Could G fund serve purpose of F fund?

[tsp34diy]

I am considering rebalancing my TSP, and in doing some research read that the G fund is one of the best bond funds available and can be used as the bond portion of a portfolio. I read that with the G fund you receive the low risk of an ultra short-term bond fund, but with the return of an intermediate term treasury bond fund. Before I dump the F fund, has anyone considered this possibility and agree with it? Just wondering. Tom

[nnuut]

Welcome to the Message Board tsp34diy, the "G" fund is a Government Securities Investment Fund. You make the rate of government Securities, you can never lose! It makes about a penny, either .08% or .09% every 4 to 6 days depending on the rate. Here is a link with all you need to know. You can lose money in the "F" fund and make more money than the "G", but with the "G" you are safe.
Norman:D
http://www.tsp.gov/rates/fundsheet-gfund.pdf
Click on Fund Sheets on the right and select the "G" Fund.

[rokid]

I am considering re-balancing my TSP, and in doing some research read that the G fund is one of the best bond funds available and can be used as the bond portion of a portfolio. I read that with the G fund you receive the low risk of an ultra short-term bond fund, but with the return of an intermediate term treasury bond fund. Before I dump the F fund, has anyone considered this possibility and agree with it? Just wondering. Tom

Many people consider the G Fund a "free lunch", i.e. no downside risk, always a positive return.

However, if you have a reasonably long investment horizon, e.g. > 5 years, the F Fund has returned approximately 1% more per year than the G Fund since their inception. In addition, the F Fund was a great diversifier for equities in 2000-2002.

In my opinion, the G fund is really a cash/money market fund. As such, I allocate a portion of my fixed income portfolio to it - 40%. However, since the F Fund also has low volatility and a higher expected return, I allocate approximately 60% of my fixed income assets to the F Fund.

I used to be 100% F. However, I like the idea of having at least one fund in positive territory when both bonds and equities are negative. This approach hurts my long term returns (~ .4% per year), but makes me feel better on a day to day basis.

Financialengines.com, Nobel Laureate William Sharpe's website, recommends 100% G - no F. Incidentally, financialengines is free to government employees trying to set up a TSP asset allocation. In addition, financial author Rick Ferri recommends 100% G. He feels it's better to increase equity risk rather than fixed income risk to achieve higher returns. I don't agree with his argument, but....

Ask your question on the Bogleheads website, http://www.diehards.org/forum/index.php, and you'll get lots of responses. However, 100% G, 100% F, or a mixture are all very defensible. 100% G probably won't hurt your long term returns too much.

Finally, I'm assuming that you're a buy and hold investor. If you're a market timer, ignore everything I've just advised. :laugh:

Good luck.-----Jim

[nelsonal]

The free lunch comes from getting long term rates without having exposure to duration risk. Normally, long term rates are associated with long term loans (I know, I know, but stick with me here). This means that if rates rise, your long term loan remains locked you in to a less valuable position. This is measured by duration (which is a measurement of how long a loan takes to get the money you paid at the beginning, back). Because this risk is significant (just ask anyone who owned a bond or bank in the 70s) long term rates are typically higher than short term rates. The G fund pays TSP holders that long term rate (including the duration risk premium, but doesn't subject holders to any duration risk. That's a free lunch.

However, duration can be good when rates are declining (which is why the F fund has risen faster than the G fund over the last few months (Sept 07-Jan 08). Someone could back test, but I'd bet just a simple fed following strategy (buying the G fund on the first fed Rate increase and F fund on the first rate cut) would be a pretty effective fixed income strategy).