Current Thrift Savings Plan Allocation and Business Cycle Analysis – March 2015


Thrift Savings Plan candles03/14/2015

The Bull Market turns Six

March 9th was the sixth birthday of the current Bull Market. The Thrift Savings Plan S Fund is up 200% during this run. The other TSP funds have all trailed the S Fund, with the TSP C Fund up 150%, the I Fund up 112%, the F Fund up 28%,  and the G Fund up 9.86%.

Periods of growth like this are the key to building a significant retirement nest egg. It is largely because of the dramatic gains during this period that my Thrift Savings Plan balance is rapidly approaching the million dollar mark, and my non-TSP investing balances are not far behind.

Stunningly, however, nearly one-third of all funds invested in the Thrift Savings Plan are held in the TSP G Fund, which is astonishing when you look at the relative returns above. Plug in any numbers you like, but for anyone with even an average balance the difference would be hundreds of thousands of dollars in missed returns during that period.

The Fed and Interest Rates

The market (and your Thrift Savings Plan balance) hasn’t gone straight up during that time and, as I’m sure you have noticed, volatility returned with a vengeance over the past week. The big story has been the possibility of the Federal Reserve raising interest rates sooner rather than later. The financial media will use this meme to explain pretty much every stock market drop until rates actually go up, but will never get around to explaining why the market goes up on the alternate days.

So why did the market drop so much a week ago? The short version: the stock market is exactly wrong about half the time in the short term.

The slightly longer version (and I promise it isn’t very long and will wrap up with some good news for you at the end): the February employment numbers came in at 296,000 jobs created, which caps an extraordinary run of similarly good numbers, and resulted in the unemployment rate falling to 5.5%. That is the upper end of the 5.2 – 5.5% range which is targeted as “full employment” by the Fed.

The fear which drove last Friday’s selling is that this great news (which shows that the US economy is continuing to strengthen) will result in the Fed starting to very slowly increase interest rates this summer instead of this fall. And that those higher interest rates will eliminate the cheap money which companies have been using to fund their operations (and to fund buybacks and dividends), and higher bond yields will pull money away from the stock market as everyone races off to buy bonds

A couple of points on this:

First, I am not at all convinced that the Fed will start to raise rates in May or June, or even anytime in 2015 for that matter. The Fed’s mandates are to maximize employment, keep prices stable, and maintain moderate long-term interest rates. Anything less than 5.2% unemployment could theoretically cause rampant inflation (which would be in conflict with that second mandate), so typically the idea is that the Fed would start to raise rates to keep that from happening. But the Fed also has an inflation target of 2%, and has been equally focused on pushing inflation up. Letting the unemployment rate continue to drop might be exactly what they need to do to push towards that target.

But they might raise rates this summer, and it would be next to meaningless in real impact over the medium and long term in our Thrift Savings Plan. The rate increases over the next year or two will be very small and won’t make any real difference in how much money companies will borrow, so it will have close to zero impact on corporate earnings, share buybacks and dividends. And I don’t really think everyone is going to sell all of their Apple stock and race off to buy ten year treasuries because they are paying 0.25% more than they were a few months ago

Interest rates are going to go up. It doesn’t make a bit of difference to long term investors whether that happens tomorrow or a year from now. It matters a great deal to CNBC and, because they can spin the specter of interest rate hikes into a scary story, and scary stories attract eyeballs for their advertising. Remember how we went through this for two years every time the Fed hinted that Qualitative Easing was going to end, and how the market kept powering up during that period?

Market performance before previous rate hikes (the good news I promised is in here)

thrift_savings_plan_roller_coasterThe market is going to be volatile over the months leading up to a hike in interest rates because the day traders move the market temporarily on every bit of news. But if history is a guide the market will perform very well overall during that period.

The Fed has tightened monetary policy (which is another way of saying “raised interest rates”) six times since 1980. In the nine months prior to the first rate increase, the S&P 500 has gained an average of 23% (and 8.5% on average during the six months prior to the hike). So whether the Fed acts in June or September, we are in what has historically been a good period for the Thrift Savings Plan stock funds.

Those strong performances have not come without some angst for investors, however, as in each of the six periods described above the market has suffered a relatively significant setback at some point in the six months prior to the first rate hike. Most of those corrections have been in the 5-10% range. And we are well overdue for a 10% correction – we have gone 41 months without one, well in excess of the 18 months on average those occur. So we’ve got that to look forward to…

The market does well during this phase because the Fed is trying to balance a surging US economy at an optimal level of growth, employment, and inflation. If unemployment falls too low, the cost of labor increases as employers raise wages to compete for a limited supply of workers. Wages go up, which is good for the workers, but then so do prices because companies pass those wage increases along to their customers. If the US had a closed economy, it wouldn’t matter if wages and prices raced skyward together because everyone would be making enough to buy the more expensive goods and services. But we exist in a global economy, and if US wages and prices go up, while those remain lower in other countries, that puts the US at a competitive disadvantage. Our goods and services become too expensive, US companies’ sales decrease, they start laying people off, and we cycle into recession.

Current Thrift Savings Plan Allocation:

My current TSP allocation remains 100% in the TSP S Fund (this reflects both my contribution allocation as well as where my existing balances are invested).

Thrift Savings Plan Fund Performance Year to Date:

•    TSP C Fund:  0.22%
•    TSP S Fund:   3.71%
•    TSP I Fund:    3.45%
•    TSP F Fund:   0.53%
•    TSP G Fund:   0.36%

February Economic Numbers:

I am going to dispense with most of the charts and discussion about the economic indicator numbers this month because – basketball. And also because there isn’t much to say – things are continuing to move in the right direction and I’m satisfied that we understand which phase of the business cycle we are in and the risk of recession is extremely low.

Employment numbers: the February jobs numbers were very strong, total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5 percent.

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 52.9 is within the range of what we are looking for, but it is worth noting it is the lowest number we have seen in more than a year

Yield spreads: The yield curve steepened in February, indicating stronger growth and a lower risk of recession. I obtain my data for this section from the Cleveland Federal Reserve.

Money supply growth rate: Money Supply M2 in the United States increased to 11820.30 USD Billion in February of 2015 from 11701.10 USD Billion in January of 2015. This was a significantly higher growth rate than we have seen at any point in the last year, and is a good sign for the economy.

Conclusion: So again, all of the indicators are pointing in the same direction, and I believe that we remain in the Recovery Phase of the Economic Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing, and that the chances of the US economy entering recession anytime soon are very low. For that reason, I remain 100% invested in the TSP S Fund.

Death and Taxes: If you are like me and haven’t quite gotten around to doing your taxes yet, it is about that time. If you are so inclined, you can get TurboTax products at a discount on Amazon through the TSP Allocation Guide’s affiliate link below, and you can also get 10% added to your refund if you take it in the form of an Amazon gift card (so a $1000 refund turns into an $1100 gift card):

Shop Amazon – Tax Central – All You Need in One Location

The Next Update

I will send out a new update next month after all of this month’s data comes in unless I decide to make a change in my allocation or something shocking happens which requires me to send out a new update. I send out a notification of these updates (or Thrift Savings Plan 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?

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 (that $195 billion still invested in the TSP G Fund shows that we still need to get the word out to a few more Feds). 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!

23 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – March 2015”

    1. At some point that will be likely, but I still need to do some more research before committing any of my Thrift Savings Plan balance to that roller coaster.

  1. You mention the strong G fund participation as a negative for all the Feds missing great returns in the other funds – however, you make no mention of individual retirement time frame and whys o many may be inclinded to protect their principal and invest conservatively.

    1. I’m sure there are a few Thrift Savings Plan participants in that situation, but not fully 1/3rd. In my experience, most Feds who are in the TSP G Fund are there because (1) that was the pre-set default for many years and they never changed it, or (2) they got scared after a nasty downturn like 2008 and never moved back to stock funds.

  2. I would be very interested in your opinion on investing in crude oil as the price appears to be at a near term low. I would be able to hold on to the investment for two years in hopes of a 100% return.

    1. I believe that energy stocks are one of the great opportunities we have seen in a long time. Oil is very cyclical, and while every revolution of the cycle is different, I don’t have any doubts about it moving back up at some point.

      I have started buying quality energy companies which I like, but am averaging in slowly (I probably have about 25% of the funds I eventually expect to put into energy stocks invested at this point). We may have hit the bottom, but it could also easily be 10 or 15% below where we are now. I’m not in a rush because all indications are that oil prices will remain low for at least the next few months and possibly much longer than that.

      I would be over the moon if we saw a 100% return in two years, but that’s a long shot in my estimation. I’d be very happy with a 30% return in that period, but we could easily be flat two years from now. My time horizon on these investments is probably in the 5-7 year range and I will be content with the dividends these companies generate until they start to move back up.

      1. I’m along the same trackline as you on the energy sector. Not my ideal sector to dabble in, but I gained some positions recently to roll the dice and see how things are 5-10 years from now.

  3. Thank you for the well thought out and clearly stated analysis. I would only add that presently the biggest threat to our TSP balances continues to be the occurrence of an unforseen geopolitical event. If history has taught us anything we know it will eventually happen and that it will roil world financial markets.

  4. I currently have 90% in the C fund and 10% in the S fund. After reading your post and doing my own reasearch, I’d like to put 100% in the S fund.
    Do I loose money by constantly changing my TSP allocation?

      1. True that inter fund transfers do not incur any fees BUT failed attempts at market timing are will always be a drain on your balance. The folks running TSP will tell you they have limited the number of moves permitted each month to help keep operating costs down but I honestly think they have installed these limits to protect TSP members from themselves.

  5. TS Paul,
    I saw on the news yesterday about the Feds meeting early for a possible interest rate hike. As you said in earlier postings, when this occurs, TSP should be equally distributed in S and C funds. What are your thoughts about the upcoming meeting, and should I/we split our TSP funds between S and C soon?

    1. Rates haven’t started moving up yet, and even when they do it will be very slowly because the Fed just wants to ease the overnight rate gradually up to between about 3.5-4%. While doing so, it doesn’t want to tank the economy because then its only recourse will be to cut interest rates, which would be very embarrassing and show that they had screwed up. So they are more likely to be slow than fast.

      That said, I do think we are well into that grey area between phases of the business cycle, so I would be very comfortable with my Thrift Savings Plan allocation being either 100% S Fund or 50/50 S and C Funds. When in doubt, I tend to stick with the small caps, particularly after last year’s underperformance which has left them more fairly priced.

  6. When the Feds decide to raise interest rates should I move my TSP funds to the G fund, since the stock markets seem to want to go in the negative everytime there is a possible Fed interest rate hike, like today 18 Mar 15, now the markets are just 180 degree turn around into the positive on word that no interest rate hike in April.

    1. Totally up to you, but I would note that 8 of the last 9 times the Fed started raising interest rates, the stock market has been up for the following year.

      The market is going to bounce around, but odds are that it will be up more than down over the mid and long term.

  7. Thankyou for the input, I’m fairly new to the stock market and TSP investing, since I have 10 years or so till retirement, I will just leave it in the S fund and not try to time the interest rate hike.

  8. Will you change your investing philosophy as you approach retirement? I am three years out, but I plan to live at least 20 years into retirement, so I have always said my risk time frame should include how long I plan to be in retirement. What are your thoughts as we all approach retirement? Thanks for your in site.

  9. I am 2 years away from retirement. I have followed your strategy for 2 years. When I do retire, should I take my TSP funds and move them to my Roth IRA account or continue with my Thrift Savings Plan account. Thank you for your service to all of us who have listen to you.

    1. Every investor’s situation is going to be a little bit different, so I would hesitate to have too much of an opinion on yours. When I reach retirement, my sense is that I will likely leave everything I have in the Thrift Savings Plan there. That’s based on my situation, though, where I will have an equal amount of money in non-TSP accounts so I have considerable flexibility in both investing options and withdrawals. The advantages of keeping money in the Thrift Savings Plan is that it gets me low fees which can’t be matched anywhere else (and those start to add up), as well as access to the TSP G Fund, which is a unique investment vehicle which gets you very predictable returns while completely protecting your principal and just doesn’t exist outside the TSP. The negatives are that you are locked into the TSP’s five funds (although those are plenty for most investors) and the limited withdrawal options they currently have (I believe those will likely change over the next few years to allow more flexibility and to look more like most 401(k)s).

  10. Hi TS Paul! Thank you for the extremely educational blog! Unfortunately, for my first few years as a Fed and of my career, my TSP was fully allocated to the G fund 🙁 sad I know. However, within the last year I’ve seen a 58% increase in my TSP due to the reallocation my contributions. Now, I have 27 years until I can “retire,” so I am trying to understand this world and set my self up for success!! I was wondering are there any beginner resources you recommend (readings/tools/etc.)? Thanks!

Leave a Reply