Rule Number 1 for investing your TSP money is to not lose money. Rule Number 2 is to maximize gains. Rule Number 3 is to never forget Rule Number 1 & Rule Number 2!
My 30+ year career in the financial services industry has been split down the middle between bull market and bear market. From 1985 to 2000 I enjoyed the forgiving nature of a relentless bull market. Since 2000, I have had to learn how to invest in the unforgiving environment of a bear market.
The most important thing I’ve learned over the past 15 years is that the strategies we used during the bull market of the 1980’s and 1990’s don’t work in the current bear market. Buy & Hold was a reasonable approach when stocks only went up, but it is a miserable strategy when prices decline.
The volatility we’ve seen since 2000 has laid bare the ineffectiveness of Buy & Hold. Investors who held through the 2000-2002 decline endured a 48% loss; investors who held through 2007-2009 lost 57%. Setbacks like that are life-changing.
The problem with Buy & Hold is that it lacks a sell discipline. It has no mechanism for protecting investors from significant market selloffs. In today’s environment, protecting principal from devastating declines is a necessity. Since Buy & Hold lacks a mechanism for protecting investors from the worst the market can throw at them, it is inappropriate for today’s market.
Here is a typical example of a flawed investment return. A +50% gain in one year followed by a -50% loss the next year, is a zero average percentage (meaning you broke even for those two years) and would be reported as such in the fund performance figures. But now let’s do the math again with dollars involved using a $100,000 “C” fund type of account:
$100,000 plus the 50% gain equals $150,000. Now apply the 50% loss for the following year and you have just $75,000 ($150,000 X 50%). This is a 25% LOSS on your original investment that was not reflected in the average percentage results!
Tactical investing is a specialty category of investment management that offers a “risk on/risk off” discipline. When market trends are positive, tactical investment managers are invested in a “risk on” posture, but when trends turn negative, they get out of the markets and take a “risk off” position. When trends turn positive again, they resume a “risk on” posture.
This approach to investing is much more appropriate in today’s roller coaster market. Going back to my #1 rule for successful investing – avoiding losses – tactical management provides a specific mechanism for protecting principal. In the TSP, tactical management improves performance dramatically.
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