Certainty Vs Scenarios In TSP
When the market is at all-time highs and the trend is up, it's easy to believe that it will just keep going up. The higher the market goes, the more ingrained this belief becomes. At some point, belief turns to certainty. That's the point at which TSP investors are in trouble.
It's that mental transition to certainty that causes investors to watch their gains evaporate during market declines. The key is to maintain a healthy level of skepticism and view the trend as a series of scenarios rather than certainty.
Why Certainty Destroys Traders
In a recent article on TradingView.com, Mihai Iacob explains the difference between a professional investor vs an amateur.
"Every losing trader I’ve ever met had one thing in common: they wanted certainty.
This setup will definitely work. This pair must go up. But markets don’t work like that. They don’t reward certainty — they reward adaptability.
The difference between amateurs and professionals? Amateurs bet on one fixed outcome. Professionals prepare for scenarios.
When you lock your mind on just one outcome, two things happen. First, you become emotionally tied to it — when it fails, you spiral. Second, you ignore new information — even when the chart screams something changed.
That’s how a manageable trade turns into a disaster."
While Mihai is focused on trading, the same concepts apply to TSP investing. The market crash in 2000 and 2008 are the best examples, but we could also consider the Covid collapse and the 2022 bear market.
The monthly chart of the S&P500 (our C fund) shows an explosive, long-term rally from early 1995 to mid-2000. With the exception of the brief Long-Term Capital Management Crisis in 1998, the C fund gave investors a 5-year rally with 225% gains!
By early 2000, with the tech bubble in full swing, it's understandable that TSP investors could become complacent and believe with certainty that price would keep going up.
The same could be said in mid-2007, when the C fund rallied 100% off the 2002 lows and had just made a new all-time high!
TSP investors lulled into a mental state of certainty do not have a plan B. They are mentally unable to respond, even when the chart is screaming that things have changed. The result is watching years of gains evaporate before your eyes and being powerless to stop it.
Scenarios Vs Certainty
Another way to approach TSP investing is by applying scenarios vs a state of mental certainty.
No one has a crystal ball. No one knows when a long-term uptrend will come to an end. Running scenarios against the trend helps us both validate its continuation and alert us to when the trend has changed. This keeps us adaptable, ready to respond to the eventual trend change, and protect the majority of TSP gains.
One scenario we can use is a simple channel. Price never moves up and down in a straight line. It trends in long-term channels. The longer the channel is in place, the more significant when the channel is eventually violated.
During a long-term uptrend, a violation of the lower channel line is a BIG red flag that something has changed.
The chart below shows the long-term uptrend channels being violated in November 2000 and January 2008. TSP investors who reallocated out of the C fund on that channel breakdown locked in years worth of gains and avoided massive losses.
Bottom Line
As humans we crave certainty, and recency bias reinforces that certainty. Unfortunately, certainty is also reinforced by group think. When price is trending up, the media is constantly reporting positive news, and all your friends are certain price will continue higher into the future, enjoy the ride while it lasts.
Bull markets can last much longer than what is supported by the underlying fundamentals. As long as the trend is up, the trend is up!
At some point, the uptrend will come to an end. Understanding this is half the battle. Run scenarios against the trend. They can be channels, trendlines, moving average lines, or other technical analysis tools. These scenarios will tell you when its time to take some chips off the table, lock-in gains, and await the next opportunity.
Most importantly, running scenarios against the trend will keep you alert and open to an eventual trend change. It will keep you out of the complacency that comes with certainty.
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GrowMyTSP.com does not provide personal investment advice. We are an education and analysis service, helping TSP investors grow their accounts using strategies and models that best fit their personal circumstances and risk tolerance. Get started at GrowMyTSP.com.
