Now that the stock market is booming, many once-cautious TSP investors feel like they should be walking on the wild side. Taking more risks in home instead of taking home more rewards.
In fact, some are.
But before they go too far, they should try to remember how they felt about the TSP and risk a few years ago, when many people were bailing out of stocks and safe-harboring in Treasury securities that were paying peanuts. The definition of “risk” varies between a recession and a bull market.
When stocks are down, it is “risky,” many feel, to stay with them and keep buying more. When stocks are up, it is “risky” to stay in something like the G Fund when there is potentially all that money to be made in stocks.
During the early years of the recession, a lot of people got out of stocks. They moved millions of dollars from the C, S and I Funds into the super-safe G Fund. They knew they wouldn’t make much (understatement) with the Treasury securities. But they also felt they wouldn’t lose anything (other than selling the C, S and I Fund share low) more.
Ask any financial planner, and they will tell you that when times are good, many people get bold and when times are tough they get cautious — as in scared.
Now we are in a feel-good period, and more investors say they are willing to take more risks.
Example? We heard from a fed, call him Jay, who has been invested 100 percent in the 2030 Lifecycle fund. He said his returns have been pretty good, “but I want to do better.” His plan? He now puts 75 percent in the 2050 Lifecycle fund and 25 percent in the C Fund. “My reason was that the risk in the G Fund to me was too high in the 2030 so I wanted to get out of it and go for a little more risk with a higher reward.”
With just over 10 years to go until retirement, he asks if he is doing the right thing, or should he put everything into the C Fund?
Lifecycle funds automatically readjust and rebalance the portfolio. It gets slightly more conservative — less in stocks more in bonds and the G Fund — over time. It will sell when stocks are high and buy when they are low something, many ordinary human investors don’t do.
I’m not a financial planner. I probably couldn’t orchestrate a two-car funeral procession. I’m not a psychic either! But I did put the question to a well-known financial planner. Here’s his take:
He said that now that stocks are at an all-time high, your investor (like many others) wants more in stocks. He is considering putting all of his TSP money in large U.S. stocks because he doesn’t want too much ‘risk’ in the riskless G Fund.
As to putting half in the 2030 L fund and half in the C and I Funds, he said he would instead recommend putting it all in the 2050 fund or something longer than the 2020 fund.
He said it’s interesting, and human nature, “how many people now want to take more risk and put more into stocks” — an investing condition he calls “predictably irrational.”
CBSMoneyWatch columnist Allan Roth puts it like this: “No one ever says, I’m going to get greedy and buy high, and panic and sell low. They always have sophisticated reasoning, but they are doing just that.” To hear Roth on our Your Turn radio show, click here.
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Nominations now open for 2014 Causey Awards Federal News Radio’s 5th Annual Causey Awards seek to recognize and honor the good works of people who challenged the status quo and changed, for the better, human capital management. Nominate someone today for his or her outstanding achievements and important human capital/human resources contributions. While we’re looking for people who made a difference in the HR world, they don’t necessarily have to work in an HR role. In the past, we’ve honored CIOs, a chief of staff, and an inspector general, in addition to human resources professionals, all for their contributions in the HR arena.