Although the right mix of investments for your TSP account depends entirely upon where you are, where you want to go and how you’d like to get there, there are a number of characteristics that all good investment portfolios have in common. A good portfolio is always:
Risk averse. Your portfolio should not expose you to any more risk than is necessary to meet your objectives. For some, this will mean a portfolio composed of mostly stocks. For others, it will mean all cash. For most, it will mean something in between. For every investment portfolio, there is a minimum level of risk and return that are necessary to safely achieve its objectives.
Cost efficient. A good portfolio achieves its objectives at the lowest possible cost. If your portfolio costs more than about 0.20 percent to own, it could probably be better.
Risk efficient. Risk is something to be avoided, when- and wherever possible. To know the quality of your portfolio, you must know how much return to expect from it and how likely it is to deliver something else. A good portfolio delivers the expected return you need with the least possible risk. Risk efficiency is achieved by properly diversifying your portfolio.
Tax efficient. Like other costs, taxes must be minimized in order to maximize the quality of your investment strategy and the portfolio it produces.
Simple. A good portfolio minimizes complexity and avoids using unnecessary components. If your portfolio contains more than 20 securities, you can probably do better. When it comes to selecting the building blocks of your portfolio, fewer is better than more. You should be able to quickly review and assess your portfolio’s performance from a few account statements that each contain no more than a handful of securities and transactions each year.
Transparent. You should clearly understand what each element of your portfolio is, and what it is supposed to do. Trust is not something that should be given to anyone in the investment business. It should be earned, and then given only sparingly and where absolutely necessary.
Easy to manage. Making changes to your portfolio should be convenient and easy for you to accomplish.
Your TSP account gives you the ability to develop and manage a portfolio that possesses every one of these characteristics. Attributes 2, 5, 6 and 7 are inherent to the TSP, while attributes 1, 3 and 4 can be readily obtained with the right approach to managing your account. It is up to you to make sure that your outside investment accounts offer the same opportunity.
Mike Miles is a Certified Financial Planner licensee and Principal Adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email questions to fedexperts@federaltimes.com.
