Need advice on funds - "newbie"

[bcb1]

I've been contributing to the TSP since I became a fed in 2000. I'm up to contributing 8% now; moving up to 10% next open season. I have 22 years to retirement. I'm trying to accumulate as much as possible; so I'd say I'm moderately aggressive when it comes to risk/return.

For the first year or so; I just let the money go into the G fund. Since then, I've been 50% C and 50% S funds. I've got a couple questions that I hope some of you seasoned TSP veterans can help me with:

1. I've quite a bit of money still sitting in G. Probably not smart to leave it all there - but would it make sense to dump it all in C or S (or even F)? Would it be better to spread it out between the 3?

2. What makes sense over the long haul (22 years): 100% in C fund and forget about it? 25% each in C, S, I, and F? Stay where I'm at now (50% C and 50% S)?

I would like a relatively "hands off" approach (I don't want to be moving my balance around and changing my allocations once a week). What is a good balance between "day trading" and "leave it all in the C fund forever"?

[cowboy]

Hi bcb! It is totally up to you how agressive you want to get and I probably am more agressive then most. I think a very good long term investment would be for you would be to set up more in stocks. Here is what I would do:

F - 20% C - 20% S - 40% I - 20%

The F fund is your hedge when markets go down and usually goes the opposite direction when stocks go down, F goes up.

I will say this though, if I was playing long term I would watch the charts and control my allocations in accordance to the trend. For example, trend is down invest all into stocks when trend is going up do not invest until starts back down and put it into F. I would hardly ever play the G fund. This would only require as a rule a few trades a year and your account would grow faster. When trend starts back up reallocate to the above.

This is just my take on this and you need to adjust in accordance to your risk factor and time until retirement. I think your result would be a :D.

Over the long haul, its been best to stay in equities (C, S, I)

Since 1984, the C & S fundshave been almost comparable. (+274% S, +284% C)

Since 1970, the I fund (if it existed then) has slightly outperformed the C. (+361% I, +322%C)

Since 1980, while the C fund has been up about 350%, the F fund is up about 240%, and the G fund up a little over 200%.

So, if you really don't want to look at your tsp funds, just invest in the C, S, or I funds. If you want to tweak them a little more,for a slightly higher return, then don't invest in equities in those monthsthat have traditionally produced less return than theG fund.

The G fund has averaged about 8% return/yr or .67 return/month during the past 24 years. During the past 54 years, the following months have returned less than the G fund -September (worst), February, August. If you had invested in equities only in the months of September and February over this time (54 years), you actually would havelost money. July has also begun toaverage negative returns over the past 10 years (-1% avg).

So, moving to the G fund during these months has generally been a good idea.

It IS interesting that many people talk about summer rallies, however July and August have generally been lackluster months at best for stocks...

[bcb1]

Thanks Cowboy and Saraho. I appreciate your advice. Couple more ??.....

Cowboy - I'm a bit concerned about I fund. Do you think long-term that it's as safe as S and C funds? Is it the riskiest fund? If so, I might be more comfortable with 33% each in F, C, and S.

Saraho and/or Cowboy:If you had a fairly large balance in G right now: Would you move it all into one fund; or spread it out? My thought is to go perhaps 35% F and 65% C - but that might be a little too conservative.....

bcb1 wrote:
I'm a bit concerned about I fund. Do you think long-term that it's as safe as S and C funds? Is it the riskiest fund? If so, I might be more comfortable with 33% each in F, C, and S.

Saraho and/or Cowboy:If you had a fairly large balance in G right now: Would you move it all into one fund; or spread it out? My thought is to go perhaps 35% F and 65% C - but that might be a little too conservative.....

Given the constraints that you previously described (not wanting to trade much..and having 22 years to go), I feel that the advice that I gave you previously is applicable to your situation.

The I fund is an international C fund. As you can see from my previous posting, it has outperformed the other funds over 35 years. It has been quite safe in the long run, averaging 10.3% annually.

[rokid]

bcb1,

In my opinion, the purpose of bonds during the accumulation phase of investing is to dampen portfolio volatility enough to allow you to stick to your allocation during equity bear marketsand not sell in a panic, i.e. buy high and sell low. Since you're already considering a 33% allocation to the F Fund,you might want to consider a relatively high allocation to bonds, e.g. 30-40%. One way to achieve this would be to split the difference between the G Fund and the F Fund, i.e. 20% G and 20% F.

Since 1926, small cap stocks, i.e. S Fund, have provided a higher average return than large caps. However, in the 1990s, domestic large caps, i.e. C Fund, provided the best returns. In the late 1980s, foreign large caps, i.e. the I Fund, provided the best returns.

Conclusion? It's impossible to predict which TSP equity fund will provide the highest returns over the next 22 years. Consequently, you should invest in all three. A typical approach might be to allocate the C and S funds based on their relative U.S. market capitalizations of 80% C Fund and 20% S Fund. This allocation would approach the total market, e.g. Wilshire 5000.

Globally, the relative market capitalization of domestic and international equities would indicate a 50/50 split between domestic and foreign equities. However, most experts recommend a maximum allocation of 20-25% foreign equities.

Based on the preceding arguments, you might consider:

20% G Fund, 20% F Fund, 36% C Fund, 9% S Fund, and 15% I Fund. Based on historical returns since 1988, a MVO analysis indicates that allocation would provide a 10% average return with a 10.5% standard deviation. In other words, 66% of the time your average annual returns would be in the range of 20.5% to -.5%. If you want more return, you can take on more risk, i.e. more volatility, by reducing your allocation to bonds.

For example, a MVO analysis of ariskier 25% F Fund, 45% C Fund, 11% S Fund, and 19% I Fund allocationindicates an 11% average annual return with a 13.2% standard deviation. In other words, 66% of the time your annual return would fall within the range of 24.2% to -2.2%.

If you'd like more expert (as opposed to my amateur advice) information on asset allocation strategies, John Bogle, William Bernstein, Roger Gibson, Burton Malkiel, and Jeremy Siegel have written excellent books on investing and asset allocation. I highly recommend all of them. Good luck!

[Rolo]

Welcome, bcb1.

I'd go with saraho...sara ho...sarah o...in sticking with a C/S/I allocation. G is not an investment, it is cash, and it is a losing proposition. Unless you really like Ramen noodles.


The F fund is your hedge when markets go down and usually goes the opposite direction when stocks go down, F goes up.
Normally this is true, however, this hasn't been the case in the past four years. F is crap right now and should be for a long while--too much risk for little reward. Junk bonds are the only thing I have hedged/hid inbond-wise.

So that leaves C/S/I.

I am not a big fan of C at this time. Or at any other time. I am really trying to find a reason to like the C fund and am not finding one.

So you have S and I left. The only thing to decide is how much of each. Sure, 50/50 will work: half of your stuff is in the US market and the other half is spread all around the globe. Also, these two have the highest returns historically. In 22 years, they should still have the highest returns.

You cannot make money without taking risks. Give me volatility, or give me death! :D

To mitigate those risks, just pay attention to what is going on in the market overall. You don't need to know all of the technical crap to see that the market is going in the crapper and you don't need to reallocate every month. You only need to forego emotion and look at the trends and adjust accordingly, perhaps once/year, if that.

Think of it this way: your portfolio is a machine. How is it running? Is it a finely tuned machine running the market, or is is falling apart? Just like your car, it requires inspection and regular maintenance, and if it doesn't perform quite like it should, then look into it. If your car sputters, I certainly hope you do not ignore it, but give it the warranted attention. And if you see a Tangerine PT with those dice under my nickat a stoplight, then you better have your car in tip-top shape! :X :D

[rokid]

bcb1,

Rolo is advising acceptance of increased risk to achieve a higher returns. That’s perfectly reasonable advice. However, how much risk you're willing to undertake should be based on your personal circumstances and constitution, i.e. if you can take losses without panicking, acceptance of increased risk should provide increased returns.

An MVO analysis of Rolo'srecommended allocation indicates a 12.7% annual return with an 18.2% standard deviation. Therefore, statistically, 68% of the time, you can expect an annual return in the range of 30.9% to -5.5%. 95% of the time you can expect an annual return in the range of 49.1% to-23.7% (two standard deviations). Of course, a 24% loss in a $10K account with 22 years left to go may be no big deal. However, a 24% in a $400K account two years before retirement would be a disaster. Personally, I've set up my portfolio to suffer no more than a 7%loss with a 95% confidence level.In addition, personally, I haven't invested in the G Fund because I'm willing to accept a little more volatility to get a slightly greater long-term return.

Interestingly, an MVO analysis indicates that, historically, a TSP Fund 12.7% return can be achieved with only a 17.8% standard deviation by allocating 27% to the C Fund, 14% to the S Fund, and 59% to the I Fund. Personally, I’d want todiversify acrossthree rather than two funds.

Unfortunately, returnswill be different over the next 22 years. Therefore, an MVO analysis or anyone's asset allocation recommendation will not come true. In fact, some expertsare suggesting, in opposition to conventional wisdom, that future bond performance might equal or exceed stock performance - another good reason for some allocation to bonds. That hasn't happened historically, or even recently, however, it's being projected by some. Therefore, aprudentstrategy is to diversify across the available TSP funds, i.e. don't put all of your eggs in one, or even two, baskets. No matter what the markets do, you'll have a piece of the action. :^

[bcb1]

Rokid and Rolo: Thanks for the excellent advise and insight. Believe it or not; I was an economics major in college that somehow got involved in computer geek stuff after a few years in the workforce. Now I'm 100% computer geek :) All those money & banking, macro, and micro economics classes seem light-years distant now.

Here's what I did so far:

Current contributions are allocated 45% S, 50% C, and 5% F funds. The more I think about it; I might take your advice and go a little higher on F.

Money in my account is now distributed 20% F fund, 50% C, 20% S, and 10% I.

I feel pretty good about things for now - and I'm wondering how often to re-evaluate? I don't want to move stuff at every little pulse of the market. But maybe twice a year is not quite enough.....?

[rokid]

bcb1,

I rebalance once a year. In addition, I use my bi-weekly contributions to dollar cost average. Otherwise, I'm buy-and-hold. So far, I've been very happy with the results.

Your account allocations look fine.However, if you want to maintain those allocations and keep your level of risk constant, you should contribute the same percentages, i.e. 20% F, 50% C, 20% S, and 10% I. Over the year, the best performing assets' allocation percentageswill increase. At the end of the year you can rebalance your assetsback to their original allocations. This yearly approach will allow you to enjoy the returns from stronglyperforming assets. At rebalancing time, you'll lock in the gains and simultaneously buy the poorly performing assets at relatively low prices. Then, hopefully, in subsequent periods, those cheap assetswill run up in price,i.e. reversion to the mean. Boring, but effective!

Finally, FYI, the MVO on your asset allocation is 11.3% expected annual return with a 14.3% standard deviation. Very close to historic S&P 500 average annual returns at substantially lower risk. Of course, your actual future returns could be higher or lower!

Good luck! :^

saraho wrote:
Over the long haul, its been best to stay in equities (C, S, I)

Since 1984, the C & S fundshave been almost comparable. (+274% S, +284% C)

Since 1970, the I fund (if it existed then) has slightly outperformed the C. (+361% I, +322%C)

Since 1980, while the C fund has been up about 350%, the F fund is up about 240%, and the G fund up a little over 200%.

So, if you really don't want to look at your tsp funds, just invest in the C, S, or I funds. If you want to tweak them a little more,for a slightly higher return, then don't invest in equities in those monthsthat have traditionally produced less return than theG fund.

The G fund has averaged about 8% return/yr or .67 return/month during the past 24 years. During the past 54 years, the following months have returned less than the G fund -September (worst), February, August. If you had invested in equities only in the months of September and February over this time (54 years), you actually would havelost money. July has also begun toaverage negative returns over the past 10 years (-1% avg).

So, moving to the G fund during these months has generally been a good idea.

It IS interesting that many people talk about summer rallies, however July and August have generally been lackluster months at best for stocks...

Why do people constantly qoute prices from 50 years ago? Wasn't gas like 2 cents then? If you think you'll ever see the G fund 8% return, I have some ocean front property in AZ. for sale. :)

I'd stick with the past 12 years personally.

tsptorture wrote:
Why do people constantly qoute prices from 50 years ago? Wasn't gas like 2 cents then? If you think you'll ever see the G fund 8% return, I have some ocean front property in AZ. for sale. :)

I'd stick with the past 12 years personally.

Why do people constantly think that what has happened during the past decade is all that will happen in the future and that any other scenario is ancient history?

An 8% G fund return was the AVG during that period. IMHO, we'll be at 8% or higher sooner than you think.

[Rolo]

If we ever play Spades at teknobucks' place, I want saraho as my partner. :)

[cowboy]

Rolo wrote:
If we ever play Spades at teknobucks' place, I want saraho as my partner. :)


LOL ! I bet she wouldn't miss a trick either. Anyone that does not think the G fund can not hit 8% is foolish. In the late 70's, early 80's my father was making 12 - 14 % interest on CD's why others were playing the stock market. He even had one that was compounding daily, it was sweet! I like her history lessons as I'm not into researching. I like (KISS), Keep IT Simple Stupid! It works for me. Keep up the good work Saraho!