Although the right combination of investments for your TSP account depends entirely on where you are, where you want to go and how you would 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 more risk than necessary to achieve your goals. For some, that will mean a portfolio consisting primarily of stocks. For others, it will mean all in cash. For most, this will mean something in between. For each investment portfolio, there is a minimum level of risk and return necessary to achieve its objectives safely.
Profitable. A good portfolio achieves its goals at the lowest possible cost. If your wallet costs more than about 0.20% to own, it could probably be better.
Effective risk. Risk is something to be avoided, whenever and wherever possible. To know the quality of your portfolio, you need to know what return to expect from it and how likely it is to produce something else. A good portfolio offers the expected return you need with the lowest possible risk. Risk efficiency is achieved by properly diversifying your portfolio.
Tax efficient. Like other costs, taxes should be minimized in order to maximize the quality of your investment strategy and the portfolio it produces.
Simple. A good wallet minimizes complexity and avoids using unnecessary components. If your portfolio contains more than 20 stocks, you can probably do better. When it comes to selecting the constituents of your portfolio, less 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 only a handful of securities and transactions each year.
Transparent. You need to clearly understand what each item in your wallet is and what it is supposed to do. Trust is not something that should be given to anyone in the investment business. It must be earned, then given sparingly and where absolutely necessary.
Easy to manage. Making changes to your portfolio should be convenient and easy to do.
Your TSP account gives you the ability to develop and manage a portfolio that has each of these characteristics. Attributes 2, 5, 6, and 7 are inherent in the TSP, while Attributes 1, 3, and 4 can be easily achieved with the right approach to managing your account. It is up to you to ensure that your external investment accounts offer the same possibility.
Mike Miles is licensed as a Certified Financial Planner and Principal Advisor of Variplan LLC, an independent trustee in Vienna, Virginia. Email questions to [email protected].