Thinking about timing the market with your Thrift Savings Plan account? I see many people who want to turn their TSP into a platform for what is essentially day trading. There are whole Facebook groups about it.
Just don’t.
Usually, my rants are on subjects that I know inside out. But today’s rant is going to be on a subject about which I know just enough to make an idiot out of myself. I’m OK with that.
Lately, I’ve been running into more and more people who are using their TSP for more active trading. They’re trying to beat the fund indexes by moving in and out of the different funds. 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: First, 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: Second, titer-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: Lastly, values can’t be predicted while you’re trading. 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. 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 to Financial Independence and Retirement for making sure that I said all these things right! He’s a lot smarter than I am when it comes to investing.
There are groups dedicated to this. As well as some individuals recommending shifts in allocation. There is a subscription service that claims better returns if you follow their software generated recommendations. I can’t remember the name. People have been doing TSP timing for quite some time, For some reason I do tend to run into it in waves. They time it right a few times or they perceive they did, and they think that means they have some expertise. Hopefully they are right, but statistically they are not.
It’s some consolation that this nonsense is unlikely to cause anyone to lose their entire TSP portfolio. I think. Or I hope.
Kate,
As usual great post.
Although I never tried it, my partner who actively studied the markets and traded in our brokerage accounts did actually manage to allocate within his TSP accounts and do very well. I credit this to his immersion into the trading landscape and his understanding of the time delay with TSP allocation changes.
The cut-off time should be moved to 4 p.m. if the system can’t manage real time exchanges. Today the market moved 6 percentage points from low to high.
If you make a move at noon, you sit on pins and needles for 4 hours hoping the market doesn’t crash or skyrocket against you.
Absolutely. Charles Shwab allows you to do that until almost market closing. The trading is not instantaneous regardless of what time you make the trade; it will be effective at closing time…but at least you can wait until almost market closing to make a decision and not being set up for failure in case the market plunges or skyrocket late in the afternoon. In the stock market 4 hours is an eternity.