Ask The Experts: Money Matters

By Mike Miles

Know the odds to get the upper hand in managing funds

Bookmark and Share

If you have a Thrift Savings Plan account, you’re an investment manager. If you’re counting on that TSP account to provide income for your use in retirement, you’re a particular kind of investment manager: a pension fund manager. As a pension fund manager, it’s your job to do whatever you can to coax the fund — your TSP account — into supporting the benefits you’ve promised yourself.

If you are, or will ever be, entitled to a Civil Service Retirement System or Federal Employees Retirement System annuity, you probably, and rightfully, expect that the providers of that annuity make good on their promise and deliver the cash when the time comes. You should expect no less from yourself as the manager of your TSP account. Of course, you can hire an adviser and delegate the task to someone who is qualified, but finding someone who is deserving of your trust is not an easy task. Unfortunately, there are more wolves than good shepherds out there.

So, like many a TSP investor, you’re left to your own devices in managing this part of your pension fund. And if you’re going to do it, you should do it right.

One secret to successful pension fund management is to stop confusing sales pitches with advice. Stop relying on advertising for your financial education. Would you hire a pension fund manager if his only qualifying credential was a subscription to Money magazine?

If you’re going to be a pension fund manager, your responsibility is to understand the game you’re playing and the environment in which you’ll be playing it. I’ve found one of the most useful teaching aids in my own education to be the roulette wheel. If you’re not familiar, the European variety, which offers the best odds, contains 37 spaces, each with a unique number from 0 to 36. One space is green, 18 are red and 18 are black. You place a bet on a space or set of spaces. The wheel is then spun, and a ball is released onto the wheel. When the ball comes to rest, the space it occupies determines the winning bet.

The wheel is instructive in that it offers an easy-to-understand set of probabilities, or odds. There are lots of possible bets on a roulette wheel. You can bet on any number or possible combination of numbers in exchange for a predetermined payout. Bet $1 on a single space and win, and you’ll receive a $36 payout. The probability of winning a single-space bet is one in 37. With $1 bets, you’ll spend $37 to spin the wheel 37 times, but your expected payout for 37 spins is only $36. The odds say that if you bet a single space each time and spin the wheel 37 million times, you’ll spend $37 million to do it, lose $1 million and be left with $36 million. That’s a loss of 2.7 percent of your investment, which is the best deal you’ll get from a roulette wheel.

There are, of course, bets available that will take your money faster, but no matter how you play the game, over the long run, you must expect to lose at least 2.7 percent of your money. No matter what you do, you can’t nullify the fact that the game is biased against you and that you’re more likely to lose money than to make money playing it.

What can this teach you about pension fund management? Plenty! Your job is to understand the odds of every bet you make, and to make sure that you’re betting in such a way that the odds are skewed as far as possible in your favor. In a casino, the house has the edge. In investing, if you play the game right, the edge is yours.

If you play the right bets in your TSP account, you’re more likely to win money than lose it. Play the game the wrong way, however, and you can forfeit that edge.

As in the casino, the secret to playing the investment game well lies in avoiding the mistakes, avoiding the poor bets. Trying to time the markets or failing to diversify your investments properly decrease your odds of success. And, like the casino, paying someone to try to beat the game decreases your odds of winning.

The TSP’s funds, by design, go a long way toward helping you maximize investment performance. Implement the proper asset allocation in your account and keep it there. That’s the best you can do.

Comments

  1. Rick Shade Says:
    July 2nd, 2010 at 8:02 am

    But with the government matching contributions up to 5% aren’t the odds much better?

Leave a Reply

PLEASE NOTE! Do not submit ANY questions via the Comments form. Instead, please send your questions directly to fedexperts@federaltimes.com. Questions submitted via the Comments form will NOT be answered!