Top Mistakes you can make with your TSP in a bear market

No two bear markets are the same, and it can be challenging to identify the driving forces in real-time. Because of this, many investors find it challenging to make choices for their portfolios.

Federal employees frequently make these mistakes when dealing with their TSP in a bear market.

1. Ignoring rebalancing

Not rebalancing in a timely manner and correctly during bear markets might cause you trouble. Your portfolio should have enough liquidity to give you the income you’ll need for the foreseeable future if you’re close to retiring.

This is less significant if you’re still employed and making money. However, if you’re already retired and living off your portfolio, you’ll need more cash and assets with minimal volatility.

Market volatility reduces your potential to generate cash sustainably (important word: sustainable). This is because volatility makes the market more unpredictable in the short term.

You must plan for these financial requirements in advance because it is higher.

The only exception is if you have a taxable account (individual, joint, or trust). This way, you may be able to use strategic rebalancing to generate sizable long-term tax savings.

As such, the timing of your portfolio rebalances matters tremendously, and you may choose to delay earning cash to fit more closely to the added goal of creating tax savings.

2. Being overly cautious

This point has severe cognitive dissonance. True, you want to protect your wealth during bear markets, but how long do bear markets typically last? Will you be using all of your wealth during this time?

Historically, bear markets have lasted an average of about ten months. Some are brief, and some are longer, but they always come to an end.

As a result, some investments in your portfolio need to be made in the years following the bad market. While it’s challenging, try to divide your money up into several pots with distinct purposes, some for now and others for a long time in the future.

This is where having a strategic investment plan in advance is helpful.

3. Panic transfers to the G Fund

G Fund transfers are at their greatest levels in a long time, which is no surprise. Federal employees are finding it difficult to see the drastic fall in the value of their portfolios. Transferring funds from riskier assets into more conservative ones, such as the G Fund, helps guard against further erosion of the principal.

However, this form of transfer has two disadvantages. It also prevents you from taking part in the regrowth after it returns. Additionally, by making these transfers after experiencing drops, an investor may effectively make those losses permanent. This post provides a warning on the “G Fund Trap” for investors.

5. Not preparing distributions in advance

This mistake is closely related to the first one. Creating a strategy for your anticipated cash demands is essential if you want to know how much cash you should have on hand. However, you need to plan how you’re going to get access to this money at the same time.

Federal employees who use their retirement portfolio to augment their needs face a hurdle due to the TSP’s function that pulls distributions from all funds. When you request a withdrawal from your TSP, your account will take a proportionate amount from all of the money therein.

The distribution request will compel sales from the other, more risky funds you have in your TSP, potentially taking out investments that have fallen and permanently enlarging your losses.

If possible, think about getting the money you need from sources that don’t have this restriction. But be careful – holding too much cash in your portfolio increases the chance that it won’t increase quickly enough to fund your lifestyle for the rest of your life.

Numerous studies have shown that families with a formalized financial plan are more successful than those without. You must devise a plan, whether you do it alone or with help from pros.

Making wise and appropriate financial judgments is far more possible if you can create a strategy for the decisions, you’ll need to make in the future.

You’re also much more likely to steer clear of the errors mentioned in this article if you’ve created an investment strategy expressly for a year in which markets might decline by as much as 20%.

Consider talking to a financial advisor to support you in making the best choices for you and your family if you’re finding it challenging to tackle this alone. Your future is at stake; it’s not just your money.

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