What’s a TSP/401k/IRA Investor to Do?
Jul 07 2010
I recently returned from trips in New York and Chicago after listening and talking to numerous mutual fund and private money managers. I went to these meetings and conferences not just looking for the golden nuggets but expecting to find them. If only.
Discussions were all over the map. We are living in strange times. No one has a grip on the current economic environment. When looking into a complex situation, depending on their area of specialization, you get positive and negative opinions. Common themes surfaced; interest rates, inflation, taxes, future laws and regulations, the country’s budget, the world’s budget issues, and finding opportunities in this confusion.
As an investor with similar goals and means as you, here’s what I came away with: “The more things change, the more they stay the same.” While some of the individual pieces have changed in this economy, in a big picture way, this country and world have always gone through turbulent and confusing times—and always will.
For those of us who continue to work and invest through our employer plans, I believe even more in the philosophies and strategies we have shared on the pages of this blog and in our presentations. You can be successful if:
• You understand some of the history of our country and our economy.
• You take the emotion out of your investment plan.
• You use strategies that take advantage of known market conditions.
o Average down, Proper Allocation, Re-balance
You can read about the details of these points in past blog posts.
• The Average Investor, Part 1, Part 2, Part 3, Part 4.
• In a Bear Market
• Market in Perspective
• Before You Pull the Trigger
If you are closing in on retirement (within 5 years), you have it a bit more challenging. It is possible that stocks won’t have a strong rebound within this period and bond values may take a hit. Continue your systematic investing by maxing out your contributions. If stocks continue their volatile ways, wild swings up and down but basically remaining flat over time, systematic investing will allow you to pick-up more shares in the down times. When stocks return to their normal course, you will be glad you have more shares. Consider a balanced allocation among your stock and bond positions and add alternative investments to a portion of your allocation.
TSP members, you are very limited in the alternative world. This is one reason why I recommend you roll your TSP into an IRA after you leave the Service. Pick an IRA with investment options and low cost. You have to go with your I, S and G funds. For illustration: C 35%, F 35%, S 10%, I 10%, G10%.
For you folks with more choice, consider adding REITs, international stocks, international bonds, cash, short-term bonds, dividend paying stocks, high-yield bonds. These would be added to a base of balanced stock-bond holdings.
Not to throw cold water on anyone’s dreams but some of you may need to delay your retirement plans to build more assets. Y’all be careful out there.
How about us retired guys with no cost of living increases, while costs keep going up? What do we do?
I would think twice about ever giving up the privilege keeping your retirement funds in the TSP. While not as flexible as an IRA, it provides plenty of diversity at a cost that simply can’t be beat. Even nationally syndicated financial columnist, Scott Burns, refers to it as the “platinum standard”.
I was disappointed you suggested getting out of TSP. If you get out your cost go up many times for the options you gain. For most of us the options offered by the TSP are more than we can handle. The advisors say not what to buy but to buy. I have about 1/3 my investments with the big outfit and the TSP always beats them in total return. I am getting less then 2/10 % return on cash savings for the big outfit.. Thanks you.
GABE
To deal with this crazy economy, how much cash should one have available. I am retired and have about 3-4 years in very liquid cash. I am retired; however, I still do some consulting work. I will start taking dividend distributions on the investment portfolio that is 55% stock, 10% realestate and 35% bond. I will slow down the distributions from cash and take income distributions from the investments.
Thank you for your comments. I appreciate the cost and simplicity of the TSP and respect some folks prefer the simplicity of the TSP. Studies indicate that too many options can drive people to confusion and inactivity. It’s been shown that 9 options start to max us out. I would recommend people stay with the TSP if you find it comfortable and you don’t want to spend time studying investment concepts and options.
However, cost alone is not a reason to stay with a TSP. There are IRAs with the appropriate investment options that can be just about as cheap as a TSP. If I can get more options at a similar price, I’m going for it. There are excellent money managers out there worth a fraction of a percent more in costs.
Stick to a program that matches your level of comfort and the amount of time you’re willing to invest.