Can You Afford Not To Diversify?

What to do with your Thrift Savings Plan (TSP) account?  So much has been written about this over the years.  Should I stay or should I go?  I say, why not have them both.  In our opinion, the TSP is a fantastic way to grow your retirement nest egg.    It’s low cost, and the funds are nice proxies to the large cap, small cap & international funds found in private sector 401K plans.  With guarantees* of never losing money, it’s also hard to argue with using the G Fund. 

However, as one gets closer to and into retirement, life circumstances change.   Financial and Investment planning should change accordingly.  In our later years, we are not able to afford the losses like those incurred during the Tech Bubble or Great Recession of ’08.  Who knows what the next 5-10 years will bring?  While the TSP has many advantages, there are also a few negatives.  Specifically, the level of diversification is lacking.  All of the equity positions in TSP are highly correlated, meaning TSP funds react the same way at the same time in varying economic or geopolitical events.  Dr. Harry Markowitz won a Nobel Prize for his Modern Portfolio Theory.  I won’t bore you with the minutia, but the main tenant is that in order to achieve an efficient portfolio, one should use investment vehicles that have low to slightly negative correlation to each other.  This is not the case if you are only allocated between the C, S & I funds. 

One suggestion would be to take a portion of the account and move it outside TSP into non-correlated investments.  How much to move is based on individual circumstance, but common ranges are anywhere from 20% - 40%.    This way, your portfolio can be truly diversified**.

If this is a topic you would like to discuss in greater detail, please feel free to call or e-mail.

* The payment of G Fund principal and interest is guaranteed by the U.S. Government.

**¹Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions