Ask The Experts: Money Matters

By Mike Miles

A trust test for TSP ‘advisers’

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I regularly browse message boards and forums for and about Thrift Savings Plan participants. Unfortunately, what I’ve found is troubling.

The range of understanding demonstrated by the questions people ask is incredibly wide. You can tell a lot about what people do and don’t know about the TSP and how to use it by the questions they ask. The high percentage of clueless questions concerns me since the effective use of the TSP will be the only thing standing between surviving and living for many career federal employees.

The only thing more troubling to me than the questions some people ask is the too-frequently inaccurate, misguided or irresponsible answers they receive. While I believe that the answers are almost always provided with the best of intentions, bad information and advice is often worse than none at all, regardless of the motivation behind it.

Some TSP participants appear convinced that they have “cracked the code” of investing and are eager to share their insights with others. Unfortunately, what they believe is good for them will not be good for you. Based on their inability to answer certain key questions, it’s unlikely that it will ultimately turn out to be good for them, either.

There is no one-size-fits-all (or even fits-most) investment strategy for the cash reserve target, asset allocation model, investment securities and rebalancing plan you’ll use in managing your portfolio. There are, however, certain universal components that are common to all reliable investment strategies. These are the things you must know before you can engineer an investment strategy that will support your needs with a minimum of risk.

Here is a list of questions any good investment strategist must be able to answer before being considered trustworthy:

What is the statistically most sound expected return for each and every year of the period your financial plan — usually a single or joint lifetime — will cover?

What is the basis for this expectation, and is it sound?

How likely is the expected return to be realized in each investment period?

What are the probabilities that the actual return will be lower than the expected return in each future planning period?

What standard of living is the proposed investment strategy designed to support over the investor’s lifetime?

What are the specific financial objectives that arise from the planned standard of living?

What flows of cash into and out of the account will be required to achieve the financial objectives?

How likely is it that the proposed investment strategy will produce results that threaten your ability to fund the planned standard of living, in the near or distant future?

Is the person proposing the strategy willing to stand accountable for the quality of the advice they are giving and the results it produces for you?

I have yet to encounter anyone recommending a specific investment security, product or strategy to TSP participants through an online message board that can provide a satisfactory response to even one of these questions. Yet, selecting the right investment strategy is the process of answering these questions and comparing the results from the available candidates.

The nature of the questions being asked by TSP participants, and the nature of the answers they provide for important investing questions, are evidence that, like most employers, the federal government has placed a burden on its employees — acting as their own pension fund managers — that they are not prepared to handle.

It is incumbent upon you to educate yourself and to protect yourself from bad advice. Before you consider any investment strategy for your TSP account, ask the “adviser” to answer these questions. If there is hesitation or the answers seem less than reasonable, you’ll be safer moving on to a more trustworthy solution.

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