Why F?

[flannelpants]

Is there ever any reason to invest in the F fund? From what I understand the F fund has higher risk than the G fund, but delivers the same low returns. Does anyone have any amplifying information?

[eukrate]

When interest rates are dropping, as they have been for some time, the bond prices will tend to increase, giving a better return than the G fund. Falling rates is not the only factor in the F return, but it adds a good bias. My own guess is that the Federal Reserve won't increase rates until the end of 2004 - because of the dead job market - so having some money in F is probably a good bet for the next 6 months..

On a related note, there's a similar effect on the I fund when the dollar drops against European currencies - it adds a
favorable bias (small increase) to the I return, but is not the dominant factor in that return. This is the situation now and should continue for perhaps 3 more months.

[AllexBancs]

flannelpants,

I will humbly disagree with eukrate. Interest rates are at 50 year lows and will increase sometime in the future. Will that be next month or next year? No one knows. Therefore why risk a loss of your principal? You can get the majority of any gain you will see in the F fund through the G fund. And there is no loss to principal in the G fund. I switched out of the F fund for these reasons and cannot see myself using it again for a long time. Good luck to you. Let's keep it real. AB:cool:

[eukrate]

Here's why - over the last 6 months the cumulative returns have been G: 2.17% F: 4.88% (twice as much). Also the dispersion from the mean : G:0.079 F: 1.19 shows the volatility is more in F but not terribly more.
By the way, what does "keep it real" mean?

[tsptalk]

So eukrate, if the lame jobs reports keep interest rates low, but they do not go further down, can bonds continue to rise or will they also remain flat?

Also, don't you worry that a revised jobs report (as I have been sayingI expect) could spook the bond market?

I admit I have limited knowledge of the bond market beyond rising and falling interest rates. I avoid the F fund more out of ignorance than anything else.

Thanks,
Tom

[eukrate]

Bond prices are driven by CHANGING interest rates, so if the rates are stable, that factor goes away. One still needs to consider fear of recession, decreasing productivity, and other things which bond traders look at in setting prices. These factors seem to rotate in their importance and currently interest rate expectations are very important, that's why the Fed's probable actions are a driver now. Of course a revised jobs report can spook prices but that effect should be temporary. Just keep your eyes on Alan Greenspan - the Feds' actions signal future bond prices now. Recently the Fed made no change in the FedFunds rate and hinted another 'no change' at the next meeting. These would indicate increasing prices, all else being equal..

[AllexBancs]

eukrate - I disagree with you on several points. I guess it really depends on why you would want to hold any allocation in the F fund.

1. Just because in the past the F fund has been a good diversifier away from the stock funds, it may not be in the future. Let's face it interest rates have nowhere to go but up from here. Even if they don't go up in the next 2-3 years I would rather get out now and take the G fund returns.

2. The maturity date of the average bond in the F fund is too long. If my memory serves me right it's something like 8 years. The middle and long term maturity bonds will get killed when interest rates are raised. And loss of principal will most likely occur.

3. Using the G fund instead is like getting short term bond returns with no risk. Repeat no risk towards principal.

4. I use the G and F fund to diversify my total portfolio. It is the anchor of the portfolio. When the 3 year bear market hit I was very glad I had a portion of my portfolio in the G and F funds. However, at 50 year low interest rates the freelunch is over. The sweet spot for bond yeilds is now lower than the average maturity of a bond in the F fund. So I see no reason to hold it anymore. Isthat market timing...yes it is. If my belief is that interest rates will increase sometime in the future than I have no need to hold a intermediate term bond. And that is what the F fund is.

5. I don't agree with your volatility scores for the F and G funds. Where did you get them?

6. Bond prices are driven by many different factors. The most important being changing interest rates and perceived changes in interest rates. Be very careful, we are at 50 year lows and it is only a matter of time before they increase.

JMHO. Let's keep it real. (Just my trademark saying) AB:cool:

[eukrate]

1. agreed. rates are more likely to go up than down. But it's the time frame that's important. I say there's a few good months left. Watch the Open Market Committee actions

2. agreed (it's 7 yrs) but we won't be in F then since rates will have started up

3. very low risk but also very low returns. I'm arguing that in this declining rate environment, take advantage of F then get out

4. see 1.
5. computed them from return data on tsp.gov Used 'average' and 'std' functions in excel

6. I think I said the same thing about multiple factors. No arguement that rates are very low. see 1.

still don't get "keep it real"

[AllexBancs]

eukrate - nice post. I submit we agree to disagree (just like I told my ex-wife).

AB:cool:

[Pete1]

I see no point in owning the F fund, especially for long term buy and holders looking to reduce the risk of the overall portfolio.The G fund is the best risk reducer I haveseen. It provides a short-termbond return with 0% risk to principal. Very difficult to argue against 100% of the fixed income allocation going to the G fund for the long term. Also, the short terminterest rate pattern is notpredictable- the F fund is taking a beating this month while the G fund keeps plodding forward - it is the ultimate diversifier for a long term portfolio tilted towards stocks. Here is a recommended long term allocation for all to consider:

G - 25%

C - 25%

S - 25%

I - 25%

Rebalance once per year to the original allocation and forget about it. :D

[tsptalk]

Welcome Pete1!

I guess we'll see you again in a year? ;) Just kidding. Buy and hold is a legitimate way to invest (with a reallocation as you said).

Thanks for joining us. We look forward to your input.

Tom

[eukrate]

You're missing an easy opportunity with your approach. Just switch your G money into F when interest rates are dropping.
See
http://finance.yahoo.com/q/bc?s=^TYX&t=my&l=on&z=m&q=l&c=

During 1995-2003, F returned more than G every year-except in 96 and 99 when rates were increasing - usually by several percent annually. Re-allocate once per year - it's not that much different from buy + hold, but it pays off.

[Pete1]

Tom, thanks for the welcome!!



Eukrate, not to be a nitpick but on March 24th, you indicated that we had a few good months left (the F fund was at $10.30,). Ironically,it has dropped by over 2 percent since March 24. Where is the F fund headed? Idon't know.Wemay have a better idea tomorrow. I just don't feel comfortable trying to guess where interest rates are going. Too easy to get burned, especially considering thatwhat I want from the fixed income piece of the allocation is reduced risk rather than marginal return. If I want to take on more risk in order to achieve a higher return, I will increase thestock allocation.

[eukrate]

Nitpick -

Sorry to burst your bubble but all forecasts are GUESSES and not guaranteed. The Fed Reserve took no action to increase rates - still hasn't - the yields were pushed up by traders made nervous by good earnings. You should make contributions to the board before knocking others'.



Tsptalk -

Your board is a good effort, particularly for such newbies. I'm outta here for a while. Thanks to you,allexbancs,wheels and the others with thoughtful posts. eukrate

[tsptalk]

Where are you going eukrate? :?

[Pete1]

Actually, there is no bubble to burst :D I do not put much faith in short-term guesses. Too easy to get burned. However, I do appreciate that others on this board feel that there are easy tospot patterns and opportunities in the market and that theyadjust there allocations to capitalize. What I am contending is that for long-term buy and holders, there is only marginal benefitin allocating anything to F. Take risk by increasing the stock allocation anduse the fixed income piece as a risk reducer. Sorry that you were offended by my comments.

[Pete1]

If anyone is interested, Larry Swedroe goes into detail about why bond funds should not be the vehicle of choice for fixed income investing in his book "What Wall Street Doesn't Want You To Know, How You Can Build Wealth Investing In Index Funds"p. 274-279. Once again, thisbook is geared to long-term buy and holders.

[Ecurb]

Tom

All bond yields were down pretty good, except 3 month and 6 month. F fund should have done well today.:)

Thanks to you and FrizzB, I was there...:^

Ecurb

[tsptalk]

Yeah thanks, that was good. Too bad the S fund couldn't keep up with the C fund today though. It would have been a better day... for my allocation.

[CJ]

Tthis is what I have noticed quite a few times. I have always felt fond of the F fund, but in 2004 it has burnt me a few times.

Sometimes, when the C,S & I funds are dropping, the F will go up.

G F C S I

1-Aug-03 10.05 9.63 10.19 10.56 10.42
4-Aug-03 10.06 9.66 10.22 10.51 10.39
5-Aug-03 10.06 9.63 10.04 10.37 10.43
6-Aug-03 10.06 9.70 10.06 10.31 10.33
7-Aug-03 10.06 9.73 10.13 10.32 10.37
8-Aug-03 10.069.74 10.17 10.34 10.40
11-Aug-0310.06 9.71 10.20 10.43 10.47


CJ

[tsptalk]

Hi CJ -
Here's a little Bonds 101.

You can track bonds with charts like you do stocks. They get overbought and oversold also. I don't know if I'd say there is a correlation between stocks going down and bonds going up. In theory (not always an exact science) when bond yields go down, bond prices (bond fund) go up, but also stocks tend to go up because the yield (or return) on the bonds becomes less attractive to an investor so they opt for stocks.

That's the theory. But when stocks were dropping and the economy was sinking in 2000-2002, Greenspan was dropping interest rates to stimulate the economy, thus bonds went up, even though stocks kept going down.

Now we have the opposite. The economy is heating up. Greenie must keep things from heating up too much (inflation?) so he will raiserates. Stocks will keep going up because the economy is good as arecorporate earnings, but bond prices (bond fund) should weaken as we haveseen the past few weeks.

The reason I am playing bonds now is because they have come down pretty hard, pretty quickly. I'm just looking for a short term bounce.

Hope that makes some sense.
Tom

[CJ]

Thanks Tom, the fog is clearer.

Another question, -> I thought I read somewhere"When the US dollar goes down the bond funds go up" (F-Fund)

Well, Yesterday the US dollar was down 1.1% against the Euro, 1.2% against the Swiss buck, and over 1.0% against another countries dollar. If the above is true, Why was the F fund down the past two days?

CJ

[tsptalk]

I don't know of that one, but it would make sense in general as the dollar goes down when our economy is slowing and that triggersthe Fed to lower interest rates which raises bond prices.

I doubt it correlates day to day however. The dollar could be down because the euro is up and thatshouldn'taffect bonds.

Tom

[Pete1]

The rising/falling dollaris more of an I fund issue. F fund is more related to rising/falling interest rates. Just keepan eye on rates and you should be okay. I still feel that the better risk/reward relationship for both the short and long term isto be found in the stock funds. Once youtake a significant loss in the bond fund,you might have to wait a very long time to get your money back. At least with stocks, if you get hammered,you can make it up quickly. How many .10 cent increases have we seen out of F fund?Few andfar between.

[Rolo]

eukrate wrote: 3. ... I'm arguing that in this declining rate environment, take advantage of F then get out

I think the declining rate environment is sufficiently over; certainly they are not dropping any further. G Fund is as fixed as fixed income can get.

Going on the safe assumption that the F Fund is at or near its nadir, would now be a good buy point for "fire-and-forget" long-term investors? I do not know enough to answer that.What annualised rate of return would one see X years from now in the F fund?

[Pete1]

I would be surprised if the F fund is at the nadir - we have not even had a rate increase yet. Many in the financial press are talking about a series of2-4 interest rate increases through 2005. The 30 year fixed mortgage rate is supposed to be around 7% by the beginning of 2006. We have a nice fixed income alternative in the G fund. Why take additional risk with your "safe" money?

[Pete1]

I do want to add that if you are a reallyastute timer, there may be a wonderful opportunity once the interest rate hikes level off. 1994 seems somewhat comparable to what we are seeing now in 2004. Bonds returned around 18% after the interest rate hikes leveled off 1994 and stocks also went wild when the rate hikes were completed.