the most likely way, to maximize your retirement income stream.
The problem with blindly buying and holding any mix of TSP funds is that this approach tends to ignore your circumstances and how they will change through time. What may start out as a reasonable mix of funds, or asset allocation, for your age, current wealth and package of financial goals — retirement point, savings contributions, spending and terminal wealth — will certainly change as the value of each of the funds changes relative to the others. Your optimal asset allocation may also change as your wealth, age and goals change through time.
In other words, a buy-and-hold investment strategy, even if appropriate when implemented, will almost certainly become inappropriate at some point in the future. Rather than helping you to achieve your goals, an aging buy-and-hold strategy will likely wind up working against you. The right asset allocation today may be the wrong asset allocation tomorrow.
If you want to maximize your income in retirement, carefully managing your TSP account is essential. Every mistake costs you money — money that you could have been part of your income. Spending lots of time invested in the wrong asset allocation scheme is a potentially serious mistake to be avoided.
An overly aggressive — that is, volatile — investment strategy subjects you to the risk that downward swings in your portfolio’s value could coincide with withdrawals in a way that permanently reduces your income stream. An overly conservative strategy may lull you into a feeling of security as it shields you from losses, but it will not produce the growth needed to support your goals in the long run. You’ll fail to realize that you’re in trouble until it’s too late.
The right way to manage your TSP account is to do exactly that: Manage it — and manage it actively according to your objectives.
Active investment management has gotten a bad reputation because of the way it has been defined. When people talk about active investment management, they are nearly always referring to the practice of speculatively buying and selling securities in order to beat a certain benchmark. In practice, this means trading in selected components of a market to try to outperform that market — a hard thing to do and counterproductive to maximizing retirement income streams.
The kind of active management I’m recommending involves periodically identifying the right asset allocation for your situation and then implementing it. Periodically assess your investment resources, goals and personal circumstances, select a reasonable asset allocation to meet your needs with a minimum of risk, and then rebalance your account to this allocation.
Do this at least once per year, but no more than four times per year, and it’s virtually impossible for your retirement plan to fail.
Even if your allocation remains the same, rebalancing your account to the target allocation is a critical risk management tactic.
There are many sources of investment risk. Like speculative trading, ignoring your TSP account is risking catastrophic failure in the end.
Only by prudently and actively managing your TSP account, can you be confident in achieving your retirement goals.
