Even the most diligent investors have difficulties in bear markets. No two bear markets are identical, and the factors that affect them are often challenging to put together in real time. As a result, many investors struggle with portfolio decisions.
This article will go through the most common mistakes federal employees make when dealing with their TSP this year.
Whether due to forgetfulness or being paralyzed by indecision, not rebalancing quickly and appropriately during bear markets can cause issues.
If you’re approaching retirement, your portfolio should have enough liquidity to provide you with the necessary income for the foreseeable future. That’s less important if you’re still generating income. However, if you’re already retired and drawing on your portfolio, the need for low-volatility assets and cash increases. During bear markets, it increases even more.
When markets are turbulent, your capacity to generate cash in a sustainable mannerâ€”keyword: sustainableâ€”is hampered. That’s because volatility enhances the market’s short-term unpredictability.
What are the chances that if you need cash in 12 months or less during a bear market, the markets will have dropped even more by the time you’re ready to earn that cash? It’s higher, so you must plan for these cash needs ahead of time.
There’s one exception: if you have a taxable account (individual, joint, or trust), strategic rebalancing can result in considerable tax savings over time. As a result, the timing of your portfolio rebalances is critical. So, you may want to postpone earning income to align more closely with the added goal of achieving tax savings.
Being Too Cautious
This point has major cognitive dissonance. True, you want to protect your wealth during bear markets, but how long do bear markets last? Will you spend all of your money throughout this period?
We began prepping our clients for a bear market in January this year. Historically, bear markets run around ten months on average. Some are shorter, some longer, but they all have one thing in commonâ€”they all come to an end.
Due to this, portions of your portfolio must be invested for the years following the bear market. In 10 years, you’ll most likely need your portfolio. Volatility between now and then is far less critical than volatility on the money you need between now and the end of this year.
We know it’s not easy, but try to divide your money into distinct piles with different jobsâ€”some for satisfying your immediate needs, some for the long term.
Having a well-planned investment strategy ahead of time is quite beneficial in this situation. It frees you of the weight of decision-making when the gut takes over your brain. Investors attempting to forecast declines have wasted much more money than has been lost in the corrections themselves.
Transferring to the G Fund in Panic
Unsurprisingly, G Fund transfers are at an all-time high. Employees in the federal government are struggling as their portfolio values plummet. Transferring money from riskier assets to safer ones, such as the G Fund, helps to safeguard the principal against future decreases.
However, this type of transfer is a double-edged sword. It also prevents you from participating in the regrowth when it returns. Furthermore, if these transfers are made after experiencing losses, an investor may effectively make those losses permanent. We want to warn investors to avoid the “G Fund Trap.”
Not Planning Distributions in Advance
This mistake is closely related to the first. It’s vital to make a strategy for your expected cash needs, so you know how much cash you’ll need on hand. Meanwhile, you must also consider how you’ll obtain this money.
If you request a TSP withdrawal, your account will draw proportionally from any money contained inside. We just discussed how you want to make cash ahead of time so you don’t have to sell stocks after they’ve fallen even further.
Please reconsider if you intend to use the G Fund to meet your cash needs. The distribution request may trigger sales of other more aggressive funds in your TSP, potentially realizing investments when they have declined, thus, making those losses permanent.
The risk of sequence-of-returns occurs when the market declines when you need to withdraw funds. This risk is mitigated by not having to touch the falling investments. This feature of withdrawing distributions from all TSP funds presents a difficulty for federal employees who use their retirement portfolio to supplement their needs.
If possible, try meeting your cash needs using sources that don’t have this restriction. However, be cautious since having too much cash in your portfolio might put your money at risk of not growing quickly enough to maintain your lifestyle for the rest of your life.
For over 20 years, Jeff Boettcher has helped his clients grow and protect their retirement savings. “each time I work with my clients, I’m building their future, and there are few things that are more important to a family than a stable financial foundation.”
Jeff is known for his ability to make the complex simple while helping navigate his clients through the challenges of making the right investment decisions. When asked what he is most passionate about professionally, his answer was true to character, “Helping my clients – I love being able to solve their problems. People are rightfully concerned about their retirement income, when they can retire, how to maximize their financial safety and future income.” Jeff started Bedrock Investment Advisors for clients who value a close working relationship with their advisors.
A Michigan native, Jeff grew up playing sports throughout high school and into college. While Jeff is still an ‘aging’ athlete, Jeff will take more swings on the golf course than miles running these days. He creates family time, often with weekly excursions to play golf, a hobby he shares with his three young children.
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