By: John Jilek, CFP®
Published: January 22, 2019
When is playing it safe a bad idea?
What does safe really mean?
Federal Employees have a lot of worries going into 2019. Rightfully so! I write this on the 25th day of the government shutdown. Uncertainty seems to be everywhere, but letting this pervade your long term investment strategy is invariably a bad idea.
Where should I be invested in the Thrift Savings Plan is a great question. The good news is there are really just two factors that most Federal workers should be considering to answer this question. What is my time frame for spending the money, and what is my risk tolerance with respect to volatility, or the ups and downs of the market investments.
Answering these two questions is critical before choosing your investments in TSP. After all, you only have five investments to choose from: G, F, C, S, & I. How simple is that? Or is it? It is if you break them into two groups. The G& F funds are bond or fixed income funds, and C, S, & I are stock funds. Bond funds are stable and pay income, but do not offer growth. Stock funds give you growth, but you will experience losses as well as gains as the stock market moves up and down.
Regarding time frame and risk tolerance, let’s consider an entry level employee with 30 years or so until retirement — a long time frame until they will access TSP money to supplement their retirement. The only real consideration here is their risk tolerance as they have a long way to go before spending will begin. They also do not have a lot of money in the plan yet, and drops in price of the stock funds will prove to be their best buying opportunities as their paycheck deferrals buy them additional shares at a discount. The answer for early career is light on the G & F funds and heavy on the C, S, & I funds.
How about Mid-Career employees with 15 years to go? Now we have to take into account a shorter time frame for additional purchases, and the fact that these folks have a significant amount in their accounts already invested. Too heavy on the stock funds could cause them to lose in a market downturn, and too heavy on the bond funds could lead to more years working. In this case, time frame and risk tolerance are weighed pretty much equally. Half in bonds and half in stock is very typical for investing during this stage of your career. Give what you have some protection, but still go for growth.
And what about the Federal workers with 5 years or less to go? Why risk it? Most of a Federal workers investable net worth at this stage is tied up in TSP. You only have to look at the last decade where the stock funds would have caused you to lose roughly half of your investment in those funds twice. Time frame in this case takes precedence. Overweight in the bond funds is okay here. Sacrifice the return and protect your base. If you want to go for some growth, take your remaining investments into the TSP and focus on the stock funds.
With the above examples, you could go in and pick individual funds. Many Federal workers still do. What I always recommend is for Federal workers to take a look at the Lifecycle Funds’ fact sheet on www.TSP.gov under the Forms tab. Print the PDF in color and take the time to read the first paragraph. This paragraph maps out the investment strategy of the L-Funds in three sentences.
In the first sentence, each of the five L-Funds contain all five of the individual funds G, F, C, S & I. As a matter of fact, this was done by investment professionals based on different time horizons for spending the money.
Funds are rebalanced back to the original percentages of each fund you started the day with. Wow! I wish my own 401k rebalanced daily. I only get a monthly rebalance on my plan.
The last sentence informs the reader that every three months they will reallocate your funds to give you a little more G & F and a little less C, S, & I. Why would they do this? To protect your accumulated balance as you move toward the end of your career and start to spend your money back out of the TSP. Slowly and methodically moving you out of stocks and into the safety of bonds. Brilliant!
When in doubt, choose an L-Fund!
John Jilek, CFP® has been a Financial Advisor since 2000, and is certified by the Certified Financial Planning Board of Standards. He has been an active trainer for over twenty-five years.