April/May 2018 TSP Allocation Update

04/17/2018

Welcome back for the April/May update.

First up, I want to again thank the folks who donated to support the site since my last update. I have big plans to create a podcast in the near future so readers can listen to new posts on the go, as well as to expand the website later in 2018. Those plans may be a little unrealistic as my friends tell me that things are going to be a bit busy at home with the arrival of the baby. At any rate, the podcast will add a few extra expenses to the site and those donations will definitely help cover those.

Bottom line up front: I will be sticking with an allocation of 50% TSP C Fund and 50% TSP I Fund in both my existing balances and new contributions this month.

Thrift Savings Plan Fund Returns

For all the volatility (and there has been a lot of volatility), the TSP stock funds are all nearly flat for the year overall. Year-to-date returns (through 04/17/2018):

  • TSP C Fund:  1.77%
  • TSP S Fund:  2.77%
  • TSP I Fund:  1.0%
  • TSP F Fund:  -1.54%
  • TSP G Fund:  0.79%

The Mailbag

Since my  last update, I have received a slew of questions from folks who expect I might be very concerned about talk of trade wars and/or the volatility we have been seeing in the market. Of course those of you who have followed me during volatile times in the past know just how hopelessly boring I am and how little attention I pay to things like that.

Trade Wars

 

The subject of trade wars has almost fallen out of the media in the insane news cycle we are living through right now. I don’t think we are going to have a trade war, I think it is mostly posturing and electioneering. Trump started out rather unwisely taking on the entire world, including important partners and allies, but as it became apparent that we needed those countries to cooperate to pressure China those other threats have abated.

 

There are important issues which should be dealt with in a sober manner regarding Chinese trade policies and intellectual property theft. Unfortunately, we have waded in with no apparent strategy or even a coherent ask of the Chinese, which will make rallying allies and prevailing in the WTO very difficult. As a result, I expect lots of speeches, some very minor concessions which have no impact on the major points of contention, and a declaration of victory with “more to come.”

 

Neither side wins in a trade war. As a rule of thumb, the country which is ahead in the trade imbalance typically suffers more. In this instance, China has about a $370 billion edge over the US. But China has a political system and capital reserves which would allow them to suffer for a lot longer than we can. Xi Jinping doesn’t have midterms coming up in the fall and will likely be in power for another 20 years, he can afford to wait out Trump and the Chinese population would accept some economic pain rather than give in and lose their self image as an equal economic power. China has $3 trillion in foreign reserves and can afford to prop up their economy and sectors impacted by a trade conflict as they did during the 2008-09 economic crisis.

 

About 20% of China’s exports come to the US, totaling about $505 billion in 2017, while the US sends about $120 billion in products and services to China.

 

Actual tariffs have only been imposed on steel and aluminum at this point, but nearly 65% of all steel imports are exempted from the tariffs already, and probably a much higher percentage will be exempted by the time things shake out.

 

Other tariffs of $50 billion have been “proposed” by both side, but not yet instituted. In the US this phase is called notice and comment, and the sectors which would be hurt are lobbying aggressively to prevent them from ever being enacted.

 

If these tariffs were instituted, the first place it would be felt in the US would be in the prices paid for inexpensive consumer goods, particularly electronics. Walmart and its customers would be hit hard.

 

China’s proposed tariffs target a few key industries and sectors, including agriculture, aviation and automotive. China buys 1/3rd of the US soybean crop, but would buy almost none if 25% tariffs were imposed. To be sure, commodities like soybeans trade freely and US soybeans won’t rot in warehouses – foreign suppliers would increase prices and shift their sales to China and US suppliers would shift to smaller markets, but at a smaller profit. Boeing expects China to buy 6800 planes over the next 20 years for nearly $1 trillion – sales which Airbus (which is building a factory in China) would be happy to make. And US chipmakers would be especially hard hit – Intel, AMD, Applied Materials, Qualcom, Broadcom, Micron, and Texas Instruments all export more than 20% of their products to China.

 

China could also respond in non-trade matters, cutting support for pressure on North Korea at a critical time or reducing the purchase of US debt (or even selling debt and plunging that market into turmoil).

 

I think we will continue to see talk of trade wars in stump speeches and press releases, but in the end both sides have too much to lose. I believe the most likely outcome is China will make some minor concessions (buying more of a few things), the White House will declare victory, and there will be no impact on either economy. Even if it is worse than that, I think an outcome with a significant impact on the US economy is very unlikely and so it has no impact on my investing decisions at this point.

 

Market Volatility

 

The S&P 500 has moved least 1% on 30 trading days so far in 2018 — 17 up and 13 down. To put that into context, there were a grand total of eight movements of 1% or more for the S&P 500 in all of 2017.

 

But for all of that violent movement, it is less than 2% away from where it was at the beginning of the year.

 

Volatility isn’t good or bad – it’s just motion. Some runners have a very smooth, efficient motion. Some swing their arms wildly and bob up and down. If both runners finish the race in the same amount of time, does it matter? And if the stock market finishes the year up 10%, does it make any difference if it was a slow, smooth ascent or a jerky, up-and-down ride? Is there a difference between the results of the blue line and the orange line in this graph?

 

I won’t be touching my retirement money for at least ten years. What it does in any given day, week or month is completely meaningless – I only look at the market each day for entertainment. I “made” about $30,000 today. I “lost” about $100,000 in February. Neither of those numbers make any difference to me – I’m not happy about today and I didn’t lose a minute of sleep in February.

 

I care what my balance is going to be in ten or twenty years. And because I am convinced by all the evidence I have seen that being invested in the stock market during all non-recessionary periods is the best way to maximize that balance, I really couldn’t care less what it does between now and then.

 

I change my TSP allocations based only on economic indicators, never on what the stock market does.

 

So where to from here?

All indications are that the US will avoid recession in the next year. The economy isn’t extraordinarily strong, but this slow, steady growth is easier to manage than an overheated, inflationary economy. Short to mid-term, my guess (and it really is a guess) is that the stock market will continue its recent run – earnings for the first quarter are projected to be 17.3% higher than the first quarter of 2017 (and that would be the strongest year-over-year improvement since 2011). Tempering that, first quarter economic growth estimates have been cut in half from about 5% to 2.4%, and stock market valuations are still well above historic averages.

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 nonfarm payroll employment edged up by 103,000 in March, and the unemployment rate was unchanged at 4.1 percent. Employment increased in manufacturing, health care and mining.

Taking a look at the unemployment rate over the course of the year, you can clearly see that we are at the natural rate of unemployment and further significant improvements in the rate are unlikely. So we focus much more on wage growth at this stage in the business cycle.

In March, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $26.82. Over the year, average hourly earnings have increased by 71 cents, or 2.7 percent. Average hourly earnings for private-sector production and nonsupervisory employees increased by 4 cents to $22.42 in March.

I obtain this data from the Bureau of Labor Statistics.

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 March PMI reading of 59.3 is a very strong number:

Manufacturing expanded in March as the PMI registered 59.3 percent, a decrease of 1.5 percentage points from the February reading of 60.8 percent.

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 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the March PMI indicates growth for the 107th consecutive month in the overall economy and the 19th straight month of growth in the manufacturing sector. The past relationship between the PMI and the overall economy indicates that the PMI for March (59.3 percent) corresponds to a 4.9 percent increase in real gross domestic product (GDP) on an annualized basis.

The last twelve months:

 

Yield spreads: The yield curve has made a definite move to the upside and gotten steeper in the process. I get this information from the Cleveland Fed, who had this to say:

As we move into spring, short rates have continued to rise, but long rates have not followed along, twisting the yield curve flatter. Using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.5 percent rate over the next year, equal to the February number, and just up from the January prediction of 1.4 percent.

The flatter yield curve had more effect on the estimated probability of recession, which increased a bit. 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 13.4 percent, up from February’s 11.1 percent, as well as January’s 12.9 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) growth improved markedly in March:

Money Supply M2 in the United States increased to 13918.10 USD Billion in March from 13858.30 USD Billion in February of 2018.

 

 

Conclusion

All of the above data leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle (although I do think we are moving later in that stage) and so I am going to continue to allocate my balances and contributions 50% to the C Fund and 50% to the I Fund.

Things I Like

I have lately been trying to make myself more secure online, particularly when I am traveling. A big part of that is using a VPN (virtual private network) on my phone, iPad and laptop whenever I am on any WiFi network besides my home network, and even when I am on cellular systems while traveling overseas.

This allows me to connect to dodgy public/hotel WiFi networks without concern as it automatically encrypts everything I do, the provider can’t even tell what websites and apps I am using, and I can make myself appear to in another country with the click of a button (handy for streaming Netflix or WatchESPN in parts of the world where my account is blocked).

I selected NordVPN based on reviews, speed, price (about 10 cents a day with the two-year plan), and ability to use a single account on six different devices simultaneously (so I can protect all the family’s devices with one account).

I tend to do fairly exhaustive research on things before I buy or sign up, and it seems a shame to not share the results of that research with anyone, so I have created a Things I Like page which you can always find through the Resources tab in the menu. It has absolutely nothing to do with the Thrift Savings Plan, but this is my only website, so there it is.

What I’m Reading

In case you somehow missed it, James Comey’s A Higher Loyalty: Truth, Lies, and Leadership is finally out. This is also completely unrelated to the TSP or investing and isn’t really a recommendation (I just downloaded it today and haven’t even started yet), but it’s the book I will be reading this week.

The Next Update

Quick note: not surprisingly, life is busy with the baby coming, so the next update might be a bit delayed and will almost certainly be a short one. Rest assured that if I see a cause for concern in the May economic numbers, I will get something up and send a notification out to the email list.

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 stumble 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!

41 thoughts on “April/May 2018 TSP Allocation Update”

  1. Paul: How are you going to accommodate us deaf folks who are finding this website very useful if you do podcast?

    Reply

    1. The website will always come first – the podcast (if I can make it work) will just be an audio version of the exact same content (sans images). Tonight I can’t even fix the spacing between paragraphs so I’m not sure the podcast will be as simple as I imagine.

      Reply

  3. I appreciate your articles and updates. How can/should we adjust our allocations if we have less than 10 years to retirement- say 7 years. I know it’s an individual decision and that you should be diversified with some safer options as you near retirement etc. You mention that you have 10-20 years so are less concerned about motion but just curious how you would advise those of us that are closer.

    Reply

  4. I have followed you for years. I adhere to your advise. I would like some help with where to be in retirement. I have a higher than average risk factor. Thanks.

    Reply

  6. Paul, you are doing a great service for a lot more people than you think. I can probably speak for everyone when I say thank you.

    Reply

  7. Thanks, Paul — you are a voice of reason and sanity — and congratulations in advance on your impending family addition!

    Reply

  8. I really wish you’d keep it straight instead of weaving in your politics. If I wanted to read a Comey tabloid, I’d go to Walmart.

    Reply

    1. I just said I was reading it, and specifically said that this wasn’t a recommendation. The Comey book is sort of what a lot of people are talking about this week, no matter their politics. No political slant intended, sorry if it came across that way.

      Reply

      1. I personally don’t care what your political affiliation is. If I get great financial advice from a democrat, or a republican, I’ll take it! I look forward to your post every month, good sir! Congrats on the chitlin’, being a dad is the best! And as a result of your post, I feel very confident that I have financially set myself apart from most, and can continue to provide for my family the way I desire for years to come. As the previous comment said, you are appreciated more than you know…

        Reply

    2. Robert, Paul stated it was not a recommendation. He is just reading it. I didn’t take it as “taking sides,” and even if he did, so what.

      Reply

    3. Not a big deal. Politics make up a very very small part of a person. My daughter is a liberal college student but a great well rounded person. Besides, he’s just telling about a book that he has yet to read…cut him some slack. He’s helping us all.

      Reply

    4. Robert: The act of taking in information (ie, reading a book) is only seen as a political statement by those whose politics are based on staying as ignorant as possible. Even Republicans do opposition research (smart ones, that is). If facts and data aren’t your thing, maybe this website isn’t for you.

      Reply

    5. Robert: I read the same article and did not see anything politically about it. In the end this is Paul’s own website and is effectively entitled to do as he wish. It is not like he was charging an upfront access fee or hired by the government to provide us all this insight into TSP management gained from his research. It is HARD work.

      Reply

  10. Congrats on the upcoming baby! There is nothing more wonderful than having a baby in the house, and your entire life is about to change for the better. And thanks for all your TSP advice. I’m slow absorbing all that I can.

    Reply

  12. A podcast would benefit me greatly. In this day, my media consumption revolves around talk radio and podcasts. I have two kids in diapers so I hardly have anytime to read anything. Thanks for your insight.

    Reply

  13. Paul,

    I was looking back to see what changed between December’s post (100% C) and this post (50% C, 50% I), and I couldn’t see where you changed your recommendation. The link on the sidebar to the Feb/Mar post comes right back to this one. Could you elaborate (again) or provide a link to your reasonings on the change to include the I fund?

    You’ve always seemed to be a bit down on the I fund (calling it an outdated measure of the global markets). I’m just wondering what may have changed in that assessment, or what in today’s market makes the I fund viable.

    Thanks for all you do, and congratulations on your baby-to-be!

    Reply

    1. I made the change and discussed my rationale in the January “Look Forward at TSP Investing in 2018” post – http://www.tspallocation.com/tsp-investing-2018/

      As far as the I Fund goes, I just don’t like it as the only international option for TSP investors because it doesn’t include rapidly growing markets like China. It does a fine job following the developed international markets index, so when those economies are growing it will do well.

      Reply

    1. I tried the Faber method for almost three years and the whipsaw took all the gains I would have made. Works well in a down market but didn’t pay off in the end so that is why I came here. This method matches my investment philosophy much better. However, it is probably still better than buy and hold.

      Reply

  15. TS Paul can you reply to Carol below, I am in the same boat but actually closer. I am eligible in 1.5 years.

    Thank you. Joe
    ____________________

    Carol says:

    April 18, 2018 at 12:07 pm

    I appreciate your articles and updates. How can/should we adjust our allocations if we have less than 10 years to retirement- say 7 years. I know it’s an individual decision and that you should be diversified with some safer options as you near retirement etc. You mention that you have 10-20 years so are less concerned about motion but just curious how you would advise those of us that are closer.

    Reply

    Reply

  16. Hello, I’m new to your site and I am so glad to have found it. The information you give is so helpful to me because this all seem not a foreign language. I was actually googling advice on TSP allocation because doing what my coworker does has not been lucrative for me so I am starting to do my own research and invest in the market outright but every little bit helps because I am presently buying back military time so I probably have another 8 -0 years to work and my TSP will not support me. Thanks

    Reply

  19. Do you have a running 12 month summary of returns based off your recommendations? Or maybe annual summaries as well?

    Reply

  20. Right now, I think it’s very difficult to make predictions because some significant unknowns like the tariff issue. It’s tough and you’re doing a great service and just very difficult to predict what will happen. Over the longer term, I’m sure things will work out and just bumpy for a while…I think! LOL

    Reply

  21. I left the I fund back in June. With all the talk of tariffs this fund seems to be a losing fund. I am 60/40 S/C respectively and have done rather well so far this year with that mix.

    Reply

    1. Trade wars and other short term unpredictable events don’t factor into my investing decisions at all. If the trade war tips us towards a recession, that will show up in the numbers and I will make a move. Otherwise, the market will bounce back like it never happened. Only a problem for someone who needs the money this year.

      Reply

  24. Hey TS Paul, congrats on the little one and thank you again for the wealth of knowledge you’ve posted. I just found your site this week and really enjoy going through your assessments. Enjoy every moment you have with the baby, they grow up quick. I have three kids myself, and love every minute of it. Just wish I could sleep through the night again someday ha ha!

    Reply

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