Ask The Experts: Money Matters

By Mike Miles

What TSP investors should worry about

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As a Thrift Savings Plan investor, what should you worry about? You might be surprised that my list doesn’t include whether to contribute to the Roth or traditional accounts, or that you’ll have to begin taking distributions someday, if you aren’t already. Here is my list of things worth worrying about:

Political meddling. The greatest threat to the TSP, as an institution, comes from members of Congress. The TSP contains nearly $400 billion. It’s the juiciest single profit target for the financial services industry. So far, they’ve had to go after it one retired investor at a time, but they imagine — fantasize, really — how great it would be to gain access to all $400 billion at once. Connect the dots, and you realize that the only way to do this without having to pass through the protective fiduciary gauntlet imposed by the Federal Retirement Thrift Investment Board is through Congressional action.

So far, the attempts by certain members of Congress to insert new investment options, for example, have failed, but it will only take one successful effort to ruin the TSP for the federal worker.

Another stock market crash. This always will be a concern for a retirement investorbecause the risk is ever-present and can do real harm to your retirement standard of living. It is impossible to predict with certainty when market crashes will occur and how severe they’ll be. I think of it this way: At any given moment, the probability that the C, S, I or F Funds will either beat, or lag, the expected rate of return is about 50 percent — a coin flip. The market’s tug-of-war makes it so. If you need that expected return to support your planned standard of living in retirement, then you don’t want to risk not being there to collect that return when it comes. But if losses come instead, you don’t want to participate in them any more than necessary. For most investors, there’s risk to being in, and out of, the market, so a balance must be struck. Hold as much of each fund as you need to hold to support your retirement plan, but no more.

Rising interest rates. Rising interest rates pose two threats. First, they drive bond prices, and hence values, down. Yes, that means that, like stocks, bonds are risky investments. The F Fund, which is a bond fund, can and does lose value from time to time. Second, rising interest rates tend to depress the value of stocks. This is because the formulas used by competent investors to assess the value of a company’s stock are heavily dependent upon a “discount rate” that is, in turn, dependent upon interest rates. And higher discount rates mean lower prices for stocks. The F Fund’s primary purpose in your portfolio should be to hedge the risk of loss from holdings in the C, S and I Funds. Whenever you hold stocks, you should also hold bonds as a hedge. Because they are risky assets, however, like stocks, you should only hold the amount needed to efficiently hedge your stock positions, and no more. Today’s low interest rates mean that controlling your exposure to the F Fund is particularly important.

The rationale for your choices. There about a zillion financial decisions you’ll face during your life — choices you’ll have to make. Before you act, you should thoroughly investigate, understand and critically evaluate the rationale for taking that action and the reasons why that action, alone, is the best possible action to take. There are reliable ways to make your financial decisions, including those you’ll make in managing your TSP account, the best they can be. There is no need to settle for anything less.

Mike Miles is a Certified Financial Planner licensee and a principal adviser for Variplan LLC, an independent fiduciary in Ashburn, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at blogs.federaltimes.com/federal-money.

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