Determine Your Investor Profile – Manage Your TSP Part 1

investor profileMost FERS retirees will rely on their Thrift Savings Plan (TSP) to provide a vital source of income in retirement. With the overwhelming amount of investment advice and recommendations coming from all angles, it can seem like managing your TSP effectively is an impossible task. At our retirement trainings, we give four investment principles that can help guide you through the murky waters ahead. The first of the four fundamental investment rules is to determine your investor profile.

Who you are as an investor?

Your investor profile is simply who you are as an investor. What are your goals? What do you want to achieve through your investments? Some federal employees need the TSP funds in retirement to pay off debt or to meet routine monthly needs. Others may be less concerned with day-to-day needs and want to use much of their TSP to provide for their kids, grandchildren, church, or charity.

Risk tolerance and capacity

The two factors that determine your investor profile are risk tolerance and capacity. Risk tolerance is time horizon, level of education, personality, political philosophies, etc. Tolerance is essentially who you are as an investor. As you consider your investor profile, a key area you need to address is your own mindset toward risk. How comfortable are you with taking on risk? If you are an experienced investor, this is a great moment to look back on your track record and see what story the numbers tell. If you stayed steady in your course through a tumultuous event such as the market crash of 2008, then you may be better at taking on risk than others.

Discovering your level of risk

Looking at your track record as an investor is a great way to begin discovering the level of risk you are comfortable with, but it’s not your only tool. A quick Google search can pull up a number of risk quizzes and assessments. Completing one of these assessments, and having your spouse fill one out are excellent ways to learn more about both of your views toward risk. At RBI, we have a free Risk Tolerance Questionnaire that you may find helpful.

Meanwhile, capacity is where you are as an investor. Capacity addresses your age, lifestyle, income-tax bracket, liquidity, and general financial situation. If you need to get four children through college, you are certainly in a different situation as an investor compared to someone with only one child who has already graduated college.

Determine your investor profile

Determining your investor profile is essential to managing your TSP effectively. By looking at the past and future you can discern your risk tolerance and capacity. To know how to manage your TSP, you must first know where you’re going. I’ve not heard of many pilots who take a plane into the sky with no plan as to where they are to land. In the same way, you need to chart a course for your TSP. Charting this course begins by simply determining your investor profile. See our video below for more on determining your investor profile.

Next month, we will build on the next fundamental investment rule: allocate appropriately.