Due to the recent volatility of the stock market, the Thrift Savings Plan issued a reminder to participants to “Stick to your plan: Avoid chasing returns.”
“The stock and bond markets can change rapidly,” the TSP said in an email Tuesday. “By the time you react to the situation, the market may be moving in the opposite direction, and you could miss out on significant gains. Remember that investing for retirement is for the long-term. Try not to let short-term market movements steer you off course.”
The rest of the TSP’s “Stick to Your Plan” messages reads:
Once you’ve established your retirement goals and a savings strategy that fits your needs, you’ll have the best results if you stick to your plan. Don’t get sidelined by distractions. Make adjustments to your strategy only after careful consideration.
It’s always a good idea to periodically ask yourself whether your retirement portfolio properly reflects your willingness and ability to take risk. But if you are certain about the amount of risk you can tolerate, don’t allow short-term market movements to steer you off course.
Suppose, for example, that you have many years before retirement and you have determined that investing in the TSP’s stock funds is appropriate for your time horizon because of the potential for higher long-term returns.
If you move your money out of your TSP stock funds when the market starts to dip, you may miss out when it bounces back.
An investment strategy of chasing returns or trying to “time the market” means you have to be consistently correct two times: exactly when to get out of a particular asset class and exactly when to get back in.
Most investment experts agree that such success is highly unlikely over long periods.
Remember, your investment performance is determined, in large part, by your asset allocation, not by guessing which market sector is going to be in favor at a particular time.
The Price of Bad Timing
Significant movements can occur rapidly in the stock and bond markets.
By the time you react to the situation, the market may be moving in the opposite direction. If you miss one or two brief upswings in a decade, your investments may underperform the average market return for the entire period.