TSP Strategery

Ok, here’s what you’ve all been waiting for. Even though almost every month I say that I don’t give out specific TSP advice, that does nothing to stem the tide of emails asking for….specific TSP advice. Doesn’t even slow them down. I even get this one all the time, “Chris, I know you don’t give out TSP advice, but what TSP funds do you think I should be in right now?”

So here we go. I’ll give you a number of TSP strategies and you can figure out which one works best for your situation. And if you’re smart, you’ll talk to a professional about it.

What are we talking about here, exactly?

When someone is younger, they are often said to be in the accumulation phase of investing. They have the longest time horizon, and generally have a higher risk tolerance. As a result, they can typically afford to be more aggressive. Truth be told, this is the easier phase.

When someone is older, they are often said to be in the preservation phase of investing. They have built up a nest egg and want to protect it. While they still want to earn some money, and may still even be long-term investors, they are also more focused on not losing money that they have accumulated.

Somewhere in a person’s lifetime, they start to switch from the accumulation phase to the preservation phase. This is generally done gradually. It’s not like they were 100% in the C Fund on Wednesday and 100% in the G Fund on Thursday. At least, that’s not how it should work. (Although I know many of you that have done that).

The question becomes then,

“Just when do I start getting more conservative? And how do I do it? How do I allocate my TSP?”

I’m glad you asked….

Before we start, let’s better define the phases in a way we can all understand. So let me put it like this. If your vocabulary is peppered with the words, “yeet” and “lit”, and you spend some time every day with your face crammed into TikTok you can probably just keep your money in the stock market. Near-term crashes will have long since rebounded by the time you are withdrawing from it.

On the other hand, if your Mom used to drop you off at the mall to hang out in the arcade all day with your friends, before you went and bought rock music on cassettes, you need to start thinking about getting a little more conservative with your TSP. (You might also need to start thinking about getting a colonoscopy).

And finally, if the cool kids in your high school had 8 Tracks in their Trans Am’s, then you might be a little overdue for this article. (And probably your colonoscopy).

My Disclaimer

Even with all that follows, this article is still education, not advice. I’ll provide the framework of different investment allocation strategies that you might want to research more for your own TSP account. And spoiler alert: NONE of them have anything to do with timing the market. They will in no way, bear any resemblance to any of the TSP allocation services, that don’t work by the way. ( In fact, I’m so opposed to them, I won’t even waste time talking about them.)

THE THRIFT SAVINGS PLAN — a review

First, let’s all get on the same page about our investment options. There are 5 funds in the TSP—2 bond funds (G and F), and 3 stock market funds (C, S, and I). That’s it. There are no other funds. The L Funds are just combinations of these funds-not different funds. Let’s talk briefly about each one:

G Fund, aka the OG Fund

The G Fund was the original TSP fund. It debuted on April Fool’s day, 1987. It is a government bond fund. It is the only fund guaranteed not to lose money. And it’s the only fund not available outside of the TSP. All of the other funds can be purchased in the private sector. Since 1987, it’s averaged a return of 4.82% a year, but in recent years, it’s been far lower. The 10-year average is 2.04%. Think of it as the best money market available in the world.

F Fund

The F Fund is the other bond fund. It invests in corporate and some government bonds, and it CAN lose money. In fact, as of this writing, it is the only TSP fund down for 2021. Since it’s inception in 1988, it’s averaged 6.18% a year, with the 10 year average return being just over 4%. It is available in the private sector as it tracks the Bloomberg Barclays US Aggregate Bond Index.

C Fund

Now we’re getting somewhere. The C Fund is the most popular of the stock funds. It seeks to track the S&P 500 Index. Just about every investment company out there has an S&P 500 Index Fund. It started the same day as the F Fund in 1988, and has averaged 10.9% a year since then. Unlike the bond funds, the 10 year average is actually higher than the long-term average: 13.9% a year.

If you are interested, there are approximately 505 companies in the index. (Yes I know it says 500, but it’s not always exactly 500). These are the largest US companies that are publicly traded.

S Fund

After the C and F Funds debuted, we had to wait 13 years for the next TSP fund. The S didn’t come out until 2001. It has averaged 10.24% annually since then, with a 10 year average of 13.32%. This Fund tracks the Dow Jones US Completion Total Stock Market Index. This Fund contains all of the US companies publicly traded that aren’t in the C Fund. In other words, there is no overlap between the funds. There are about 3,448 companies in this Fund, and by default, all smaller than the 505 largest companies.

I Fund

This is the TSP’s version of an international fund. It also came out in 2001 and has averaged only 5.2% over the last 20 years, and 5.8% over the last 10. It seeks to match the MSCI EAFE Index. The Fund contains only foreign companies, and only in a limited number of countries. Currently, TSP is looking to replace this I Fund with something that invests in more foreign countries.

STRATEGIES

The Lifecycle Fund Approach

This is for those that don’t really like to think about this stuff, and love just hitting the Easy Button every chance they get. There are 10 lifecycle funds available to you, in 5 year increments from 2025 to 2065 and one that is called the L Income Fund. As mentioned before, they are not different funds, they are just different combinations of the 5 TSP funds.

The strategy is to pick a year that most corresponds to the year you think you might be withdrawing from the TSP and invest all your TSP money into that fund. Let’s say you pick the L2040 to walk through an example. The L2040 as of July 2021 is about 21% G Fund, 7% F Fund, 36% C Fund, 10% S, and 25% I.

As you can see, it’s automatically diversified. So if it’s diversification you seek, this is the easiest way to go about it. As we already talked about, people tend to need to become more conservative (less stock market) as they get older. The L Funds automatically take care of this for you. Each quarter, the Fund’s allocation changes slightly more conservative. You don’t have to do anything. Quarter after quarter, year after year. Eventually, you’ll get to the actual year 2040, and then the Fund will automatically convert to the L Income Fund, which is around 77% G and F, and 23% C, S, and I.

You don’t have to worry about any rebalancing, or trying to decide which funds to switch into depending on the market or anything else. It’s all done for you. Everything is automated: the diversification, the re-allocation, and the increased conservatism.

The 60/40 Approach

Here’s the long-standing, textbook approach to asset allocation. This is has been the starting baseline going back decades. Vanguard Founder John Bogle did not invent it, but he certainly popularized it. There is some argument about whether or not it’s still valid, but then again, there’s always some argument about whether something is still valid or not in the finance world. Regardless, it’s still a good starting place.

The concept is simple: 60% of your portfolio should be in stocks (C, S, and/or I), 40% should be in bonds (G and/or F). This is supposed to provide some diversity (all your eggs aren’t in one basket like the S Fund, for example), as well as smooth out some of the gains and losses swings (if stock do bad, bonds will do well—that sort of thing).

This approach is a solid one but it brings up some questions. Is the 60% split evenly between all the stock funds? Do I have to use all of the stock funds? Or bond funds? What happens when the 60% becomes 70% because the market has outpaced the bonds?

Let’s attempt to answer some of the questions. First of all, no alarm is going to go off if you alter this strategy a little to make it fit your goals and preferences. Personally I don’t invest in the I Fund. I don’t think the return is worth the risk and volatility. (Yes, I understand there is some merit to diversification, but putting an investment in my portfolio that drags it down in the name of diversification is just plain stupid.). So if I were adopting this strategy, I’d keep it simple and split my 60% between C and S only. But you do you. Same with the bond funds—split them between G and F.

Generally, the market will outperform bonds in up years. That means that the 60/40 ratio may look like 70/30 by the end of the year. So what do you do with that? Simple. Just rebalance back to 60/40. You’ll be locking in some gains and putting them into bonds. How often do you do this? Up to you. Monthly, Semi-annually, or annually are all very common choices. I rebalance annually because I like to keep things simple.

What if you want to be a little more aggressive? Or less aggressive? That’s easy too. Just adjust the percentage up or down. Maybe you’re a 70/30 gal. Or a 50/50. Or maybe you are a 70/30 at age 50 and a 30/70 at age 70. That’s perfectly alright as well.

The point is not that the 60/40 is a hard and fast rule, but rather it is a great place to start. It’s certainly better than switching all around between funds because of the next election, or the new virus, or rumors of a war, or the next elections, or the price of oil, or wherever the arrow landed this morning when your favorite TSP trading service spun their “Wheel of Allocation!”

100 Minus Age Approach

This is an old one that you don’t see much anymore, but it has a very strong component to it—it provides a hard number for those that have trouble making up their minds.

The simple rule of thumb here is that you take 100 and subtract your age. The resulting number is the percentage that you should be in equities, aka stocks. So, let’s say you’re 40, and you’re starting to think about being more conservative and intentional with your investing strategy. 100-40 = 60% stocks, 40% bonds. Or, basically right where we were in the previous approach. If you’re 55 years old, you should be 45% in stocks (100-55).

The beauty of this strategy is that it provides a hard and fast rule to become more conservative as you get older. By the time you are in your 70’s, you are 30% stocks and 70% bonds.

It’s not really a bad strategy, but it has come under pressure in recent years to adjust the number from 100 up to 110. The thought being that using the 100 just produces a portfolio that is too conservative. The pros say this because you can’t really rely on bonds to return what they have historically returned. Lower interest rates mean that bond yields are not what they used to be. What I rarely see them mention is that stock returns are much higher than long term averages. With the long term average being around 8%, stocks have consistently returned 5% more than that for the last 10 years.

Like anything else, you can feel free to adjust this as you see fit. Personally, 60% stocks at age 40 would be too conservative in my mind. If I were to employ this strategy, I’d probably go with the 110 age, myself.

The Barbell Strategy

I will not go into great detail on that here, since I’ve already taken the time to write a small book on the subject, available HERE. This takes the TSP and divides it into a safe side and a risky side. Personally, I use the C and the G Funds and nothing else. One could use the C/S and the G/F if they wanted.

The amount of money in the protected side would be a pre-determined number of years’ worth of withdrawals. Typically at least 5, sometimes up to 10. That is the bond side. The remaining funds are in the market side.

This is somewhat similar to the 60/40 approach. However the difference is that it allows the user to think through the process of just what should go into each side of the equation based on how many years worth of dollars he wants to protect. In other words, he’s not just looking at the percentage by itself, but rather what that percentage represents. Maybe it’s 7 years of withdrawals, for example, that leads him to come up with putting 35% of his TSP in the bond side, leaving 65% for the stock side.

If anyone cares what I’m doing (and I don’t know why you would), I have really taken a liking to the Barbell Strategy. My preferred flavor is a simple one of 70% C and 30% G. I plan on keeping that for the foreseeable future. I rebalance annually. You can read how I came to that strategy HERE.

SUMMARY

These are just 4 of the strategies that someone could use to help them with their TSP allocations. There are many more. In fact, there is probably no end to the number of strategies out there. My advice is to find one that works for you and stick with it.

Just about anything is better than trying to time the market.

Understand I’m only talking about the TSP when I’m talking about these strategies. Once you get out from under the constraints of the TSP, and the limited investment options, then of course, there will be a whole host of additional strategies to pick from. For example, one could create a strategy comprised of various investment “buckets” made up of growth stocks, value stocks, income stocks, corporate bonds, cash, and precious metals. We don’t have that flexibility in the TSP yet so I don’t include those types of things. If you’re going down that route in the private sector, I highly suggest you find some pros to assist you.

However, it appears as if the “Mutual Fund Window” from the TSP will go live in Summer of 2022. Once this happens, we will reportedly have over 5,000 private mutual funds to choose from within our TSP. That may change our options and strategies significantly!

I’m sure people get tired of hearing me say it, but personal finance is very personal. There is no way someone (myself included) could advise you on an investing strategy without sitting down and going through all of your finances, determining income, debt, goals, personality, risk tolerance, outside investments, etc. An email to any “expert” won’t be enough to get some good feedback.

With all that in mind, I think I’ve come up with a new approach. If you’ve read all of this and still ask me where your TSP should be invested in, I’m going to default to a 60/40 split, across all funds.

There.

Look how many emails I’ve saved us!