The Six Figure Retirement Mistake

June 8, 2020 7:58 AM , Updated July 6, 2020 2:01 PM
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Golden retirement nest egg cracked in half and empty on the inside with a drawing of a dollar sign with wings above it flying away

iStock.com

I am not at all qualified to give advice on recovering from the actual disease, but as we all know, the COVID-19 coronavirus has had many financial symptoms as well as physical, and feds are only partly immune.

Federal employees are blessed to have incredible job security. Most people around the country simply don’t enjoy that privilege, but as many feds are well aware, the TSP was not protected from the downturn.

The TSP is an amazing retirement savings tool that most private plans simply can’t compete with. The match is awesome and the fees are ridiculously low. In most cases, I discourage feds from moving their money outside of the TSP.

Bear Markets and the TSP

All of this being said, just like any other investment, the TSP can and will go down; that is simply the nature of investing and the stock market. While many consequences of the coronavirus are unprecedented, how the stock market reacted is not.

Depending on the source, there have been about 25 bear markets in the last 90 years (A bear market is when the market drops by at least 20%). That averages out to approximately one bear market every 3.6 years. Based on that, the only thing that is unprecedented about this market drop is why it took so long after 11 years of growth.

Now, I am not trying to discourage people from investing. Investing is essential to building wealth and fighting inflation throughout your career and retirement. All I am trying to do is educate people on what is normal so that they know how to react the next time this happens. Just remember, most feds have already lived through 4-6 bear markets/recessions and will probably live through at least that many more.

Trying (and Failing) to Time the Stock Market

The trick is knowing what your investment strategy is and sticking to it. Some people try to time the market and go to the G Fund right before the market goes down. The problem is that no one knows when exactly the market will go down or come back up. Someone might guess right a few times, but they only have to be wrong a couple of times to destroy years of growth. Even professional investors can’t consistently time the market.

One of the reasons that this is so difficult is because a huge portion of stock market growth happens just a few days a year. If it so happens that you are in the G Fund during those days then your returns will be much worse than those that just stayed invested.

This graph shows just how powerful this principle is. It comes from a study done by Fidelity on what would happen to a hypothetical $10,000 investment into an S&P 500 index fund (comparable to the C fund) from 1980 to 2018.

Bar graph showing the losses on money invested long-term in missing just five days of gains
(Graphic from thesimpledollar.com)

As the graph shows, those that stayed invested the whole time would have turned their $10,000 into $708,143, but by missing only the 5 best trading days they would only have $458,476. The results only get worse as you miss more of the best days.

During the 38 year period that this study covered, there were about 10,000 trading days. That means that if we try to time the market, we are trying to pick 5 days out of 10,000. The odds aren’t in our favor.

To make it even harder, most of the best trading days during this period happened in the middle of significant downturns. It is like playing Russian roulette with your retirement savings where 99,995 out of 100,000 times you lose. 

The best strategy just happens to be the most stress-free one as well. Decide what your long-term investment strategy is and stick to it. Don’t worry about what the market is doing day-to-day; worry about what you are doing. Focus on what you can control and not on what you can’t. This will not only improve your TSP outcomes but improve your life as a whole.

© 2020 Dallen Haws. All rights reserved. This article may not be reproduced without express written consent from Dallen Haws.

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About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at PlanYourFederalBenefits.com.

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