As the Dow Jones industrial average tanked over 504 points yesterday, even the
most conservative and passive of investors (read: TSP's G fund patrons) could
not help but take notice. The worst market day since the 2001 terrorist attacks
underscores the sense that Former Fed Chair, Alan Greenspan, stated over the
weekend: we are in fact in a recession.
But what does that mean for government employees and military
personnel invested in the Thrift Savings Plan (TSP)?
Even conservative investors are bound to see their retirement yields go down, at
least until the market corrects; but the Federal Retirement Thrift Investment
Board is crafting a contingency plan to keep the TSP running in the event of a
firm collapse.
Currently, the assets of the G Fund are managed internally
by the Board, while the assets of the F, C, S, and I Funds are managed by
outside investment firm Barclays Global Investors. The F, C, S, and I Funds, each
of which has a portfolio based on the composition of a market index, remain
invested in Barclays funds regardless of the performance of the securities
markets. The L Funds are invested in the five individual TSP funds based on
professionally determined asset allocations.
However, the recent collapse of major firms like Bear Sterns, and now Lehman
Brothers and Merrill Lynch, are raising the proverbial red flag for TSP and
partner Barclays. In response, Gregory Long, TSP's executive director, continues to
reinforce the message that if you have a long-term goal, you should have
long-term plans. Even so, Long and the Board recognize that participants may
benefit by buying equity funds when their value is low, a technique known as
dollar cost averaging, which is intended to reduce exposure to risk associated
with making a single large purchase.
The idea is simple: spend a fixed dollar amount at regular intervals (e.g.,
monthly) on a particular investment or portfolio/part of a portfolio,
regardless of the share price. In this way, more shares are purchased when
prices are low and fewer shares are bought when prices are high. The premise of
dollar cost averaging is that the investor wants to guard against the market
losing value shortly after making his investment. Therefore, he chooses to
spread his investment over a number of periods.
So what's the best strategy? TSP is a long-term investment and market
volatility will always exist. While stock values never really go straight up;
they all rise and fall over time; it's all about risk management and risk
tolerance. However, investors within four years of retiring could
consider shifting money into the less risky G Fund. But for long term
retirement investors, a panic response could wind up costing a lot of money. Your best strategy is to ride out the storm or purchase equities while prices are down - just think of it as a big Macy's sale that will end soon, albeit not soon enough.
Also Interesting:
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