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While we all know that timing the market is virtually impossible, that doesn’t seem to keep many investors from giving it their best shot. Each time that the market takes a dive, many TSP participants will begin to transition money to the G fund. Then, after the market has made the majority of the recovery, those same participants will begin to feel okay about the risk and head back into the C, S, & I funds again.
The problem with this strategy is that buying high and selling low is counterproductive to your ultimate goal of amassing wealth for your retirement. So, what should you do?
As if there aren’t enough acronyms within the federal systems, consider DCA a retirement acronym. DCA stands for Dollar-Cost Averaging.
To give you an example of how DCA works, let’s run the numbers. Imagine for a moment that you are investing $300 per month into the C fund for 6 months and the market goes through its typical market cycles.
|
Date Purchased |
Price/share |
Shares Purchased |
|
January 1 |
3.50 |
85.71 |
|
February 1 |
5.00 |
60 |
|
March 1 |
5.00 |
60 |
|
April 1 |
3.50 |
85.71 |
|
May 1 |
2.00 |
150 |
|
June 1 |
2.00 |
150 |
The average price per share over the period illustrated above was $3.50. [(3.50 + 5 + 5 + 3.50 + 2 + 2) / 6 = $3.50] But, the average price paid per share would equal $3.04. [($300 * 6 mos.) / (85.71 + 60 + 60 + 85.71 + 150 + 150) = $3.04] If you were able to pay an average of $3.04 per share during a time when the average price per share is $3.50, would you consider that a good deal?
Why is DCA effective? Because it ensures that you will buy more shares when the market is down and fewer shares when the market is up. Once you embrace the concept, you may even find yourself thinking of market corrections as buying opportunities. That’s when you’ll know you’ve made the transition from a trader to an investor.
OK, we’ve established that there are benefits to sticking with your chosen TSP investment plan. But let’s take a step back: How should you allocate your TSP dollars? That depends on a number of factors.
Some good questions to ask yourself are:
- “How much money will I need in retirement?”
- “What is my time horizon?”
- “How much risk am I willing to accept?”
- “How much risk am I able to accept?”
- “How much diversification is appropriate?”
- “What is my desired rate of return?”
You will also need to take into account any investments you have outside of the TSP. It’s essential that you consider your whole financial picture in making decisions about your TSP investments.
If you are not sure about the answers to some of these questions, don’t hesitate to seek help. A qualified financial planner can provide you with a clear view of your current financial picture, help you establish clear goals and provide you with an action plan for pursuing those goals—including a plan for how to make the most of your TSP.
© 2012 First Command Financial Services, Inc., parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Insurance Services, Inc. and First Command Bank. Financial planning services and investment products, including securities, are offered by First Command Financial Planning, Inc. Insurance products and services are offered by First Command Insurance Services, Inc. Banking products and services are offered by First Command Bank. In certain states, as required by law, First Command Insurance Services, Inc. does business as a separate domestic corporation. Securities products are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met.
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