April 2017 TSP Allocation and Business Cycle Analysis

04/25/2017

This will be a fairly short update as April is almost over and I need to get it out, so please excuse any typos and the lack of charts this month. I will talk about the terrible, no good, horrible March jobs report and why it wasn’t a big deal, and a bit on the politics and geopolitics effecting the market day to day.

I’m also going to talk just a bit about why I think the TSP Life Cycle Funds and other strategies which move increasing proportions of investors’ balances to bonds as they approach retirement are overly conservative for investors who have a defined annuity in addition to a Thrift Savings Plan or 401k.

The surge in the market over the past couple of days was largely a result of the French primary election on Sunday. The results of that election pretty much guaranteed that France will not move towards leaving the European Union, which the stock markets liked from a stability standpoint. So that caused money to go sloshing back into riskier assets, and out of “safe” things like treasury bills.

Bottom line up front: I will be sticking with an allocation of 100% TSP C Fund in both my existing balances and new contributions this month (and for the foreseeable future).

Thrift Savings Plan Fund Returns

Everybody likes seeing the numbers, so here you go. March was more or less flat, with the exception of the I Fund which continued its nice move:

  • TSP C Fund:  0.12%
  • TSP S Fund:  -0.08%
  • TSP I Fund:  2.85%
  • TSP F Fund:  -0.01%
  • TSP G Fund:  0.20%

And the TSP Funds year-to-date in 2017 (through 04/25):

  • TSP C Fund:  7.35%
  • TSP S Fund:  6.45%
  • TSP I Fund:  10.19%
  • TSP F Fund:  1.46%
  • TSP G Fund:  0.75%

Why Shifting to the G Fund as you get Closer to Retirement is Overly Conservative

This is a subject I get a lot of questions on, so I thought it was worth a little space this month. At some point I will come back to this topic and give some numbers for various scenarios, but this will just be a quick summary for now.

Most Americans no longer have a defined benefit plan (a pension). As a result, to replace the income they earned while working they rely on Social Security and disbursements from their defined contributions plan (typically a 401k). Because the disbursements from their 401k is such a key part of their retirement income stream, for many it makes sense to protect a sizeable portion of their investments to avoid having a badly timed crash substantially reduce their income for the length of their retirement.

What they are doing is trading returns for stability – they will certainly receive a lower rate of return over the long term, but by betting both that the stock market will go up (by investing in stocks) and that it will go down (by investing in bonds) at the same time, their gains and losses effectively cancel each other out. That’s great from a stability standpoint, but the result is their returns essentially consist only of dividend yield (from the stock funds) and interest earned (from the bond funds).

Federal Employees and military service members have a very different system. In addition to Social Security and TSP disbursements, we also receive an annuity based on number of years worked and our salary prior to retirement.

That annuity is just like a big, safe, not-going-anywhere bond fund. That is money we are definitely going to get, but it is not going to grow – at best it is going to keep up with inflation. Just like the G Fund.

If we double up by also allocating a large percentage of our Thrift Savings Plan balance to the TSP G Fund, we have “protected” the part of our savings which doesn’t really need protecting and which is supposed to be growing for us.

Geopolitics and the Thrift Savings Plan

North Korea, Syria, Russia, ISIS – you will see headlines from various sources attributing the daily ups and downs of the stock market to worries over missile launches or reactions to terrorist attacks overseas. That’s pretty much all nonsense, even on a short-term basis – the media just needs to fill space so they can sell advertising, so the daily explanation for why things moved ever so slightly in one direction or the other gets spewed out. Nothing in the overseas news at this point should have an impact on the long-term direction of the stock market.

Politics and the Thrift Savings Plan

Notwithstanding all the noise coming out of DC these days, the only thing which might have a significant impact on the stock market moving forward would be tax reform. That is an easy issue to talk about in campaign speeches, but may be even more difficult to enact than a replacement for the Affordable Care Act. If recent efforts on healthcare are any indication of how likely we are to see legislation in other areas, market moving corporate tax cuts and overseas profit repatriation might be a long time coming.

All the other news reports (shutdown, executive orders, health care redo, etc.) can only move the market in the very short term – a few days at the most (and probably not even that).

March’s Economic Numbers:

In this section I discuss the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me in deciding how to allocate my Thrift Savings Plan balance. (These indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle.)

Employment numbers:

Total non-farm payroll employment increased by just 98,000 in March, which was well below expectations and the worst number we have seen in a while. But at the same time, the unemployment rate dropped from 4.7 percent to 4.5 percent. And hourly wages increased 2.7 percent from March 2016. (I obtain this data from the Bureau of Labor Statistics.) So what do we do with these apparently contradictory numbers?

First, it is helpful to explain that the numbers come from two different sources. The jobs number is the result of a survey of businesses and government agencies, while the unemployment rate is generated by a survey of American households (literally asking individual people whether or not they had a job that month). The discrepancy between the two surveys can often be attributed to how the data deals with factors such as weather, part-time and off-book employment, and people entering and leaving the workforce.

So all that said, I take two things away from the employment numbers this month: (1) I’m reminded not to put too much confidence into monthly data, and remember that these hiccups smooth out over longer periods of time, and (2) for the last few months I have been repeating that: “We are in the full employment range, so at this point we also glance at some other numbers like wage growth and number of people entering/reentering the workforce to gauge whether things are still moving in the right direction.” This month’s strong wage growth number is exactly what I have been talking about there and tells me that the economy is continuing to strengthen.

Purchasing Managers’ Index (PMI):

As usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates growth in manufacturing and anything over 43.2 indicates an expansion of the overall economy. The February PMI reading of 57.2 is a very strong number:

Manufacturing expanded in March as the PMI registered 57.2 percent, a decrease of 0.5 percentage point from the February reading of 57.7 percent, indicating growth in manufacturing for the seventh consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI above 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the March PMI indicates growth for the 94th consecutive month in the overall economy and the seventh straight month of growth in the manufacturing sector. The past relationship between the PMI and the overall economy indicates that the average PMI for January through March (57 percent) corresponds to a 4.3 percent increase in real gross domestic product (GDP) on an annualized basis.

Yield spreads: The yield curve moved up and became slightly flatter in March. I get this information from the Cleveland Fed, who had this to say:

Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate the expected chance of the economy being in a recession next March at 7.43 percent, up a bit from February’s estimate of 5.63 percent and January’s estimate of 5.46 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.

Money supply growth rate: Money Supply M2 (which includes savings deposits, money market mutual funds and other time deposits which can be quickly converted into cash or checking deposits) increased from February to March. The growth rate is what is meaningful here, and if I wasn’t rushing and put in the chart you would be able to see the growth rate gapping up nicely:

Money Supply M2 in the United States increased to 13390.60 USD Billion in March from 13313.10 USD Billion in February of 2017.

Conclusion

All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am going to continue to allocate all of my balances and contributions to the TSP C Fund.

A New Section in Which I Try to Make you Feel Guilty

This website is always going to be free for you, and my goal has been to have it be break even for me (it’s easier for me to get permission to do this from my agency if I am just bringing in enough money to cover expenses). But lately expenses from the upgraded hosting (so the site doesn’t crash from the flood of traffic when I send out an update) and the service for the giant email list (which costs over $100/month) have been outpacing income from the ads on the site and the donations I’ve received. I discovered while I was doing my taxes that I actually lost a little money doing this last year.

The options are to put more ads on the site (maybe some of those fancy pop-up interstitials), to move the mail list to a cheap dodgy provider, or if 1/10th of the people reading this kicked in a dollar it would pay all the expenses of the website for a year. So if you think that sounds like fun, you can donate to support the site here.

(While we are on the subject, I owe a number of folks who have donated over the past few months an email thanking them for doing so, and I’m sorry to have been slow to do that. I am always humbled and amazed by your generosity when those donations come in, and it makes me feel really good about the little community we have created here.)

Recommended Reading for TSP Investors

I was too busy to read anything new this month. A number of my favorite past recommendations are compiled on this page if you are looking for something else to read:

http://www.tspallocation.com/tspresources/#reading

The Next Update

I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military a few times a week at: @TSPallocation

What’s in it for me?

I don’t ask anything except that you share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment (although if you want to, you can donate to support the site here). You can help by telling the person sitting next to you, linking to this site from your own webpage or blog, liking it on Facebook, sharing on Twitter and in other investing forums, or actively participating on our Message Board. So if you found this post useful, please share it with your friends and colleagues using the email and social sharing buttons below right now. Thanks!

 

24 thoughts on “April 2017 TSP Allocation and Business Cycle Analysis”

  1. I’m happy to donate; your “if 1/10th of viewers donated $1” bit resonated with me. You’ve certainly helped me earn more than $1 by understanding what I’m doing with my TSP.

    Out of curiosity though – wouldn’t the site be equally effective as a (free) blog on a Facebook fan page?

    1. The main reason I didn’t want to use a blogging platform or Facebook as I was starting up was because I enjoyed learning how to create a website and implement various features, learn about search engine optimization, etc. I also didn’t want to give up the control which would go with that – they can change the rules on you any time they want. And finally you are really limited in what you can do on those platforms – in my case I plan to implement a fairly complicated returns page with daily updates and customized charting.

  2. I don’t know why more people haven’t donated. Last time I checked, my retirement accounts have grown by thousands of dollars by following your advice.

    1. Don’t give me too much (or any) credit for your successes because I don’t post a lot of original thoughts on here. I’m mostly just a translator for much smarter people than me – I read what they have to say about the broader markets and apply their wisdom to the Thrift Savings Plan.

    1. Now that the French election is in the rear view I really need to take a hard look at the I Fund’s underlying economies again. Europe has definitely strengthened recently, but I don’t know how confident I am that is a long term trend. From a valuation standpoint, the I Fund does appear to have more upside potential, but Europe is still in such flux politically it makes me nervous.

  3. Excellent update as always. I work for the FAA and I make sure everyone I work with reads your updates and takes your advice into account while making their tsp allocations.

  4. Thank you for your time and advice. I was just curious to know your reasons for sticking with the C fund in May. Are you concerned about the recent historical May dip that the S&P 500 takes? What about the I Fund’s outperformance of the C Funds so far in 2017? Do you feel this will not continue? Again, thank you for your time and help. I currently have all of my TSP allocations in the C Fund, as you do, but have been wondering if it would be safer to move my money to a different fund or if the stock market will continue its bullish trend with Trump’s tax reform proposal and the recently completed French elections.

    1. Sticking with the TSP C Fund because I base my TSP investments on the phase of the business cycle, not anything else. Right now my assessment is that we are in the mid/growth/performing stage.

      Most seasonal dips don’t stand up to scrutiny when you look at a meaningful sample of the modern stock market. I don’t ever trade based on time of year. (That doesn’t mean I’m right – probably some smart people making a fortune out there trading trends which I can’t see.)

      I am going to take a hard look at the I Fund again soon, but there is still so much uncertainty surrounding Brexit and in continental Europe that I would really have to be convinced we were looking at a long term growth trend before I would move back that way. If I look at the major component countries and feel strongly that they are headed in the right direction I will really consider switching some of my allocation that way, but right now I still think they are much more likely to slip into recession than the US is.

      Thanks for the great questions.

      1. Thanks for taking the time to provide your rationale and insight. If I decide to pull the trigger on a fund change before you do I will leave a comment when I do and the reason(s) I chose to do so.

      2. Can you post what your PIP is for staying solely in the C Fund, I was contemplating on doing a one Fund only strategy, thank you

  5. Thank you Sir, as always I enjoy when you post. Simply by reading them I feel like terminology and ideas are starting to sink in. As someone who is new to the site (and government work) I was curious you thoughts on simply leaving TSP balance (and contributions) in C or S Fund for majority of career. Looking the 10 year annualized gains (around 7%-8%) this seems to be great growth. Is this bad thinking to have the “set-it and forget-it” strategy? I understand there would be market corrections every 8-10 years, but if retirement is 10+ away I don’t see the reason to worry much about it. Hope that all made sense and thanks for all you do for us rookies out there.

    1. I always tell people that if they wanted to truly “set it and forget it”, they should put everything in the TSP S Fund for the simple reason that over time that fund has resulted in the highest returns. I don’t do that because I believe I can squeeze a few percentage points out of the market by moving to the C Fund later in the business cycle, and I can avoid some double digit losses by missing some (although almost certainly not all) of the major recession-induced corrections.

  6. I was doing a little research on the S fund. I am mostly in the C fund with a very small amount in the I and S fund. In the article with the business cycle the recommendation is 100% C. If you are 20+ years from retirement does it make sense to hold and continue to buy a small percentage of the S and I funds, or because of the business cycle to just buy and hold C? I’m still fairly new to this and understanding the cycles.

    1. I don’t invest based on how far out I am from retirement, only on the business cycle. I don’t think either the I Fund or S Fund are bad places to be right now (both may well outperform the C Fund this year), but the probabilities based on historical data is that the C Fund is more likely to come out ahead in a small majority of years during this phase of the cycle.

    1. You can change your contribution allocation for new money anytime, as much as you like. You can make two interfund transfers per calendar month for existing money. After that you are only allowed to transfer money into the G fund. There isn’t ever a fee. The only cost is the difference in accrued interest if you make a poor decision. I added a link to the TSP’s YouTube video about Contribution Allocations and Interfund Transfers.

      https://youtu.be/zjhkFhOO9cU

  7. Do you have any sponsor links you like that can be clicked on and you are compensated? I am not a Facebook fan either.

    1. The site pays expenses from donations, Google ads and Amazon affiliate links (if someone buys one of the books I recommend the site typically gets a few cents). Google is very savvy and has algorithms which know the difference between someone who just clicks on an ad and someone who actually takes a look at what is being sold, so as both a webpage owner and the owner of a lot of Google stock, I definitely don’t encourage clicking just to try to support the site.

  8. Paul,

    I did some back of the envelope analysis (a linear regression) of the year-to-date rate of growth for the F, C, S, and I funds. I came up with:

    F .12% growth, C .55% growth, S .35 % growth, I .87 % growth.

    This confirms the allocation of 100% to the C fund; although an argument could be made to include a portion in the I fund.

  9. Hello TS Paul, thank you for your contributions to the federal workforce. I have a tsp loan of roughly $15k, and am in the position to be able to pay it off now. Should I wait for a market correction? Can I achieve similar results by changing my contribution allocation to the G fund and then paying it all back?

    Thanks,
    MCB

    1. I can’t give advice and don’t know enough about your individual situation even if I could. In general, the studies indicate that waiting for a market correction is almost never a good strategy. And yes, changing your allocation so those funds were in the G Fund would have the same effect.

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