My wife got her Thrift Savings Plan (TSP) update the other day. (For my civilian readers, this is the military version of the 401k or 403b retirement savings plans). Not good times. I hadn’t noticed what she was looking at, so I just suspected it was some junk mail. I think this is the first time she’s looked at how the stock market really hit her.
“I lost [thousands]”, she said (I’m keeping the exact number private since I didn’t ask her to disclose her finances). Like most people, that represented around 30% of her money. As Monty Python might compare the money to a dead parrot in a well known skit, “It is no more. It ceases to exist.”
Lesson 1: It Hurts to Lose Money
People are risk adverse by nature. For many, winning $10,000 is going to make someone feel great… for maybe a couple of days. However, losing that amount will put a damper on the next few months. My wife had this reaction. She had gained 3 times the “thousands” in equity in her home back in 2006. While she was happy about it, we didn’t go out to Black Angus to celebrate it. On the other hand, losing $16,000 was a sobering moment.
If that wasn’t bad enough, it’s gets worse. It’s all my fault. I had found out she wasn’t maxing out her TSP. Even worse, she was putting it in the G fund – a fund that consists of “short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government.” I don’t mind being conservative, but every financial guru will say that you should “go aggro” (not in such words) on your investments with some 40 years left until retirement. So I persuaded her to do “the smart thing” and move the money to something invests heavily in stocks. We saw what happened there. This lead to a predictable reaction:
Lesson 2: People Want to Sell When It’s the Best Time to Buy
My wife quickly said, “I should get back to the G fund.” I reminded her that she was the one who suggested we put more money in the market when it had dropped. She was the one who said, it was a good time to buy at the lowest point we’ve seen in years. It was my hope that reminding her of her smart, logical thinking would get the better of her emotional reaction. I couldn’t tell if it really worked or not and still don’t know where she stands on that front.
Lesson 3: Establish Risk Tolerance Before Investing
Sometime soon, probably this weekend, we need to sit down and talk about the things that we should have already. We need to figure out her risk tolerance before I recommend she get in the fund that invests mostly in stocks. We need to go over all the funds available and do a little more diversification. Diversification does matter, even though it might not have helped too much in this case.
Overall, I would say that we are pretty lucky. My wife could have lost a lot more if she had been investing the entire time (though she would have made more on the up years). Since I had twice as much invested, I lost twice as much. I can’t imagine what her reaction would have been if that had happened to her. One thing that comforts me, is that I have a pile of years before I can even access this money (except under very specific conditions). The ideal scenario would be for the stock market to collapse for a long period, allowing time to pick up a huge pile of shares on the cheap, and then sell on the recovery. It looks like we are halfway to that ideal scenario.