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Thread: G Fund Going Up?

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    Will Your G Fund Investment Returns Start Heading Up?
    By Ralph Smith
    12/8/2004
    Click here for more articles by Ralph Smith










    You can sign up to receive notification of our latest news articles in your email each business day. Just fill out the email newsletter sign up form on the left-hand side of this page or click here to go to our newsletter sign up page.[/align]The G fund is the retirement vehicle of choice for billions of dollars invested through the Thrift Savings Plan.

    The reasons for attracting so many of investors dollars are simple. Your retirement money is as safe in this fund as it is anywhere else--actually it's safer than anywhere else. The fund never goes down and G fund investors can count on slow, steady returns.

    Of course, the fund doesn't go up much either. G fund returns for the past several years have been between 4% and 5% per year. So, for that reason, the fund isn't a great way to build up a lot of money since, by comparison, stock funds can easily go up 10% or more in a year. Of course, the C fund went down 22% in 2002 so the volatility of stock funds is much greater in the short term. Here are the historical and current return rates for all of the TSP funds.

    The G fund invests in short-term government securities that are issued for the Thrift Savings Plan. Employees working for private companies (the ones that some readers envision as having better retirement plans, better salaries, and tons of money) don't have access to the safe and sound securities issued specifically for the G fund.

    For these reasons, many investors put larger amounts of their retirement money into the G fund as they get closer to retirement. They obviously want to avoid one of those years with a 22% drop in their retirement funds just before they were planning on boarding the cruise ship and sailing off into the sunset with an annuity from Uncle Sam.

    Recent years have seen very low inflation rates. The G fund returned more than 8% per year back in the late '80's. Retirees living on a stable income undoubtedly liked the few thousand extra dollars coming in each year from their secure investment in the fund. So, as the fund returns went down due to low inflation, the income of retirees dropped as well.

    Could those returns go back up to 8% or more again? It's possible although the reason for the possible increase isn't all good news.

    Higher returns in the G fund also mean higher inflation. And, in a development that will surprise many people, the stability of US Treasury Securities are being questioned by some knowledgeable financial analysts.

    In a recent Wall Street Journal article, some experts are questioning the current bond rating given to the US Government.

    Bond yields are still low. This low return reflects the confidence of investors in the safety and security of the credit rating of the federal government.

    Last week, one ratings firm sent a note to clients contending that U.S. bonds should be given a rating of AA instead of the AAA rating they currently have. A rating of AA is two levels below the current rating and would put the credit rating of the United States below countries such as England and France.

    The debt rating of a country determines how much interest it pays on its bonds or other debt it may incur. The lower the rating the higher the interest rate.

    Investors see several problems that lead them to reconsider the debt rating for the federal government. The value of the dollar is falling against major currencies; the baby boom generation is nearing retirement and will be collecting Social Security benefits and straining our medical system, America's debt is skyrocketing and, so far at least, the politicians are not moving to solve some of these problems.

    According to the Journal, most countries with a AAA bond rating have a 20% ratio of debt to the gross domestic product of the country. America has a 60% ratio.

    On the other hand, the American economy is very large and it's growing, in part because of low taxes that stimulate business activity. And the federal government borrows and pays back debt in dollars. A cheaper dollar means it is easier to pay back debt.

    But much of our debt is financed by foreign investors. Some of those investors are nervous and a falling dollar is hurting their investment returns. This could slow demand for U.S. Treasury securities and make it necessary for the government to raise interest rates in order to attract the money necessary to pay its bills.

    The bottom line: There are storm clouds approaching for the American economy that may actually lead to higher returns for TSP investors with money in the G fund.


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    I remember those days when the G fund would give 7 to 8% annually. That was when the stocks were going up 20-30%a year. I thought, who'd waste their time in the G fund getting "only" 8%. This year I'll be satisfied with 8%.
    Tom
    Market Commentary | My Blog | TSP Talk Plus | |

    I am not a Registered Investment Advisor and this is not investment advice. Please do your own due diligence.

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    Great article, Mike!:^
    "Treat your wife with honor, respect, and understanding as you live together so that you can pray effectively as husband and wife." 1 Peter 3:7

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    Just remember, 1988 was the last time the govt. raised interest rates in December............now I'm really confused!!!!!!!! Will they or won't they???????? Hmmmmmmmmm

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    mlk_man wrote:
    Just remember, 1988 was the last time the govt. raised interest rates in December............now I'm really confused!!!!!!!! Will they or won't they???????? Hmmmmmmmmm
    What if they surprise us and CUT it???

    Hummm, what to do... as you knowit's usually good to be invested on the rate hike days.

    Maybe not this time around, though....






    "Treat your wife with honor, respect, and understanding as you live together so that you can pray effectively as husband and wife." 1 Peter 3:7

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    With the weaker than expected hiring last month, I don't know if another rate hike this month is guaranteed...

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    So what do you guys think will happen if rates DON'T go up? Will the market rejoice and rise or tank, as it has in the past, on fears that the Fed knows something bad about the economy that the rest of us don't know.



    Any guesses?
    Trading, in its simplest form, is the process of capturing the disconnect between perception and reality.

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    Actually, if the rate doesn't go up that'sa sign of eithera sluggish or "stable"economy. Of course, we all know we are far from being stable.

    So, who knows what the reaction will be.


    "Treat your wife with honor, respect, and understanding as you live together so that you can pray effectively as husband and wife." 1 Peter 3:7

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    Great post M_M. Good job of your pull back too.
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."


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    Rates are going up and they are going up easily everytime the Fed meets unless employment turns down. They have to to control inflation. In fact, there is argument that the Fed is already behind premised uponNov inflationary data. They will be measured increases unless the core inflatioary rate jumps.It's not even a q. of if or how much right now. Market will jump after for about 7 weeks as long as nothing earth shattering happens!!!

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    smedlap wrote:
    Rates are going up and they are going up easily everytime the Fed meets unless employment turns down. They have to to control inflation. In fact, there is argument that the Fed is already behind premised uponNov inflationary data. They will be measured increases unless the core inflatioary rate jumps.It's not even a q. of if or how much right now. Market will jump after for about 7 weeks as long as nothing earth shattering happens!!!
    Thanks smed, where's your buddy MT?

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  23. #12

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    smedlap wrote:
    Rates are going up and they are going up easily everytime the Fed meets unless employment turns down. They have to to control inflation. In fact, there is argument that the Fed is already behind premised uponNov inflationary data. They will be measured increases unless the core inflatioary rate jumps.It's not even a q. of if or how much right now. Market will jump after for about 7 weeks as long as nothing earth shattering happens!!!
    I'm not so sure about this smedlap. Rates will probably go up to some extent, but the fed has to be careful.I think they can go up another .5 point without any real impact.Theywant to be careful not to slow down the economy just yet. Inflation seems to be in check still. How far can they raise the prime lending rate? We'll have to play it month to month and see how the data plays out.

    Hey gang. I found a public library.Checked in last night without logging on and saw my name at the bottom as logged in. Seems my wife is getting interested in this investing stuff too :P.

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