Investment Strategies for General Motors Employees – Do’s and Don’ts for your PSP
One of the biggest challenges when saving for retirement is understanding how to invest your 401k. There are very few quick and easy ways to know for sure that you are making the right decisions. Over the years, I have had the privilege of working with several General Motors employees and retirees. Each of them used a different strategy when managing their PSP (Personal Savings Plan) or RSP (Retirement Savings Plan). Some strategies were effective, and some were not. In this article, I will explain several of these strategies and offer my professional opinion on their effectiveness.
Don’t – “Cherry Pick” your Investments
“Cherry picking” is when someone looks through the performance of the available investment options in their retirement plan and picks the investment or investments that performed the best over the last couple of years. This is also known as “chasing returns”. This strategy can be dangerous because markets typically go in cycles. It is not uncommon for the investment category that has done the best over the last few years to be the worst-performing over the next few years. For example, in the late 90s, technology stocks were on fire, but in the early 2000s, they suffered serious losses (the Tech Bubble). Similarly, gold and emerging-market stocks had a strong run in the early to mid-2000s but have underperformed since. In the last several years, large companies in the US with a growth focus (think technology) have outperformed most other investments, so it is not a surprise that Fidelity Contra and Fidelity Growth Company Funds have been some of the best performers in GM’s PSP over the last 5 years. They both own mostly large US growth companies. I am not saying these investments will suffer large losses in the near future, but it would not be wise to put too much into these funds simply because of their high returns in recent years. Balancing your portfolio across different sectors, asset classes, and countries is a much more advisable strategy.
Do – Match your investments to your situation and needs
An appropriate analogy for GM employees is the similarities between investments and vehicles. A farmer needs a Silverado 2500, a soccer mom will want a Traverse or Suburban, and a business person who drives 40,000 miles a year may want a more fuel-efficient vehicle. Similarly, a new employee in their 20s or 30s will want to own mostly stocks because they have time for their accounts to recover after a market crash. Someone who is only a few years away from retirement will want to be more conservative because they don’t have as much time for their accounts to recover. My suggestion is to sit down and write out your goals (when you want to retire, what you want it to look like, etc.), then make your investment selections based on those goals. The State Street Target Retirement funds available in your plan may be good for this, but working with a qualified financial advisor to develop a plan specific to you can be even better.
Don’t – Try to time the market
We have all heard the saying “Buy low, Sell high”. In theory, “buy low, sell high” is a great strategy, but it is extremely hard to get right. The market is very unpredictable, and most attempts at timing it fail miserably. To get it right, you not only have to sell at the right time, but you also need to buy back in at the right time. For example, as the market has recovered since 2008, I have had many conversations with clients who were convinced that we were going to experience another crash and wanted to go to cash. I had these conversations in 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017... Some of my clients listened to me and stayed invested, and others moved their money to cash or bonds and have been waiting years for an opportunity to get back in. I am not saying that we won’t see a significant market downturn in the not-too-distant future. Market downturns are normal, and we may see one soon, but we may not. We are all better off making our investment decisions based on our own situation and goals rather than trying to guess what the market will do.
Do – Stay the course
Once you write down your goals and develop a plan around them, do your best to stick to it. If finances get tight, try not to take a loan out on your 401k or reduce your contributions. This is especially important if the market is down. Taking a loan or reducing your contributions while the market is down is basically selling low. Consistency is key when investing for retirement!
I hope you found this article helpful! If you have questions or are interested in a complimentary consultation, feel free to reach out to me at brandon@fsgmichigan.com or (517) 347-4337.
Written by Brandon Carter