We get e-mail from some readers, usually responding to an article about the Thrift Savings Plan, that reads something like this: “I don’t know which funds to invest in and I don’t want to make a mistake. How should I invest my money?”
Apparently the members of the board that oversees the TSP have recognized this (and similar) problems that some investors are having in making investment decisions. In its last meeting, the Federal Retirement Thrift Investment Board discussed adding life cycle funds to the funds offered to TSP investors. (You can download the minutes from the last Board meeting here or from the link on the left hand side of the page.)
These funds will not be immediately available to investors but may become available next year.
While these funds will be new to the TSP, life cycle funds are not a new concept in investing. These funds may differ in how they function and go by different names but the overall purpose is to give investors a mix of several types of investments in one fund.
Many federal employees invest only in very conservative bonds (the G fund). This is a good investment vehicle but if you are just starting out your career, putting all of your TSP investment into this one fund is probably a mistake. The returns are steady and predictable but historically have not very good over the long term compared to stock fund returns. If you plan to retire, you will probably need a higher average return over your 25 or 30-year career that you will get with the G fund.
A life cycle fund will decide for you as to how to spread your investment funds between different types of assets. One way such a fund might be structured would be to change the investment mix as a federal employee gets closer to retirement. In other words, for a younger employee, more of the investment money would be in more aggressive stocks. As the employee gets closer to retirement, the fund would gradually move to more conservative investments.
When they become available, these types of funds will probably be a good way for some employees to invest. Each investor should look at his or her portfolio periodically to rebalance between different stock funds and bond funds. The rebalancing should reflect changes such as getting closer to retirement or large increases in the value of a fund which results in having a higher percentage of your investment in one fund. In reality, many investors put money into one fund and forget about it for years.
This is not the same as market timing which may involve moving your money around frequently to try and take advantage of ups and downs of the stock market. That is usually a losing strategy and is not the same as rebalancing your portfolio to reflect your personal changes.
The proposed life cycle funds will make it easier for investment allocations to be made. They would also make less experienced investors more comfortable with putting money into the TSP.
But, since this new fund is not yet available, it should not be a reason to delay investing in the funds currently available. Each year you delay putting money toward your retirement makes it more difficult to have enough money to enable you to comfortably retire.
