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An objective, unemotional investment strategy for your TSP, easy to say but hard to do in uncertain times
Interview transcript:
Terry Gerton We’re sitting here after weeks of uncertainty and missed paychecks during the government shutdown and a lot of people are probably feeling kind of anxious about their finances. How does that stress from just day-to-day situations spill over into how people make decisions about investments?
Art Stein Well, stress and emotion make a big difference in how people make their investments. And with the TSP, it makes a big difference in how much people are putting in the stock funds, which are the C and the S and the I funds, and then how much they’re putting in, well, especially the G fund, which is a short-term bond fund, really, it’s more of a cash account. And you know, what I’ve seen time and again for 30 years is that when the stock market crashes, federal employees and retirees tend to get disgusted and move money into the G fund. And the problem with that is, there’s never a good time to take it out of the G fund and reinvest. Usually they’ve made that move after the market has declined and frequently don’t get back in until it’s gone back a lot. So really what we caution our clients to do is to set an investment plan. And part of the investment plan is to know what you’re going to do when the stock market does crash. Because inevitably it’s going to. We don’t know when. Stock market crashes average about one every four years or one every seven years, depending upon the time period, or somewhere in between. But they are a regular part of the market cycle. And what we mean by a stock market crash is that a particular stock market like the S&P 500, which is the basis for the C fund, goes down 20% or more from a previous high. And that’s also called a bear market. A bull market is when, let’s say, the S&P 500 increases more than 20% from a previous high. And people really avoid investing in stocks or putting too much money in stocks because they fear the bear markets, they fear the crashes, they don’t like the volatility. But we’re always having volatility in any market except a bank account or the G fund. Volatility is just a fluctuation in value. Now stocks are more volatile than bonds, that’s clear. But what investors should do is trying to determine appropriate allocation between stock investments and bond investments and bank accounts. And the TSP, that means what percentage of your investments do you want in the G and the F funds, which are bonds and cash accounts, and what percentage do you want in stocks, which are C, S and I? And once you choose that percent, stick with it unless there’s a good reason to change. And the stock market crash is not really a good reason to change. And if the stock market crashes, especially for employees, that’s an opportunity. They’re investing money every two weeks. And of course they’d rather buy shares in the C and the S and the I funds when those are down and cheap than when they’re high and expensive. So just being able to stick to it really makes a difference.
Terry Gerton It’s really hard to imagine that the market is going to crash anytime soon. It’s been on such a steady upward climb for so many months. And yet you talk about when that correction, which is impossible to predict exactly, but pretty possible to predict generally happens, people do the opposite of standard recommendation. They sell low and then try to buy again high instead of buying low and selling high. Talk to us again about what kind of planning can help people avoid the emotional response to that sort of occurrence.
Art Stein Well, I think it’s very important to one, know and admit to yourself and take into account that the market’s going to crash. I mean, it’s going to happen. And it’s not unusual. It’s typical. And two, especially for employees, don’t change your investment allocation if the stock markets crash, unless you’re increasing your percentage allocation of your biweekly investments into the TSP fund. If you’re increasing the percentage going into the stock funds, that would make sense. And, you know Terry, when we speak to TSP millionaires, one consistent theme is that they had most of their investments going to the stock funds. And they did not change that when the stock markets crashed. They just kept investing. They accepted that. It was a long-term investment. And they just stuck with it.
Terry Gerton I’m speaking with certified financial planner Art Stein of Arthur Stein Financial. Art, we’re talking about a disciplined, non-emotional approach to investment here, but we’ve just come out of the longest government shutdown in history. And the current continuing resolution only goes through the 30th of January, about two and a half months from now. So how should feds think not just about their investments, about building up or building back their emergency savings if they had to dip into it during the shutdown?
Art Stein Well, this shutdown was horrible, as we know. People were living on credit card debt in many cases. It shows how important it is to have an emergency fund, three to six months of expenses in a bank account, or maybe the G fund. And what we sometimes have to recommend to people, we don’t like doing it, is to reduce your contributions to the TSP to 5%. Because in many cases, Terry, we’re speaking to people who are maxing out their contributions. But no, if you don’t have an emergency fund, that’s a mistake. Reduce it to 5%. Don’t go below that because you want to get the full 5% match from the federal government. Take that extra money that you were investing and use it to build up a bank account, three to six months of expenses. And especially, you know, this is so crazy. We’ve gone through this long shutdown, and then they had this big victory. But when you look at the victory, it only funded the government for two and a half months. I mean, how short term is that? So now is a good time. Just get on the TSP website and reduce your contributions to 5% and build up some cash. I mean, I’m praying and hoping that they won’t do another shutdown on you know, January 30th, but as we all know, things are not good with these negotiations.
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© AP Photo/David Dermer
