The TSP is Soaring: Are You Maximizing This Opportunity?

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By on July 10, 2017 in Retirement with 0 Comments

Business hand holding rising financial chart in crystal ball

As of this summer, we’re now 8 years into the current market expansion in the United States, according to the National Bureau of Economic Research.

It’s the third longest expansion so far in 241 years of U.S. history, and only two years short of becoming the longest expansion ever.

The official unemployment rate has dropped to the same level it was at the height of the 2007 economic peak prior to the Great Recession:

When measured in a different way, the absolute percentage of the population employed, we’re at still only at about 60% employment compared to the 63% peak of 2007, according to the Bureau of Labor Statistics. So, by that measure, we may still have a bit further to run, since the official employment rate doesn’t tell the whole tale.

Lastly, the U.S. stock market is highly valued, with the cyclically-adjusted price-to-earnings ratio of the S&P 500 being the second highest it has been at any time since World War II, only surpassed by the height of the Dot Com bubble.

Everything is humming along, somewhat optimistically.

But as Warren Buffett famously put it: “Be fearful when others are greedy. Be greedy when others are fearful.”

It’s times like this when resources are abundant, when many options are available, and when we’re possibly late into the current market cycle, that we should make sure our financial housekeeping is in order.

Tip #1: Appropriately Diversify Your TSP

A lot of investors sell their stocks at the bottom of market declines when bad news is everywhere, and start buying stocks after markets go up, when good news is everywhere. Now would be the time they’re buying stocks, when they’re expensive.

It’s a good idea to resist that temptation, and instead to use this opportunity to make sure your money is diversified in line with your long-term goals.

An easy way to do this is to own one of the L Funds. They automatically stay balanced, meaning that as stocks keep going up, they start selling some stocks and buying bonds, to keep you diversified. That way, should markets fall, they’ll be ready to sell bonds and buy stocks as they fall in price.

You don’t necessarily need to select the L Fund that matches your expected retirement age. There are some arguments that they’re too conservative over the long-term, but it all depends on what your goals are and what your unique situation is.   The most aggressive L Fund, the 2050 version, currently has 83% of its assets in equities, so even if you prefer to keep most of your portfolio in equities at all times, there are L Funds that can do that for you.

If you don’t use the L Funds, it’s a good time to check your portfolio balance. If your C, S, and I Fund have run up, they’re probably a bigger chunk of your portfolio than they were before, and it may be a good idea to buy more into the bond funds to rebalance your holdings towards your target.

There is no unanimous consensus on what the best form of diversification is, so it all comes down to what your goals are. I’m not giving any sort of guideline on how much of your portfolio should be in stocks compared to other investments. The main point here is to not chase markets, to not get consumed with buying stocks during peaks only to turn around and sell them when they decline.

Tip #2: Take a Look at your Debt/Income Ratio

The ratio of household debt to GDP in the United States is at about 80% right now, which is below the 95% peak it hit during the past recession, but well above historical standards. It hit 40% for the first time in the early 1960’s, hit 60% for the first time in the early 1990’s, and is now resting at a stable but high 80%.

Fortunately, we’re not the most debt-heavy country by that metric, but we’re still above average worldwide, and whenever the next recession comes along, that’s bound to go up again.

The White House’s proposed budget includes eliminating cost of living adjustments for the Federal Employees Retirement System (FERS) and making federal employees pay a lot more into the system.   If some form of that goes through, it would effectively amount to a significant cut in federal employee compensation.

Maintaining a low or moderate debt-to-income ratio during bull markets gives you more resilience and flexibility for when recessions come along.   Now’s a good time to do an audit of all your loans and see if any of them are worth paying off more quickly while money is flowing.

This doesn’t mean all debt is bad. In fact, having a diversity of different types of debt in your recent credit history rather than just one type of debt, such as having both a low-interest mortgage (an installment loan) and credit cards that you pay off in full each month (revolving credit), can slightly increase your credit score, because it shows the credit agencies that you can responsibility manage a diverse credit mix.

Tip #3: Grow Your Emergency Fund

The Congressional Budget Office expects that the federal government will hit its debt ceiling in October.

There’s always a possibility of furloughs or other measures happening during that time if Congress can’t come to a consensus, and you don’t want to be caught unprepared should have happen.

Having a cash reserve or some source of liquidity is important for everyone, and the time to build it is now, before you need it. While your salary is flowing, it’s smart to continually put money away somewhere for unexpected expenses, as well as paying off any high interest debt you might have.

How big of a cash reserve you need depends on several factors, including how large your family is, whether you own a home, and what your various sources of liquidity are.

But at least ask yourself, could you withstand a month of being furloughed without having to resort to borrowing money or tapping into your retirement accounts? And ideally, do you have 3-6 months’ or more worth of expenses in cash, and enough to cover any large house or car expenses that could suddenly pop up?

If not, now’s the time to try to get there. At minimum, it can help you sleep at night.

Lyn Alden is an investment researcher whose background comes from a blend of engineering and finance, and her work has been featured or cited on Business Insider, Marketwatch, Money Magazine, US News and World Report, and elsewhere. She has a master’s in engineering management with a focus on engineering economics and project valuation.

© 2017 Lyn Alden. All rights reserved. This article may not be reproduced without express written consent from Lyn Alden.

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