Mike Causey is on vacation. While he’s away, he’s invited guest columnists to fill in.
Money invested in your Thrift Savings Plan account could provide one-third to one-half of all the spending money you have in retirement. For that to happen you must:
Open an account, and put in at least enough to get the 5 percent government match.
Don’t panic in a bear market. Don’t get smug in a bull market.
Don’t let something, like the Great Recession, drive and keep you out of the market.
The latter depends on what “wisely” is. Hindsight is the best judge. Many experts say TSP investors should buy and hold. Definitely not try to time the market because when you try to buy low and sell high you often sell low and, when and if you return to the market, wind up buying high. Many think the self-adjusting L (lifecycle) funds make sense and take the pain out of market volatility. Some have a “system.” Today’s guest column by Seymour Money has a system whereby feds who want more control can take it. Seymour Money, by the way, is a pen name.
Recent statistics show a lot offFeds sticking everything in the G fund in the TSP. This is either inertia on the part of feds, a reluctance to take risks or confusion on what to do. There are some paid services that that will give you their idea of want to do next. And some feds (a very few) have the skills and the time to do better than 99 percent of the rest of us.
But you do not need to pay someone to manage risks and invest well. There is a “simple method” a number of feds are using to figure out what to do with their TSP accounts. It involves monthly rebalancing and allocating their funds tactically. It is based on work done by Mebane T. Faber, “A Quantitative Approach to Tactical Asset Allocation”, which can be found here. Meb looked at a great deal more than is available in the TSP (all the major asset classes), so it needs to be modified to fit. Testing has shown that we can use just the G, C, S and I funds. The F fund doesn’t help the method. The G fund will act as cash. The best part of this is it is relatively simple and free. If you are looking for a simpler system, try one of the L funds, or get a paid service. With any “system”, a paid service or this system described here, the biggest danger will be your brain. Specifically, the fight or flight part and/or the loss aversion part, and you will want to get out, not get back in, etc. even though the system says otherwise. I’ve done that more than once, figuring my brain was smarter than the system I was using. Don’t ask how well I did, please.
For each of our three stock funds, you are either “in” or “out”. This is the “tactical” part of an allocation approach. There are simple signals. When the price at the end of the month is greater than the 10 month moving average then you are “in”. If the price is less than the moving average you are “out”, and you put that percentage into the G fund (cash). You reallocate/rebalance on the first day of the month, each month. The moving average is the average of the price on the last day of the month and the previous nine months (10 numbers). It’s very easy to set up a spreadsheet to calculate the moving averages, so this is not an onerous thing to do. In his paper, Meb tests this system for over a hundred years, and gets much, much better results than a buy and hold system.
The first thing we need to do is divide the pot among the three stock funds. That’s the allocation part. You could assign 33 percent to each (with the extra 1 percent in any of the funds), or 35 percent, 35 percent, 30 percent or 40 percent, 30 percent, 30 percent, etc. Different splits come up with somewhat different returns, but the risks shift also. For simplicity the chart shown here uses 33 percent, 34 percent, 33 percent for the C, S, and I funds. When you are “out” of a fund, that percentage goes into the G fund. So far I have not found any method to change assigned percentages, while you are in the market, which improves returns.
The TSP started using shares and daily valuations in the summer of 2003. The back test starts with $100,000 in May 2004, the first month that a 10 month moving average could be calculated. It also shows the L2020 fund which started on Aug. 1, 2005. The L2020 funds starts off with a switch from the allocation system.
While initially buying the C or S fund and holding for 12 years gives the best return today, (that will not be the case in a few months!) the fund allocation system does well, and avoided some serious down turns, and much less stomach churning and better sleeping than buying and holding. In September 2015, there were signals to get out of the C, S and I fund. Since then, there was a brief three months when the C fund was back in, temporarily; 67 percent was in cash those months. Only recently has the system re-invested. You can see it missed the churn that the other funds didn’t. At the beginning of June, the system is signaling investments in the C, S and I fund.
Implementing this is really fairly simple. On the first day of the month (or the last day of the month after the day’s closing prices are published) , get the latest share prices and calculate the 10 month moving averages, determine “in” or “out”, and do a inter fund transfer before 12 noon, Eastern time, even if there is no change to “in” or “out”. Just this monthly rebalancing can add a tenth of a percent or more per year. Also, it is best to start this when the signals go from all cash to one or more funds “in”, otherwise you could be starting just before the funds start to go down. It only take a couple of hours per month (or less) of your time.
So take a look at the chart. The TSP is your retirement fund. Make wise choices.