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The
July 2009 article "How do I figure out what to do with the
money in my TSP account once I start making contributions?"
outlined the things you should consider as you formulate your
retirement investment strategy.
Once
you've established your retirement goals and a savings strategy
that fits your needs, you'll likely have the best results if you
stick to your plan. Don't get sidelined by
distractions. Make adjustments to your strategy only after
careful consideration.
Avoid
Chasing Returns
Short-term
market volatility can cause you to question your tolerance for
risk. It's always a good idea to periodically ask yourself
whether your retirement portfolio properly reflects your
willingness and ability to take risk. But if you are
certain about the amount of risk you can tolerate, don't allow
short-term market movements to steer you off course.
Suppose,
for example, that you have many years before retirement and you
have determined that investing in the TSP's stock funds is
appropriate for your time horizon because of the potential for
higher long-term returns. If you move your money out of
your TSP stock funds when the market starts to dip, you may miss
out when it bounces back.
An
investment strategy of chasing returns or trying to "time
the market" means you have to be consistently correct two
times: exactly when to get out of a particular asset class
and exactly when to get back in. Most investment experts
agree that such success is highly unlikely over long periods.
You'll
pay a price for bad timing - significant movements can occur
rapidly in the stock and bond markets. By the time you
react to the situation, the market may be moving in the opposite
direction. If you miss one or two brief upswings in a
decade, your investments may underperform the average market
return for the entire period.
Remember,
your investment performance is determined, in large part, by your
asset allocation, not by guessing which market sector is
going to be in favor at a particular time.
Be
Consistent about Saving
The
TSP makes it easy to be consistent about saving for retirement
since you make contributions through payroll deductions. By
doing so, you are using an investment strategy called dollar cost
averaging.
Dollar
cost averaging is the practice of investing a fixed amount of
money at regular intervals, regardless of market conditions or
asset prices. You buy more shares when market prices are
low and fewer shares when market prices are high. The end
result is that your purchase price per share is lower than the
average price of the shares over time.
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Dollar
Cost Averaging Illustration
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Period
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Investment
Amount
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Share
Price
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Shares
Purchased
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January
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$240
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$20
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12
|
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February
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$240
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$15
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16
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March
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$240
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$12
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20
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April
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$240
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$24
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10
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Total
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$960
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$71
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58
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The
average share price =
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$17.75
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over
4 months
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Your
cost per share =
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$16.55
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As
the table shows, by investing gradually over the four periods,
you would have paid less than the overall average price of the
shares: $16.55 per share rather than $17.75 per share.*
Although
dollar cost averaging will not protect you against losses when
the stock or bond markets are declining, it does reduce your risk
of investing by ensuring that your purchases are made at a
variety of prices, buying more shares at lower prices and fewer
at higher prices. Dollar cost averaging also eliminates the
risk of investing all of your money in the stock or bond market
at market peaks.
Revisit
Your Plan
It's
important to have a retirement savings strategy in place and to
be consistent about making your TSP contributions. It
is equally important that you periodically review your strategy
to make sure it remains consistent with your needs and goals,
your time horizon, and your risk tolerance.
There
may be many reasons to make adjustments to your TSP
allocation. For example, permanently retiring from the
workplace would signal an adjustment to your time horizon and
consideration of a more conservative asset allocation.
Other
events that might require a modification to your plan may
include:
- Marriage
- Divorce
- Job change
- Retirement from military
service
- Economic hardship
Next
month: How does the TSP calculate my share prices?
*Average
share price calculation: ($20 + $15 + $12 + $24)/4 = $17.75
Cost
per share using dollar cost averaging equals total investment
amount divided by total shares purchased: $960/58 = $16.55
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