|
|
Managing Your TSP: A Simple, Effective Strategy
By
Ashby Daniels
Friday July 16, 2010
|
You can have daily headlines from
FedSmith.com delivered right to your desktop each business morning. The service is free and you don't get junk e-mail as the price of your subscription. Just
visit our newsletter page to sign up!
|
Ashby Daniels is a financial advisor with
First Command Financial Services, Inc. Ashby works with
federal employees to integrate their government benefits into a
comprehensive financial plan and ensures that it reflects their
values and goals. His financial planning practice is located in
Camp Springs, MD.
|
While we all know that timing the market is
virtually impossible, that doesn’t seem to keep many investors from giving
it their best shot. Each time that the market takes a dive, many TSP
participants will begin to transition money to the G fund. Then, after the
market has made the majority of the recovery, those same participants will
begin to feel okay about the risk and head back into the C, S, & I funds
again.
The problem with this strategy is that buying high and selling low is
counterproductive to your ultimate goal of amassing wealth for your
retirement. So, what should you do?
As if there aren’t enough acronyms within the federal systems, consider
DCA a retirement acronym. DCA stands for Dollar-Cost Averaging.
To give you an example of how DCA works, let’s run the numbers. Imagine for a
moment that you are investing $300 per month into the C fund for 6 months and
the market goes through its typical market cycles.
|
Date Purchased |
Price/share |
Shares
Purchased |
|
January 1 |
3.50 |
85.71 |
|
February 1 |
5.00 |
60 |
|
March 1 |
5.00 |
60 |
|
April 1 |
3.50 |
85.71 |
|
May 1 |
2.00 |
150 |
|
June 1 |
2.00 |
150 |
The average price per share over the period illustrated above was
$3.50. [(3.50 + 5 + 5 + 3.50 + 2 + 2) / 6 = $3.50] But, the average price
paidd per share would equal $3.04. [($300 * 6
mos.) / (85.71 + 60 + 60 + 85.71 + 150 + 150) = $3.04] If you were able to
pay an average of $3.04 per share during a time when the average price per
share is $3.50, would you consider that a good deal?
Why is DCA effective? Because it ensures that you will buy more shares
when the market is down and fewer shares when the market is up. Once you
embrace the concept, you may even find yourself thinking of market
corrections as buying opportunities. That’s when you’ll know you’ve made the
transition from a trader to an investor.
OK, we’ve established that there are benefits to sticking with your chosen
TSP investment plan. But let’s take a step back: How should you allocate your
TSP dollars? That depends on a number of factors.
Some good questions to ask yourself are:
- “How much money will I need in retirement?”
- “What is my time horizon?”
- “How much risk am I willing to accept?”
- “How much risk am I able to accept?”
- “How much diversification is appropriate?”
- “What is my desired rate of return?”
You will also need to take into account any investments you have outside
of the TSP. It’s essential that you consider your whole financial picture in
making decisions about your TSP investments.
If you are not sure about the answers to some of these questions, don’t
hesitate to seek help. A qualified financial planner can provide you with a
clear view of your current financial picture, help you establish clear goals
and provide you with an action plan for pursuing those goals—including a
plan for how to make the most of your TSP.
© 2010 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
Click here too Add a Comment about this Article
|
