Current Thrift Savings Plan Allocation and Business Cycle Analysis – January 2016



powerball thrift savings planGood news! I was one of the PowerBall winners! But unfortunately for me, my share came to less than a dollar. And to top that off, the stock market is off to a historically bad start to the year.

And now I’m going to tell you that I’m not worried about the stock market. And that is going to make some of you market watchers absolutely crazy. One of the good things about getting old is that I have seen this movie over and over again. And that lets me take a long perspective on short-term market events. I have a lot of money in the stock market – my “losses” so far this year are probably well north of $200,000 (I haven’t bothered figuring out exactly what my paper loss is because it doesn’t matter). I also haven’t lost a minute of sleep, or doubted my investing strategy once. Because the alternative is to try to time the market, which I know I can’t do (and I don’t believe anyone can consistently do), or pull my money out of stocks, which I know will result in lower returns over the long term.

And the long term is what I care about – it doesn’t make a bit of difference to me what the market does this month, because I’m not spending any of the money I have invested in the market this month. I care about what the market does between now and, let’s say 2030, when I hang it all up and go tramping around in the woods with my dogs for a living and need my Thrift Savings Plan to support my lifestyle. And I am convinced that being invested in the stock market all the time, with the exception of when the US is in recession, is the simple way to maximize that nest egg.

The market is off to such a bad start this year because of China and oil. I’m going to save most of my discussion of these two catalysts for my Look Forward at 2016 post (which should be out in the next few days). But here is the nutshell:

(1) China isn’t big enough for its problems to have a significant, long-term impact on the US economy. But it is plenty big enough to cause a lot of short-term volatility.

(2) Low oil prices are good for the US economy long term. But obviously bad for stocks in the oil sector, which make up about 5% of the US stock market overall (about 6.5% of the TSP C Fund and about 3% of the TSP S Fund). And bad for the economies of oil producing countries, which doesn’t by itself impact US share prices, but creates fear of potential financial meltdowns abroad, which causes volatility.

The fact that China and Oil shouldn’t be having such a dramatic impact on the US stock market, definitely doesn’t keep it from happening.

tsp investingRight now we are at about an 8% decline for the year. So where do we go from here? Anyone who has read me for any length of time has read over and over again that the market will see a 10% decline once per year on average. So maybe this is the decline for 2016. Of course, to reach that average, in some years you have to have more than one such decline to make up for the years in which you had none. The good news is, there have been 27 corrections of 10% or more since 1987, and the market has recovered each and every time.

But what if it keeps declining? What if we go into bear market territory (a 20% decline)? The news here is also fairly reassuring. Absent a recession (which we most assuredly are not in) that only happens once a decade on average, so it isn’t likely now. And even if it does, we come back fairly quickly from those events as well.

Since 1985 the S&P 500 has fallen at least 20% three times during non-recessionary periods. All three times were caused by financial “accidents” – incidents in which a bubble burst or a trading system failed or politicians did something really stupid for political reasons. And in all three cases the recovery was fairly swift. These events were: (1) the Black Monday crash of 1987 (a decline of 33%, back to break-even in 22 months); (2) the 1998 Russian default crisis (a decline of 22%, back to break-even in six weeks); and (3) the 2011 Eurozone crisis, coupled with the political nonsense over raising the federal debt ceiling (a decline of 21%, back to break-even in five months).

Here’s the picture which is worth a thousand words – all those horribly traumatic corrections put into perspective over time. This is why buy and hold works:

Stock Market Corrections 1987 to present TSP

Last Month’s Economic Numbers:

So I can get this out tonight, I am going to do the Cliff’s Notes version of 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).

First up, the US numbers:

Employment numbers: the December jobs numbers beat expectations both in jobs created as well as wage growth, with a higher than expected increase of 292,000 jobs. 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 economic growth, and this month’s reading of 48.2 is below that range:

Manufacturing contracted in December as the PMI registered 48.2 percent, a decrease of 0.4 percentage points from the November. 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 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December PMI indicates growth for the 79th consecutive month in the overall economy, while indicating contraction in the manufacturing sector for the second time in 36 months.

Yield spreads: Based on yield spreads, the Cleveland Fed places the probability of a US recession based on the yield curve in the next year at 4.42%:

TSP Talk - Yield Curve

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 November to December. The growth rate is what is meaningful here, and the growth rate did slow a bit last month as you can see in the chart below:

Money Supply M2 in the United States increased to 12330 USD Billion in December from 12288.10 USD Billion in November of 2015.

Money supply tsp talk


All of which leads me to believe that we are in the Mid/Growth/Performing stage of the business cycle and so I am continuing the transition of the bulk of my investments from the S Fund to the C Fund (while maintaining my position in the I Fund). I also believe that the probability of the US economy entering a recession in the next year is low. (For what it’s worth, most economists agree with my assessment that we are in the Mid Phase of the business cycle – one page I keep bookmarked is Fidelity’s Business Cycle Analysis.)

I am a little less confident in the I Fund at the moment. Europe’s recovery is considerably more fragile than that of the US, and Europe is significantly more dependent upon selling goods and services to China than the US. I will definitely be watching the indicators for Japan, the UK, Germany, France and Switzerland closely over the coming months, and may well decide to trim or eliminate my position if China’s stumble is reflected.

Continued Transition to the TSP C Fund

I see no reason not to continue moving the bulk of my Thrift Savings Plan investments to the C Fund to reflect where I believe we are in the Business Cycle. As soon as I hit publish on this post, I will be heading to to conduct an inter-fund transfer and to change my allocations to 45% C Fund, 40% S Fund, and 15% I Fund.

And over the next few months I still plan to complete the transition as follows:

  • February: 25% S Fund, 60% C Fund, 15% I Fund
  • March: 10% S Fund, 75% C Fund, 15% I Fund
  • April: 85% C Fund, 15% I Fund

I always try to remind readers that this is just what I am doing based on my circumstances, and isn’t a recipe for what anyone else should do with their Thrift Savings Plan. Just food for thought, not something to mirror unless you have done your own research and considered your own circumstances.

Recommended Reading

This month I am recommending Jack Bogle’s Little Book of Common Sense Investing as a great bit of foundation for any investor. I am a big fan (although not one of those mindless Bogleheads) of Bogle, who is the founder of Vanguard and invented the very first index fund.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

The Next Update

Before the end of the month I hope to finish a ‘look forward at 2016’, as well as a post on my non-TSP investing. 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 about once a day at: @TSPallocation

What’s in it for me?

tsp talk beggingI 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 really want to, you can donate to support the site here). You can do that by 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!

27 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – January 2016”

  1. I have a question about moving to the C fund. By selling your S fund holdings and using the proceeds to buy C fund “Interfund transfer form S to C”, with the S fund so low, are you not locking in losses? I always thought you should wait until you at least break even to sell or trade.


  2. How would one do the proper research on what is or isn’t right for me? I have been putting in around 13% to tsp for the last five years. However I can’t seem to break the 50k mark. The last year and a half I have been timing the market, obviously horrible idea. Before that I have been in the L 2030 and 2040. Need help please.

  3. I think you should take a look at the shiller PE and consider the long term implications of stocks being wildly overpriced currently.

  4. Thanks for the update Paul! I am one of those mindless bogleheads, so you are reading some good info right now. I slice and dice a bit, add weight to total market index with Small caps, and I like to hold some weight in real estate index. My current book: The four Pillars of Investing by Bernstein.

    1. I say that affectionately – on the message boards they can be a little over the top and inflexible. Thanks for the recommendation, I will add that to my list.

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    Thank you for the update TS! Is that pup praying for a rally?

    I’m definitely not as disciplined or as optimistic as you are.

  6. Brian,

    From 31 Dec 2015 until today, the C fund has gone down ~8% while the S fund has gone down ~12%. So if you stay in S, you are currently losing money at a faster rate. Today S&P gained (0.05%) while DWCPF lost (-1.12%)

  7. Anne, I am not drawing anything out of my tsp so I am not realizing any losses. In the artical TS Paul said he was transferring funds from the S fund to the C fund. If you do this, are you not locking in losses? I’m just trying to understand so I can decide if I want to make a change as well.


  8. Think of it as an opportunity cost rather than a loss. You can stay with a fund hoping it will rebound and possibly incurring additional losses or you can reallocate to put the money in a fund that is more likely to gain more or less likely to lose value. Based on the economic cycle, C should perform better than S.

    Generally, C & S funds move together in the same direction; however since the drop last August, S Fund never came close to prior highs and has lost over 20% indicating it is in a bear market. The C fund is down around 10%. Do you want to maximize gains or minimize losses?

    When you make an inter fund transfer (IFT) you don’t lose money, instead the funds are reallocated based on that day’s closing prices. Total amount COB X percentage allocated divided by the share price determines the number of shares in each fund.

  9. I’m with Brian, like having a stock that goes down 50% if you sell it you have half of what you initially invested, if you don’t sell no loss. I don’t get that you don’t lose any money it’s just reallocated, but you’ve locked in those shares at a lower price. If you have $100K in the S and it goes down 50% then you reallocate because you’re fearful of further loss, seems to me that I’ve lost $50K.

  10. New to this post but after 26 years in the financial planning career i can concur with the wisdom of rebalancing on a 1 year or 6 month cycle. Forces you to buy into undervalued areas and sell off what has been hot. Moving from s to c is in theory rebalancing. Kudos to homework done on the economy and markets.

  11. I get it after thinking about it, if you get out of stocks and into the G fund, you’re not losing any money the key point is when you get back into stocks get in at or under the share price you left it thus buying lower or getting back in where you left off.

    1. Whenever I make the decision to make a change. Typically I will go very long periods between allocation changes and it is an uncommon event, so no routine to it.

  12. Paul,

    In your article you state your investments are 45% C Fund, 40% S Fund, and 15% I Fund, but that you’re moving your funds almost entirely to C fund over the course of the next few months…but
    you also state that this may not be the best move for everyone else.

    With that being said, what do you recommend for most people, to keep 45% C, 40% S, and 15% I ?

    The chart on the top right of your page reflects those numbers; are those updated at regular business cycle intervals for the rest of us, to follow ?

    I’m new investing in the TSP, thanks !

    1. The image on the top right will always have my current TSP allocation, but I really don’t recommend that anyone select an allocation just because I do. Thrift Savings Plan investors need to read a lot of different sources, consider their other investments and assets, decide how much volatility they can stomach, and then set their own allocations.

  13. Ts paul, hello. I’m 43 with 38,000 invested. I plan to invest more aggressive but don’t want to make too much of a foolish mistake I’m mainly invested in L funds. I’ve read your not a fan of the L fund. I’m considering doing and entire intertransfere to your March tsp allocations. Wold that be too foolish? I plan on retiring at 62 or 18 years.

  14. I just did my inter transfer to your March allocation but left my contribution to my old L fund primarily distribution chart. Do you have much knowledge on maximizing tsp contributions I’m currently doing 10 % and 20.00 a paycheck to a Roth.

  15. Feeling optimistic, already made money yesterday and C S I are doing good so far today….. TS, can you tell me the ticker symbols you feel are most associated with C,S, and I. Thanks

  16. Ts Paul, I transferred all my money to what you suggested for March yesterday…that’s exactly when the market started to rise…it got higher today. I feel lucky…not only did I get back what I lost in January, I made a little more. Can’t wait to see where it’s at tommorrow. Do you think it will level off, rise, or fall? What is your opinion on my TSP account being exactly like your March allocation suggestion?

    1. Long term, I think the market will rise. But I have no idea what it will do in the next week or month, so I don’t get caught up in day to day movement. As for your TSP allocation matching mine, I believe I have a sound strategy, but please don’t just rely on me for guidance. Good luck.

  17. Made the change to match the February Allocation on 1 February. Today, with the 3 day up streak in the markets, have erased any losses in February. I plan to make the allocation change for March o/a 1 March. Now only down 4% for the year. Finally, some good news with TSP. Thanks for the blog, I can, finally, manage my account with some understanding of how it all works. Also posted this on the main blog entry then realized it would be more appropriate here as it involves my current allocation.

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