Last month, we introduced the first of the four fundamental investment principles: determine your investor profile. These four principles are guides for you to dissect the tremendous amount of information regarding investment and retirement planning. This month’s discussion will focus on asset allocation. The second key investment principle is to allocate appropriately.
This principle ties directly in with our first rule and simply means your asset allocation matches the level of risk you are willing to take. For instance, your level of comfort with risk may be an even fifty-fifty split. In this instance, half of your contributions would be placed in more conservative funds, typically considered the G fund. The other half of your contributions may go to a fund with more risk involved.
Risk and Reward
Investing is not just about getting the maximum amount of return for your money. Although this statement may seem like a contradiction, let’s think about the implications. No one exists in a bubble. No matter how much you may try to compartmentalize life, your work responsibilities, home situation, and investing preferences are not completely separate and independent entities. For example: if you have a smooth and happy home life, that will have a positive effect on your productivity at work. In the same way, your investments—in this case for something as important as retirement—affect your mindset. If you have trouble sleeping because your asset allocation is in funds that are known to be riskier, you may simply need to invest in a fund that offers less exposure to loss. Is the potential dollar amount gained from a riskier investment worth the stress? It may be, but this is a very personal decision that only you can answer.
Investing for the Long Term
Remember that retirement planning is investing for the long term. Generally, as a FERS employee you contribute to the TSP for years to build a solid base to draw on in retirement. Investing for your future is a task that demands patience, diligence, and the ability to maintain your course. To remain steady for 10, 20, or 30-plus years, it’s imperative to allocate your investments consistent with the level of risk you are comfortable with. Once you’ve allocated appropriately, stick to your strategy. An investment plan is no good if you immediately abandon it at the first roadblock. The benefits of this approach can be truly tremendous. For more on this topic, see our video on what it means to allocate appropriately.
Next month, we will discuss the next fundamental investment rule regarding asset allocation: reallocate tactically.