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Longer term outlook TSP returns
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Longer Term Market Outlook
Updated July 2006
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Mid
Term Outlook (6 months - 1 year)
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We
began our 2006 longer term outlook in defensive mode anticipating a
correction that seemed to be a long time in coming. It took four months
but by early May the correction began. Initially we were expecting a
10% to 15% decline but as the sell off took shape our longer term
indicators quickly turned bullish telling us it was time to get fully
invested. On June 15th we made the switch from 75% invested
in the stock funds, to 100% in our longer term account.
The TSP Talk longer term outlook return for the first half of 2006 was
+6.29%, compared to the TSP funds:
G Fund = +2.42%
F Fund = -0.66%
C Fund = +2.66%
S Fund = +5.78%
I Fund = +10.23%
Diversified (20% in each fund) = +4.09%
Now that we have a bullish signal from our long term indicators, we
expect to be fully invested for several months - possibly through the
end of the year. The three areas I look at to determine if we
should be aggressive or defensive are; Psychology, stock
valuations and monetary conditions. Stock valuations remain strong
when you compare the S&P 500 earnings yield to the yield of the
10 year
Treasury Note. That has been strong for some time now and is what
I believe what has kept stocks from being hit too hard the past few
years. Remember, the S&P 500 has still not had a 10% correction in
over three years. We normally see an average of about one 10%
correction per year.
Monetary conditions remain below average but psychology is the one that
has moved us from defensive to aggressive. We have been waiting
for a decent sell off to see this happen. The sentiment surveys
and other psychology indicators are now in a position where the herd is
excessively bearish.
That is good for stocks.
While we believe that we have seen, or are very close to seeing, the lows for
the year, we can expect the summer months to test our resolve. The
market appears to be trying to bottom but we could always see a test of the
recent lows sometime this summer, and that will
surely demoralize the weaker bulls. Investor sentiment is still quite
low and that is actually good thing for stocks. The big rallies will
start when these bears start to turn bullish and start to buy. There is
still a lot of money on the sidelines which is what will fuel the next
move higher.
The Fed is still in inflation control mode and unfortunately for stocks,
that means we have not yet seen an end to the interest rate hikes.
As soon as the Fed indicates rates are high enough we should see a very
positive move in stocks. The next Fed meeting is in August so we
won't have any concrete answers at least until then. That means
that the summer could still see some bumps and bruises but we as we
stated earlier, we believe the worst is behind us.
Conclusion: If you are not active in your TSP account we believe
now is the time to be fully invested. If you are not fully
invested you may want to use any summer / fall weakness in stocks to
move to a more aggressive allocation.
See you in January.
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| Long
Term Outlook (3 plus years) |
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Not much to say here except that I am bullish for the long term. Of course there will be swings over the course
of three plus years but if you are not the type to watch the market on a
regular basis and you do have three or more years before you need your TSP
funds, stocks are the place to be. You can use the table below
as a guideline, just consider your risk tolerance and also when you
will need your money when choosing an allocation.
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| Allocation |
If
I were a long term investor not looking to make many allocation changes, I
would be fully invested. If I were not fully invested I would use
any weakness in the summer and fall to become fully invested. You can find your risk tolerance level and
choose an allocation you are comfortable with based on it. Now that
we have had a decent pullback we are now 100%
stocks in our aggressive, less active account. Here are some
possibilities:
| Risk Tolerance |
G Fund |
F Fund |
C Fund |
S Fund |
I Fund |
| Aggressive |
0% |
0% |
35% |
35% |
30% |
| Moderate |
10% |
10% |
35% |
25% |
20% |
| Conservative |
20% |
20% |
40% |
10% |
10% |
Remember,
this is a less
active, hypothetical account and it has done well over the years.
But it is not what we do with our own personal TSP accounts. We
tend to be more active.
These would be basic
guidelines for the longer term, buy and hold type of investors who make few transfers during the year.
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