Growing up, I played a lot of sports and I hated being average. I wanted to be the best and win at everything I did. And this mentality has stretched over to school, work, and family life. I am always striving to be above average at everything. Everything, that is, except for investing.
And for those that are familiar with the investing world, this may sound pretty strange. Much of the investment world is obsessed with “beating the market” and being above average. But not me. I don’t want to be above or below average. I just want to be average. Let me tell you why.
For someone to get above average returns in the stock market, there are two main strategies:
Predict market swings
Invest in individual stocks that grow faster than the market
For the feds that invest solely in the TSP, only the first strategy is an option.
And the problem with these strategies is not that they don’t work. They actually work exceptionally well (if you are good at it). The problem is that it is so incredibly hard to do either of these things well over a long period of time. As a result, people that try to get above average results, actually get worse results than those that tried to be average.
Even professional investors struggle with this. Some studies show that only 1 in 20 professionally managed funds beat the market. But even if you successfully pick the 1 out of 20 funds that does well, the odds of that fund beating the market over a long period of time is close to zero. Not to mention that these professionally managed funds require much higher levels of expertise, time, and resources. This results in higher fees which eats away at the returns of those that invest in the funds.
Even within the TSP, many people try to time the market. They do this by moving all of their investments into the G fund right before they think things are going to go down. The problem with selling right before a “down market” is two fold. First, it is very difficult to predict a down market. Second, now that you moved everything into the G fund (even if we assume that you correctly predicted a down market), when do you move it back? The only thing harder than knowing when the market will go down is knowing when it will recover.
The bottom line is that the odds are against you for trying to beat the market. That doesn’t mean it is impossible (Warren Buffet being a great example of that) but it does mean that you should think twice before betting your retirement savings on it. For every Warren Buffet, there are thousands, if not millions of people that tried and failed.
But as federal employees, I have some good news for you. The TSP funds were built with all this in mind. That is why the TSP funds will always be average. They will match the index of whatever they are meant to track. No more and no less. For example, the C fund is built to track the S&P 500 (500 large to medium stocks) and it does just that all the time. While other funds on the private side spend millions on managers to try to do better than the S&P 500, the C fund doesn’t. It then pushes the millions of dollars that it doesn’t spend on fancy managers back to you in exceptionally low fees. And over a career and/or a retirement, these small differences can make a huge difference in your retirement savings and in your peace of mind.
Now this article is not meant to tell you which TSP funds you should invest in. I don’t know your situation so I can’t give you personal advice. But I hope this article reminds all of us that more complicated is not always better.
I talk with federal employees all the time that are looking for fancy investments outside their TSP and most of the time after a short conversation, we agree that it makes much more sense to stay within the TSP. Now, investing outside the TSP is not all bad. There are many low-fee index funds and ETFs that are great long-term options. You’ll just have to wade through thousands of different funds to find ones that do as well as the TSP funds. Many times, it makes the most sense to keep it simple and stick with a buy-and-hold strategy in the TSP.
Being average is not as exciting as investing in the hottest new stock or fund but it has shown to work consistently over the long run. And for my fellow overachievers out there, that means (at least with investing) the best way to be above average is often by being okay with just average. And over time, these consistent “average” results grow to be incredible retirements.
