Should You “Juice Up” Your Retirement Investment? Here Is What Happened to One Retired Fed

This retired Air Force employee lost more than $300,000 of his retirement funds by using a hedge fund.

Most federal employees work hard for a number of years to earn their retirement pay. How you actually invest the money you are going to use for retirement is up to you. You can leave it in the government’s Thrift Savings Plan program. The TSP is easy to use, free from scandal and generally provides investors with a good rate of return on the funds that it offers.

But what if you want to juice up your returns and make more money? Can you do that?

Sure you can. At least you can try. It’s a free country. Keep in mind that the results are your responsibility (that is also true with the TSP but the possibility of spectacular success or spectacular failure is much more limited).

Here is a quick story of a federal employee who worked as an Air Force civilian employee for 33 years reported in a recent issue of Business Week.

Riccardo Lonardo worked 15 more years as an employee for a private company after he left the government. He retired in 2000 just before he turned 70 – ready to enjoy his retirement. Or, as they say in sappy movies and ads for investment companies, he was ready to “enjoy his golden years.” Like many employees who worked for such a long time and invested money in conservative funds for decades, he had accumulated quite a bit of money.

He then had a phone call from a former assistant to the broker Lonardo had worked with for some time. It was Lonardo’s lucky day. The phone call was from a new registered investment advisor who was now in business for himself. The advisor was setting up a new “hedge fund.” It was the opportunity that only comes along once in a great while. Lonardo could double his money without taking any risk with his retirement funds.

It probably sounded too good to be true (not a good sign). Lonardo listened to the sales pitch from the charming, persuasive salesman and took $200,000 of his funds to go for the quick return just like major investors were doing. It quickly made another $21,000 on top of his hard-earned $200,000. Life was good and easy street was just another block down the road. He took another $125,000 to put into the new fund so he could make more money on his investment.

According to Business Week, our retired fed didn’t know what a hedge fund was other than he thought it was a good way to protect his investment if the market went down. (As in “hedging” his bet.)

Before you hear the rest of the story, what is a “hedge fund”?

According to the Hedge Fund Association “Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.” Hedge fund traders use sophisticated investment strategies to protect investors’ money and increase returns. Many of them are very good. Also, hedge fund managers usually make money based on how much money they make for investors. According to the Hedge Fund Association, “Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment business.”

But here are a couple of downsides. Hedge funds are normally used by sophisticated investors who understand the nature of their investment. They are not used as a conservative investment for future retirement.

Some of these funds are very risky. As noted by the Hedge Fund Association “Investing in hedge funds tends to be favored by more sophisticated investors, including many Swiss and other private banks, who have lived through, and understand the consequences of, major stock market corrections. Many endowments and pension funds allocate assets to hedge funds.”

Hedge fund managers are not allowed to invest money from investors with less than $200,000 in annual income or less than $1 million in net worth. Some funds don’t comply with this requirement.

You can probably guess the outcome for retired fed Riccardo Lonardo.

The market tanked. TSP investors certainly know this as the TSP funds went down dramatically in 2001 and 2002. (The C fund dropped almost 12% in 2001 and 22% in 2002)

But by the end of 2000, Lonardo had lost $311,000 because the tech stocks used by the hedge fund went down fast and hard. The hedge fund managers were good salesmen. The fund Lonardo invested in lost nearly all of the $3.7 million it had invested.

The moral of the story: Be careful how you invest your retirement money. Investments that sound too good to be true probably are too good to be true. And, if your money is in TSP funds and you feel bad about losing money back in 2001 and 2002, remember it could have been worse-you could have had your money in the same hedge fund used by Riccardo Lonardo.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47