The stock market spent 2017 on a fairly continuous upswing, and most of the discussions regarding TSP investment were about how to get into a market that never seemed to present a buying opportunity. That upward rise took off even faster to start 2018, before a correction eventually hit in February.
The new question on everyone’s mind is whether or not the market will go back to its upward trend or if an extended bear market is coming.
Fortunately, there are some concepts that apply regardless of the turmoil in the markets and which direction they may be headed.
Here are some important strategies that everyone should consider as they look at their own investment portfolios:
Start with a financial plan
This is the most important part of any investment decision, and the key component to determine is when the money will be needed. Every dollar has its own time horizon, which dictates its own investment strategy. The plan for how the funds will be used is then instrumental in determining the overall allocation.
Determine your appropriate allocation (without considering the market)
What would be an appropriate allocation for your situation and financial plan? If that allocation makes sense now, it should also make sense whether the market was 10% higher or 10% lower. Since the market is unpredictable, you should always maintain an allocation that justifiably makes sense within your overall plan.
Stay in your lane
The appropriate allocation for your situation may have an overall range that makes sense, and that is your “lane”. You can make some shifts within that range based on your comfort level, but you shouldn’t shift to an allocation that wouldn’t be considered appropriate given your plan. For example, you may determine that your stock percentage should be between 60% and 80%. Any shifting within that range would still leave you with an appropriate allocation.
Know the difference between strategy and tactics
The financial plan will help determine the overall allocation, which is the long-term strategy. Shorter-term tactics can also be used, though. That could include shifts within that appropriate allocation range based on what is going on in the market.
If you are on the low end of the risk spectrum, you could be looking for drops in the market as buying opportunities. If you are on the higher end of your range, you may look to take profits if the market appears to be peaking.
It’s not all or nothing
One of the biggest mistakes feds make with their TSP (next to spending their entire career in the G fund) is to make shifts with their entire account. You can increase or dial back your risk level without moving everything back to the G fund. That is more a panic move, and it tends to be more emotional than rational. Small shifts can help you feel like you are reacting to market changes without modifying the overall strategy.
Have a re-entry strategy
It is very easy on an emotional level to pull your money out of the market, but it is much more difficult to decide when to put it back in. This difference is only psychological, though, as each decision can have an equally large financial impact.
If you do decide to move money out to the G fund, you should have a plan laid out ahead of time for when you are going to get back in. You may even want to write it down, to help keep yourself accountable.
Be wary of timing the market
This is a trap that many people fall into. It can work sometimes, and will fail others. Even with the right idea about what will happen, determining the timing is extremely difficult.
One way to think about this concept was best expressed by Keynes, saying “The market can remain irrational longer than you can stay solvent.” You may be 100% right about what is going to happen according to all of the signs you can see, but you can still lose out if your timing is off.
As an example, many people predicted the recent correction, and got out of the market last fall to avoid it. The problem is that the market ended up higher than when they got out, even at the lowest point of the February drop. The investor who stayed the course in the market performed better, even though the person who got out knew exactly what was going to happen (just not when).
Understand the volatility is normal
A correction is defined as the market pulling back 10% from a high-water mark, and they have historically happened at a rate of about once per year. In that context, the recent drop could simply be looked at as overdue, rather than a precursor to a catastrophe.
Any investment in the market involves risk, but that is also where you get the potential for returns. Market volatility goes both up and down, but we only complain about one of them. Both, however, are normal.
The natural psychological reaction to the market dropping is to get out to stop the losses. On the flip side, when the market is going up without a pause, everyone wants to get on the bandwagon.
If you are going make moves, it helps to favor logic over emotion at these times, and instead be a buyer when the market is down and a seller when there are profits to take.
Turn off the news
This piece of advice may be the most important of all.
The headline “Dow suffers a record drop” was followed a week and half later by “Dow has the best week in years.” The actual movement over all of the short-term ups and downs did not end up to be that much, but the stress and anxiety felt by many people along the way was much more significant. You never want to be disconnected from your overall plan and strategy, but when it comes to the short-term noise, ignorance really can be bliss.
These are just a few ideas to think about if you find your investment portfolio occupying your thoughts more than normal. Most people are best served by keeping an appropriate allocation and not tinkering with it, but everyone can benefit from some logical ideas offset the hysteria that often surrounds us.