When Is a Good Time to Change Your Thrift Savings Plan Investments?
At this time of year, I keep financial housekeeping top of mind — be on the lookout for more end-of-year columns in the coming weeks. Meanwhile, I’d like to address a question that came up in a recent discussion with a member I met at a military transition event.
At that point in time, the S&P 500 was up more than 20% year-to-date. The individual I was speaking to felt like the “other shoe was getting ready to drop,” and he wanted my opinion on making a big move to preserve the gains he had enjoyed over the past year. Specifically, he wanted my opinion about moving all of his funds in his various Thrift Savings Plan investments into the Government Securities Investment Fund, or G Fund.
We dug into his situation a bit more, and I wanted to share some of the highlights of our discussion here, if for no other reason than to provide some food for thought if you are having the same kind of notion.
Before I go there, keep in mind the importance of seeking out the counsel of your financial advisers — tax, investment, etc. — before making any big financial moves.
Market-Timing Is Hard
First, let’s look at the concept of market timing. Here, I’m talking about making big changes in how you’re invested — for example, shifting back and forth from an aggressive mix to a conservative mix, because losses are occurring in your portfolio (or, in this case, because you think they might).
Having invested, worked with clients and talked with members over the past three decades, it’s been my experience that market-timing just plain doesn’t work. And guess what? For it to “work,” you have to get two decisions correct, both the “in” and the “out.” It may seem like a good idea, and if emotions are running high (i.e., fear, greed, etc.), it can be tempting, but there are some better ways to approach things.
Diversification Reduces Risk
The old adage, “Don’t put all your eggs in one basket,” captures the essence of diversification. Sure, one egg may get cracked, but the risk of all of them cracking — or losing money — at once lowers if you have a mix of different types of investments. It’s easy to lose sight of this when you watch and/or experience a rapid rise in one part of your portfolio. I’d encourage you to avoid the temptation of piling all those eggs into a single investment, fund or asset class, no matter how much success is occurring.
Time vs. Timing
Instead of focusing on timing the ups and downs of the markets, ensure your investments are selected with the timeframe of the goal for which you are investing. In that context, it wouldn’t make sense to invest in stocks for a goal that’s only a year away. Let the timeframe of the goal be a major factor in how you choose the investment(s) to fund that goal, and you will take a big step toward a process that works and creates less stress.
Say ‘Yes’ to Rebalancing
Periodically rebalancing your investments to reflect your base approach allows you to maintain your risk appetite and buy low/sell high on a relative basis. Here’s a very simple example: You start the year with a portfolio that consists of 50% stocks and 50% bonds. A year later, your stocks have increased 20% and your bonds have declined 5%. In that scenario, you would get to the end of the year, and your portfolio would have roughly 56% in stocks and only 44% in bonds. By rebalancing, you would sell enough stocks and buy enough bonds to put your portfolio back to 50/50.
This might seem tedious, but plenty of tools and robo-platforms can make rebalancing easy and automatic. Heck, that’s a feature of the TSP‘s Lifecycle funds. Imagine how out of line your portfolio could become with your original approach after decades of just “letting it ride.”
Alignment can eliminate stress. Building a goal-focused investing approach that encompasses the factors I have outlined here can go a long way toward giving you a solid framework to achieving your goals.
Make the Switch?
So back to the question I received. Generally speaking, I don’t think a move like that makes sense. A move to a more conservative fund to ride an anticipated downturn essentially equates to market timing, so I would certainly take it off the table.
Typically, such a major allocation shift should be done only as the result of a change in goals, timeframe or risk tolerance, not because of an extreme event in the market or in anticipation of one. On the other hand, if an investor is feeling a lot of stress regarding their investments, that could be an indicator that it is time to reevaluate their overall strategy and approach. I hope I’ve provided a few thoughts here that can help in the process.
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