Most Common TSP Mistakes During Bear Markets

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.

Neglecting Rebalancing

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 manner—keyword: sustainable—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 common—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 jobs—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.

Contact Information:
Email: [email protected]
Phone: 8007794183

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.

Investment Advisory Services are offered through BWM Advisory, LLC (BWM). BWM is registered as an investment advisor and only conducts business in states where it is properly registered or is excluded from registration requirements. We are currently either state or SEC-registered in the following states: Arizona, Florida, Illinois, Kansas, Louisiana, Michigan, New York, Oregon, Texas, and Washington. Registration is not an endorsement of the firm by securities regulators and does not mean the advisor has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Although we make great efforts to ensure the accuracy of the information contained herein, we cannot guarantee all information is correct. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that a portfolio will match or exceed any particular benchmark. Any comments regarding guarantees, safe and secure investments, guaranteed income streams, or similar refer only to fixed insurance and annuity products. They do not refer, in any way, to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by BWM Advisory, LLC. Guaranteed lifetime income is available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC-insured. Not affiliated with the U.S. Federal Government or any government Agency.

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