This is the fourth segment of “The 20 biggest mistakes federal employees make with their TSP”:
“CHASING THE FUND WITH THE BEST PERFORMANCE LAST YEAR”
This is an understandable mistake – but a mistake nonetheless. The performance of each TSP fund is listed on the TSP website . When trying to figure out which funds to invest their TSP in, many folks look at these performance figures, and it is reasonable to focus on the fund(s) that has performed best recently.
The problem with this approach is that the best performing fund changes from year to year – and only occasionally does a fund stay at the top from one year to another. The fact is that investing in last year’s best performing fund is unlikely to position you in this year’s best performing fund.
So, what is a better approach? If you are looking for growth, a fairly even split between the three growth funds – C fund, S fund and I fund – gives you more consistent returns than over-weighting any one of the three. At the same time, because over the long haul all three funds have similar returns, your results will be similar with a balanced combination.
The other problem with chasing returns is that it does nothing to protect your TSP if the market declines significantly. This takes us towards another common mistake that people make with their TSP, which we will address in an upcoming post, but for now, suffice to say that chasing performance leaves you exposed to market downturns.