Ask The Experts: Money Matters

By Mike Miles

The ideal TSP allocation

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If you had just enough money to pay your electric bill next month, would you gamble with it just for fun? Hold it in cash, and you’ll enjoy another month of electrified living. Lose even part of it, and you’ll be living in the dark for a while. If the sole purpose for that money is to pay for the electricity you’ll need to live the life you want, why would you risk losing it to have a chance to win money you don’t need?

Many investors don’t understand the principles and techniques necessary to manage a retirement investment portfolio intelligently. Others are obsessed with making money for the sake of having more, regardless of any need. And some are out to prove that they are somehow better than the next guy. Whatever the reason, putting money that you’ll need at risk to gain something you don’t need, or won’t ever use, is foolish. I see it in practice all the time. Investors who have more money than they’ll ever need still feel compelled to take risk with it. Often, it seems as though they feel it’s their responsibility to push that money into the stock or bond markets, and they feel guilty if they don’t. I hear phrases like “That money should be put to work” or “I can’t just let the money sit there, doing nothing.” This isn’t surprising given that incessant advertising messages have been telling them this since they were old enough to understand the message. In the temple of Wall Street, it’s sacrilege to leave money in cash — particularly if it’s not in a house account — and their prescription for every dollar you own is more risk.

Well, let me give you another perspective to consider. The goal of retirement investing is to safely fund the lifestyle you need or want — or at least as much of it as is possible. Notice that word “safely,” which I interpret to mean “with minimum risk.” What’s the least risky place for your money? Cash, of course. And, for Thrift Savings Plan (TSP) investors, that means the G Fund. As is often the case, I’m going to propose that you adopt an idea that is directly opposed to anything you’ll hear from Wall Street. The ideal portfolio is entirely in cash, particularly when that cash is positioned in the G Fund. The argument I’m making applies to all portfolios and all cash, but it is particularly strong for TSP investors who have access to the G Fund. If you have accumulated all of the money you will need to fund your lifetime of financial goals, your portfolio should be invested entirely in cash — the G Fund for TSP accounts.

That’s right: 100-percent G Fund. This recommendation applies whether you have enough now, or reach that point at some time in the future. Your goal as an investor is to be able to afford an all-cash investment portfolio. If you can do this, you have won the game. You can tip the dealer and go home, or move on to more fulfilling activities.

Investing in risky markets is like playing a game of poker. Only, you’re playing against the best players on Earth. Yes, they’re smarter than you — a lot smarter. They have virtually unlimited resources, skill and experience, and they are very motivated to do whatever they can get away with to win. They cheat all the time. You are the sucker at the table. You might win, but if you do it’s only luck, and luck always changes. It might be that you have to play this game to survive or live the life you want, and that’s a legitimate reason to play. But why would you risk losing your money to these sharks, if you had a choice? You shouldn’t.

Unlike the poker game, the markets put the odds slightly in your favor. They go up more than they go down. But, they bring with them the real chance to lose a lot of money fast — money that you might never have a chance to recover. Money that you might need to pay your bills later. You shouldn’t take that risk unless you need to. If you can’t afford to shelter all of your portfolio from the risk of loss, then protect what you can as you go. The idea is to invest only what needs to be invested to achieve your goals. Leave the rest, safe and sound, in the G Fund.

Mike Miles is a Certified Financial Planner licensee and 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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