THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
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.)
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.
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:
The Next Update
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