The risk of the F Fund (“Lehman Aggregate Bond Index”) has been declining recently, and has now declined enough for us to shift some money into it. We are thus now split between the G Fund (“Money Market”) and the F Fund. The stock funds are still too risky, so we are staying away from them.
Monthly Archive for November, 2008
We pick the mix of Thrift Savings Plan funds that maximizes the expected returns while not exceeding a fixed maximum risk. We are continuing to stay 100% in the G Fund (“Money Market”). The characteristics of the F Fund (“Lehman Aggregate Bond”) have improved slightly, though not enough for us to move into it yet. The stock funds are still too risky, and their risk is not declining.
On May 1, 2008, the federal Thrift Savings Plan introduced a rule that limits the number of interfund transfers that participants can make. All returns presented on this website, including simulated historical returns, comply with this rule.
Ours is not a short-term “market timing” system. Neither is it a “buy and hold” system that ignores changes in the market. Instead, our system automatically adjusts the length of its trades to market conditions. In the years in which a particular TSP fund performed well without excessive risk, we stayed in that fund and did not make any interfund transfers at all. For instance, our Balanced allocation made no interfund transfers in 1996, 1997, 2002, 2006, and 2007. On the other hand, in the years in which market conditions were in a flux, we made 24 interfund transfers, the maximum number possible number under our system. This happened for the Balanced allocation in the year 2000.
Question: Just found your site and I am impressed. Your newsletter is recommending to be 100% in the G Fund (“Money Market”). Unfortunately, I am still invested in a mix of C, S, and I funds (the three stock funds). I want to shift to the G fund ASAP, but when my portfolio is seeing $5k to $10k swings daily for the past couple weeks, timing is crucial! What advice do you have?
Answer: I do not know how to time the market. You might wait for a small rally in stocks and then sell. Then again, that rally might never come. Or, by the time it does come, the amount of money you make on the rally might be less than what you would have made had you switched to the G Fund right away.
You are right though that stocks are very volatile. If you are worried about selling stocks at the worst possible time, then here is a strategy that I would suggest. Every day, transfer a fixed dollar amount from the stock funds into the G Fund. Do this over a relatively short period of time, such as 1 week or 2 weeks at the most. (TSP’s interfund transfer rule allows you to make unlimited transfers into the G Fund.) Also, since we are 100% in the G Fund right now, remember to set all future contributions to go to the G Fund.
We pick the mix of Thrift Savings Plan funds that maximizes the expected returns while not exceeding a fixed maximum risk. Right now, we are continuing to stay 100% in the G Fund (“Money Market”). The risk of the F Fund (“Lehman Aggregate Bond Index”) has been declining, though it has not yet declined sufficiently for us to move into it. The stock funds are still too risky, and their risk is not declining.
Myth: In the long-run, stocks outperform all other investments
Reality: It’s true that, in the long-term, the three TSP stock funds (C, S, and I) have outperformed the two non-stock funds (G and F). So, if you had to decide on your TSP allocations just once in your life, it could be argued that the best strategy is to split the money among the stock funds.
Fortunately, that’s not the situation that we are in. We can react to market changes by shifting money in and out of the stock funds. When stocks are performing well, we can have the bulk, or even all, of our money in stocks. When stocks are performing poorly, we can shift into the G or F fund.
I am not talking about attempting to predict what’s going to happen, but about simply reacting to what is actually happening. Typically, stocks don’t collapse overnight. And they didn’t collapse overnight during the current market crash. For example, our Balanced allocation held 100% in the I Fund for all of 2006 and 2007, when the I Fund was performing well. But then the fund’s characteristics began to worsen, so we began shifting out of it. By mid-June of 2008, our Balanced allocation was completely out of all the stock funds, and has stayed this way until now.
How did we do it? Did we predict the stock market crash? Absolutely not. We were simply reacting to what was happening.
Question: I am invested in a fund that has recently lost a lot of money. I follow your Thrift Savings Plan letter, which is out of the fund. I thus believe that it is best for me not to be in the fund either. I want to get out of it. But, since the fund has recently lost a lot of money, I want to wait a little until its price comes back up. Is this a good idea?
Answer:
No.
I do not know how to predict whether or when a fund’s price will come back up. Maybe someone else can, but I cannot. The algorithm used to give advice in our TSP newsletter simply reacts to actual price changes — it does not attempt to predict them. As long as it is clear to us that a fund is losing money, we stay out of it. Thus, here is a way in which you can answer your own question.
If you were not holding the fund right now, would you be willing to buy it right now? If the answer is no, then you should not own it. Sell it. If the answer is yes, then you should continue holding it.
Question: I am a new subscriber to your newsletter. Do I have to switch my allocations to match those of the newsletter right away?
Answer:
All investment advice, including that in our newsletter, is based on some investment methodology. Some examples of investment methodologies are:
- Select the mix of funds that maximizes expected returns while not exceeding a fixed maximum risk. (This is the methodology used by our newsletter.)
- Buy and hold the TSP Lifecycle fund with the appropriate time horizon. (This is the methodology recommended by TSP.)
- Attempt to time the market by attempting to buy at price lows and sell at price highs. (This is “market timing”, attempted by many people.)
Look at a few investment approaches. Try to understand their methodologies. Look at the returns that they have provided over many years. Consider both simulated and actual returns.
Then, pick an investment approach that makes the most sense to you and stick with it. You might change your mind about which investment approach makes the most sense to you later on, but while you think that a particular investment approach is a better fit for you than other approaches, stick with it.
Or, if you cannot decide between several approaches, you might want to split your money between them. In the language of statistics, this is called “model averaging”. For example, if you think that two different approaches are equally good, you might want to put 50% of your money into each approach.
If you are a newcomer to our newsletter, you might still be evaluating whether our approach is a good fit for you. That’s fine. Take all the time you need. But once you decide to follow our approach, follow it.
Our Balanced allocation had completely shifted out of all TSP stock funds in mid-June. Since then, the C, S, and I funds have fallen by 28%, 33%, and 38%. Our Balanced allocation also fell, but by less than 1 percent.
In the current issue, we are continuing to hold 100% in the G Fund for both of our allocations. Even though stocks have gone up a lot over the past few days, they are still too risky, and so we are still staying out of them. We do not try to time the market by picking lows or highs in prices.