Ask The Experts: Money Matters

By Mike Miles

The value of patience

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Investors, as a group, make plenty of mistakes. When it comes to investing, bad decisions are not the exception, but the rule. Investing mistakes stem from a variety of influences: ignorance, gullibility, fear and greed, to name a few. But I find impatience to be one of the most pervasive, and underappreciated, drivers of bad investment moves. The burning desire to act immediately, to do something, anything, right now, underlies many of the bad decisions investors make.

The desire to act is part of the American way. We’re all responsible for our own fates, goes the thinking. Life is full of opportunity, and it’s what you do with that opportunity that determines your success or failure in life. At least, that’s the theory. Unfortunately, when it comes to managing an investment portfolio, more activity usually does more harm than good. In large part this is because of uncertainty. Unlike many other things we work hard at, the results of our investment activity are uncertain. If you want to build a brick wall, keep laying bricksand you’ll eventually have a wall. Skill plus action almost certainly equals success.

But investing is different. It is a competitive endeavor. To reap superior profits — or, beat the market — you must take them away from another investor. This other investor, and all of the others, would rather not give these profits up, and would like to take yours from you instead. The more active you are in the investment markets, the greater the opportunity for mistakes — and losses. If you want to be successful in this game, you’ll have to be careful and defensive.

As an investor, I encourage you to think of cash as your most valuable economic resource. While your wealth is in cash — or a cash-equivalent like the G Fund — it’s safe. It can’t be lost. Safe is the most attractive position to be in as an investment manager. Putting your cash at risk by deploying it into risky assets — like stocks, bonds, real estate or commodities — is something you should try to avoid unless you can’t achieve your life’s objectives any other way. If you can keep all of your wealth in cash and safely afford to live the life you want, why put your wealth, and your standard of living, at risk? If you must take risk to earn the return you’ll need to afford the life you want, then do it prudently. Only invest the amount necessary, and only invest that in a way that is risk-efficient; that is, in a way that is expected to produce the returns you’ll need with a minimum risk.

This goal of investing the minimum amount necessary, and subjecting that amount to the least risk possible while achieving the returns you’ll need, is inherently boring. It requires long periods of time without any activity at all. In my practice, the default frequency for measuring the progress of an investment plan is once about every six months. It’s possible that something could come up to disrupt this schedule, but that’s the exception and not the rule. If I were you, I’d want to know, about every six months, where my portfolio is compared to where it needs to be to safely support my desired lifetime standard of living. If it’s larger than it needs to be, then I’d reduce its exposure to risk. If it’s smaller than needed, I’d increase the level of risk. That’s it. No other activity should be required.

The time to deal with market events is not when they happen, but before they happen, during the planning process, when you configure the investment strategy you’ll employ. This strategy should be selected to allow enough room for the kind of market events that could occur, and not be derailed by these events, should they come to pass. Trying to react to market events in real time will do more harm than good in the long run. So, develop a solid investment management plan and focus on maintaining the patience it will take to implement it the way it is designed. If you’ve done things right, the best investment move is often to sit tight and do nothing at all.

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

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L2020

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Q. I am looking for some feedback on information received from a financial adviser. I have been in the L2020 fund. The financial adviser is primarily for military and federal employees. He indicated that the L2020 fund currently has 60 percent in stocks (C, S and I funds) and 40 percent in fixed income (G and F funds).  He had suggested conducting an interfund transfer to allocate 65 percent to stocks and 35 percent to fixed income.  The formula would be 25 percent C, 20 percent S and 20 percent I funds, equaling 65 percent.  The second equation would be to put the 35 percent into the G and F funds. Any further contributions would be allocated to these funds. I chose the L2020 because I not an expert in financial investing. What are your thought on this particular formula?

A. The appropriate allocation for your Thrift Savings Plan account should depend entirely upon the demands that will be placed upon the funds in the future. Your account should be managed to meet your objectives, so I can’t possibly give you advice without understanding your financial goals. The decisions about how your account is invested should be made by the person who is responsible and accountable for the results those decisions produce. It doesn’t sound like you trust your “financial adviser” to make those decisions. Is that adviser accountable for the results — that is, your standard of living in retirement — they produce? If not, I suggest that you find an adviser/manager who is worthy of your trust.

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Penalty for transferring back into TSP

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Q. Three years ago, I let myself be persuaded to withdraw 50 percent of my Thrift Savings Plan and place it in a private qualified retirement account. I did this at age 61, and this was my one-time withdrawal, so there were no penalties.

I regret doing this. Before I retire, can I transfer this money back into my TSP without any issues?

The other option is to use this private account to purchase a fixed annuity and draw off of it during the first years of my retirement thus leaving the other half of my savings (in Thrift) alone to continue to build.  Recommendations?

A. You may transfer the money back into your TSP account any time, subject to any restrictions imposed by the source retirement plan. As I’ve written many times: Absent any compelling reason to the contrary, you should maximize your use of the TSP for retirement saving and investing.

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Timing the market: Worth the risk?

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Q: I have all of my money in stocks and I have never tried moving it into anything else. What if I was pretty certain that the stock market was going to have a negative adjustment? Should I move my money into something else temporarily until it starts to rebound?

A: You’re talking about market timing; the answer depends upon the probability of being right in your prediction, the benefit to you of being right and cost of being wrong. For most investors, particularly those relying on their investments to fund retirement income someday, market timing is a poor bet.

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L funds and the ‘lost decade’

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Q: I just read the “lost decade” article in Money Matters and I am wondering why you did not mention the L Funds. I have all my Thrift Savings Plan funds allocated to L Funds as recommended to me since I  am in my 10-year window of retirement. Is that a mistake? Should I also diversify into the other five individual  funds?

A: I’m not a fan of the L Funds, but I can’t say that using them is a mistake. The problem I have with them is that it’s difficult to know whether the robotic allocation shifts they make are appropriate for you when they are made. What do the L Funds know about your circumstances and goals?

The L Funds will help you to avoid some of the mistakes that many TSP investors make, but that doesn’t make them the best solution. Your interests are best served by selecting and implementing the appropriate asset allocation in your account on a regular basis – at least annually and no more frequently than quarterly.

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