Back in March, I spoke to a federal employee who was pretty proud of himself. He had decided to move his entire TSP balance into the G Fund a couple months earlier when the coronavirus was barely making headlines. Since then, the market had seen ups and downs of more than 30% and this Fed was sitting safely on the sidelines.
He had a TSP balance of about $280,000, so a 30% drop would have brought his balance down to $196,000 (assuming he was invested 100% in the C Fund). I am not sure what funds he was in before, but the bottom line is that he would have “lost” a lot of money, but since he had everything in the G Fund when the drop happened, his balance was safe and sound.
Some would say that this guy just saved $80k, but I would say that this guy will probably lose a few hundred thousand dollars in the process. Let me tell you why.
Don’t Believe Fortune Tellers
The problem with selling right before a “down market” is twofold. First, it is very difficult to predict a down market. Second, now that you moved everything into the G Fund (even if we assume that you correctly predicted a down market), when do you move it back? The only thing harder than knowing when the market will go down is knowing when it will recover.
Even professional investors have not been able to predict the market consistently. Anyone can get lucky once and a while, but doing it consistently is a different story.
Warren Buffet, one of the most successful investors of all time, once said, “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good”. Even Warren Buffet, who has made billions in investing, does not try to time the market.
With all that being said, I actually think it is a great thing that this fed saved himself $80k because technically, if someone could successfully time the market, they would do much better than any other strategy. All I am worried about is what he is going to do now and in the future. How much money and sleep will he lose trying to decide exactly when to make his next move? At least to me, this seems like a big gamble to make with your retirement savings.
Now, I am not always opposed to risk. When we are talking about investing, risk is always a part of the equation. The trick is to limit and manage your risk to give your savings room to grow while protecting your downside as best you can.
The good news is that as federal employees under the Federal Employees Retirement System (FERS), you have a leg up on most others. You enjoy both social security, a pension, FEHB, and other great retirement benefits.
For many feds, these benefits will provide a great base for your retirement lifestyle with their TSP filling whatever gap is left, and the trick is to try to optimize your TSP allocation to be able to fill that gap for the rest of your life.
When you are young and early in your career, it often makes sense to put the majority of your TSP in the C, S, and I funds, and because young feds tend to have a lot of time before retirement, they don’t mind that these funds bounce around because they grow at a fast rate over time. But as you progress through your career and approach retirement, it often makes sense to introduce more of the F and G Funds. These funds won’t grow nearly as fast, but they will provide more of the stability that you need in retirement.
Even in retirement, however, I almost never recommend going 100% into the G Fund. The G Fund is safe but won’t grow enough to beat inflation and maintain your lifestyle over time. Having a good mixture of funds allows the more stable funds (G and F) to provide consistent cash for your retirement lifestyle and the other funds (C, S, and I) to beat inflation and continue to grow your wealth.
Always keep in mind that there is no perfect TSP allocation. It all depends on your situation and goals. The exact percentage of each fund that makes sense for you will often be different than what makes sense for your co-workers. The best thing to do is to educate yourself enough to make an informed decision, because regardless of where you are in your career, getting your TSP strategy right can make a huge difference.
The best advice I can give you is either learn enough to come up with a long-term investment plan or just put everything into the L Fund that lines up with your retirement date. While the L Funds are not even close to being perfect for everyone, they may be the best option for those that want to set it and forget it.
Either way, stick to your plan. Don’t worry about what the market is doing. Focus on what you can control and not on what you can’t.
You can’t control the markets but you can control how much you set aside for retirement. You can’t control the economy but you can control how well you plan for the future. The good news is that by reading this article and educating yourself, you took one more step towards being prepared for whatever comes your way.