Politics (domestic and abroad) play a significant (yet hard to predict) role in feds’ retirement savings, making the guessing game of moving in and out of different allocations within the TSP a more dangerous endeavor than most recognize.
The political “Butterfly Effect” asks, when a political leader on the other side of the world “Flaps their lips”, can it lead to a financial tsunami in TSP balances? Based on this theory, yes! However, depending on the tone of the flapping and the size of the “flapper”, that tsunami could quickly force TSP index funds to either climb quickly or drop dramatically.
Of course, other issues may cause a segment of the market(s) to move one way or another, that are not (at least on the surface) directly connected to politics at all, such as:
- A new invention, a new process or a new technology may lead to segmented growth.
- Those same processes or technologies may also lead to another segment’s decay.
- News outlets’ sensationalized headlines over even the slightest market movement designed to get us all to read or watch.
For our purposes, we are going to focus on the impact politics can have on TSP balances. For today’s fed looking to make the most of their retirement savings politics (both foreign and domestic) plays a role.
A recent example of this theory is the noteworthy growth of the markets over the past several months. Investment confidence exhibited a marked upward tic as talk of lower taxes, improved infrastructure and lower health care costs seemed inevitable. Combined, they presented encouraging signs of businesses’ potential to grow jobs and increase profits. The Dow Jones grew from a close on November 8th, 2016 of 18,332 to an all-time high on March 16th, 2017 of 21,000. That was a 14.55% gain in just over 4 months.
However, we have also seen a retreat from that high, I believe in large part, due to uncertainty and the eventual fumble in the health care overhaul attempt.
Depending on how a fed’s TSP accounts are allocated, saber rattling by a US official, US ally or foe may cause significant changes in that federal employee’s retirement savings. Negative political comments could have a tremendous downward push on many of the TSP index funds.
This is ostensibly one of the reasons so many feds utilize the G-fund as a timing-based safety net. (I am not covering the G-fund subject in this piece. However, if you are interested, I reported on several potential problems with the G-fund in a recent article.)
Political figure “X” makes a comment about another country’s “aggressions” and how they cannot be tolerated. This hits the news, investors are concerned about the possible implications of X’s statement. The unknown consequences of potential actions by both the political figure and the other country cause a measure of anxiety. Anxiety leads many investors to increase their financial caution. Caution could be displayed by many folks moving money out of higher risk/return investments and placing money in lower risk/return investments.
Markets take a downward turn and many of the TSP index funds drop in value.
Simon (not his real name), a current federal employee with nearly 30 years of service, shared his very real concern about this type of political impact on his TSP values.
Simon stated that he was looking to retire within the next couple of years. He said the current worldwide political environment made him nervous about his TSP savings, yet he didn’t want to dive into full-on “ostrich mode.”
He felt this was a crucial time for his retirement preparations. A significant upward bump in the markets could make him more comfortable about the long-term outcome of his retirement plan. However, a significant drop could drastically postpone his retirement altogether. He felt his concerns were well founded, as he watched this happen to several of his co-workers in 2007-2009.
He stated his attempts to maneuver his TSP assets in and out of the different Index (and G-fund) options, in an effort to try to avoid losses and capture gains, was a wash, at best.
Simon is an intelligent and “to the point” kind of guy. His simple question was, “How can I best accomplish my growth and safety goals?”
Simon was led to understand that he would have to learn and accept two important retirement planning principles.
The First Principle
Recognize TSP’s, 401k’s, IRA’s, etc.… are not like pension type retirements. They have NO investment growth guarantees.
Regardless of the size of one’s growth goal, a corresponding amount of risk will likely have to be accepted to realistically pursue it. But, therein Simon found the beginnings of an answer to his own question.
Thankfully, we are all different. We are unique in our individual growth goals and thresholds for financial agony. So isn’t the real trick for doing the “right thing” with TSP (or other retirement savings) to first know where one’s goals, dreams and financial pain thresholds intersect?
The result of finding this intersection may assist in insulating from potentially painful losses (during down markets), yet allow for the pursuit of acceptable gains when the markets are soaring. It has the added benefit of virtually eliminating the perceived need to shuffle TSP allocations like a spastic hand of 3-card monte.
In my opinion, trying to time the market is a much riskier proposition than finding that intersection and planning accordingly.
The Second Principle
One must accept that the markets (and therefore much of the TSP index funds) have and will again drop in value. It can’t be avoided, but it can be mitigated. Without the risks of loss, there may be no hope for gains.
Simon understood these two principles and decided to pin-point his intersection. He chose to find his individual juncture by participating in his own personal Federal Retirement Readiness Review.
NOTE: There a many ways he could have accomplished this. For example, TSP.gov offers several on-line retirement planning tools that may have also assisted him in this effort.
Identifying his intersection allowed Simon to restructure his retirement savings, thus addressing both his growth needs and his safety concerns.
We all understand the investment world can experience investment droughts, sun-showers, perfect sunny days, thunderstorms, hurricanes and tsunamis. The secret isn’t to try and become a financial meteorologist. You likely won’t be able to predict political, off-handed, lip-flapping or its short and/or long-term effect on your TSP (or other retirement savings) account(s).
The trick to intelligent financial saving is to be prepared for multiple types of financial situations. In this way, a fed’s retirement savings flowers may well be able to flourish in both good and bad weather conditions.
Simon found his intersection (comfort zone) and is ready to retire later this summer. He said that when a political butterfly now does its flapping, he may not be happy with the message, but he no longer panics about his retirement savings during even unpleasant political weather patterns.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com. Securities offered through Infinity Financial, member FINRA/SIPC.