Usually, my rants are on subjects that I know inside out. Today’s rant is going to be on a subject about which I know just enough to make an idiot out of myself, and I’m OK with that.
Lately, I’ve been running into more and more people who are using their Thrift Savings Plan (TSP) account for more active trading. They’re trying to beat the fund indexes by moving in and out of the different funds. Basically, they’re trying to time the market with a tool that’s 100% unsuitable for the goal.
Timing The Market Rarely Works
Let’s start with something that doesn’t seem like it needs to be said: Timing the market almost never works better than boring buy-and-hold investing. Sure, there are exceptions. You can always find one guy that made a bjillion dollars selling everything in mid-2007 or buying the C and S funds in early 2009. But for the vast majority of folks, market timing is a losing game; even if you don’t lose actual value, you’re going to lose compared to buying-and-holding (assuming, of course, that your buy-and-holds are smart choices to begin with.)
The TSP Is Not Made For Trading
The TSP is particularly unsuited for anything that involves timing. There are three main reasons why this is true:
Order processing time: TSP transfer orders are not processed immediately. Transfers processed prior to 12 noon Eastern time are generally processed on that business day. Transfers processed after 12 noon Eastern time are generally processed on the next business day. That means your transfer could take 5 to what, 100 hours to take effect? (If you placed the transfer on a Friday afternoon and Monday was a holiday.)
Limited transfers authorized: Inter-fund transfers within TSP are limited. You may only redistribute your account balance amongst all the funds for your first two transfers of the month. Any subsequent transfer made in the same month may only move money into the G fund.
Values are determined daily: From the TSP website,
“The TSP is a daily valued plan which means the value of your account is determined each business day based on the daily share price and the number of shares you hold in each fund.
At the end of each business day, after the stock and bond markets have closed, the total value of the funds’ holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day.”
These three aspects of TSP make it an unsuitable tool for anything that even vaguely resembles market-timing, regardless of whether you’re trying to catch smaller fluctuation or big swings. Don’t get caught up in the hype of earning an extra $3.42 by risking your well-thought out investment strategy. If you must try to beat the markets, then limit your ‘brilliant investor’ fund to 10% of your asset allocation and use a brokerage account designed for trading, not your TSP.
Many thanks to Doug Nordman of The Military Guide for making sure that I said all these things right! He’s a lot smarter than I am when it comes to investing.