3 things to remember when the markets keep shifting
Typical advice about saving for retirement seems simple enough: start saving early, contribute at least enough to get employer matching, diversify your investments, make a long-term plan, increase contributions when you can. Follow these steps, and when you get to your last day of work, you’ll have a healthy nest egg to generate the retirement income you need.
But you know what isn’t so simple? The strong ties between money and emotion. And when you’re aware that your investments are up one day and down the next (then up, then down again), that market volatility can lead to worry.
Here are three things to remember when the markets keep shifting:
1. Long-term plans beat short-term worries.
People who try to time the markets with frequent buying and selling rarely come out ahead at the finish line. Remember that the amount you contribute and your investment allocation are the most important factors affecting the growth of your TSP savings.
The biggest advantage of the TSP is your exclusive access to low-cost index funds with opportunity for broad market diversification. Index funds are designed for passive investing—that is, a buy-and-hold approach to maximize your returns over a long period. Diversification minimizes your risk as markets shift. To take advantage, you can choose to build your own TSP portfolio with individual TSP funds or let the L Funds do the work for you.
2. Stocks are “on sale” when the markets are down.
When the markets are down, each share costs less. If you’re making regular payroll contributions to your TSP account, that means you’re buying more shares for the same amount of money. When markets are up, share prices are higher. Keep contributing and, over time, your overall cost of each share averages out in the middle. This is the benefit of “dollar-cost averaging,” which is much more reliable and profitable than trying to predict the perfect moments to buy or sell. In fact, the more volatile the share price, the larger the advantage of dollar-cost averaging.
3. Markets have always recovered.
Riding out market volatility is a natural part of long-term investing. Historically, stock and bond markets have always recovered and continued to grow. If you move your money out of stocks and bonds when share prices fall, you lock in your losses. You’d also be more likely to miss the best moment to move your money back into stocks and bonds when the markets do recover. After all, in order to time short-term volatility to your advantage, you have to be able to accurately predict the future twice.
One last thing to keep in mind:
Sticking to your plan doesn’t mean you should do nothing. It’s a good idea to check in with your TSP portfolio periodically to make sure it’s still on track to meet your retirement goals. If you’re not invested in an L Fund, which rebalances for you automatically, you may want to update your allocation after gains and losses in the markets have changed your investment mix. Or, depending on where you are in your career, you may want to adjust your investment mix to take on more or less risk. With your TSP, you have all the tools you need to manage your financial future.
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