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



thrift savings plan NovemberThis month: why it is so dumb to move to the G Fund after the market has entered a routine correction, an update on some non-TSP investing, and a bit of discussion on S Fund vs. C Fund as we find ourselves between phases.

Bottom line up front: my current Thrift Savings Plan allocation remains 85% in the TSP S Fund and 15% in the TSP I Fund (this reflects both my contribution allocation as well as where my existing balances are invested). As we will discuss below, at this point I would also be comfortable with just about any mix of TSP C Fund and S Fund.

Selling into a Correction

TSP change Bad-Idea-Road-SignI’ve written over and over again that (a) 10%+ market “corrections” will happen once a year on average, (b) there is no way to predict when those will happen, and (c) the market does not progress from a correction (10%+) to a crash (20%+) unless the economy enters a recession. So I’m not going to belabor those points again this month.

Instead, what I’m going to do is demonstrate what happens when investors panic and sell when these inevitable corrections occur.

Let’s say, hypothetically, that someone was invested 100% in the TSP S Fund this year. Things were trundling along fairly unremarkably until the third week in August. At that point, someone invested in the S Fund was up about 5% for the year (4.94% to be precise). From August 19 through August 24 the S Fund dropped almost exactly 10%, the definition of a correction.

Now, if you could have predicted that downturn and moved to the G Fund prior to that taking place, of course you would have done so. But the mathematics PhDs from MIT with their supercomputers can’t crunch the numbers and predict these corrections are coming, so I certainly can’t do it.

Instead what a lot of people did was panic after the correction actually occurred, afraid that it might continue and turn into a crash (even though there is virtually no chance of that happening if history is any guide). And by doing so, they locked in their losses – which up until that point had only been on paper.

Let’s say you moved from the S Fund to the G Fund on August 24th, hypothetically of course. On that date the S Fund was down -5.18% for the year. And let’s say you stayed in the G Fund through today.

From August 25th through November 6th, the G Fund has gone up 0.41%, while the S Fund has gone up 7.86%. So the guy who panicked and switched to the G Fund is now down -4.77% for the year, while the guy who went for a hike and played fantasy football instead of worrying about a routine market event is up 1.52% for the year.

Let’s turn that into dollars. If the guy who switched had $500,000 in his Thrift Savings Plan, that’s a swing of $31,450. That’s almost two years worth of contributions. (And if that’s too rich for you, let’s say he had $50,000 in his TSP – that’s $3,145.) But that isn’t the end of the pain he has inflicted on himself, because he isn’t going to withdraw that money today. Assuming that he held that particular money for another 20 years and it continued to compound at a pretty conservative rate of 8% per year, it would have added about $150,000 to his TSP balance.

So don’t do dumb stuff when corrections take place. Instead, remember: (a) 10% market corrections will happen once a year on average, (b) there is no way to predict when those will happen, and (c) the market does not progress from a correction (10%+) to a crash (20%+) unless the economy enters a recession.

And if you have friends who panicked back in August, you might help them out and forward this along to them.

TSP Allocation Guide’s performance year-to-date: 1.75% (through market close on 11/06/2015)

Year to date Thrift Savings Plan fund performance:
• TSP C Fund: 3.84%
• TSP S Fund: 1.52%
• TSP I Fund: 1.56%
• TSP G Fund: 1.71%
• TSP F Fund: 0.47%

And the TSP LifeCycle Funds are very average for 2015 so far (just as they are engineered to be), ranging from 2.08% to 2.66%.

Last Month’s Economic Numbers:

I will run through 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 October jobs numbers handily beat expectations both in jobs created as well as wage growth. Most significantly for shorter term investors, this report greatly increases the chances of a December rate hike (it would be a sure thing, except the Fed traditionally doe not like to raise rates in December). I obtain this data from the Bureau of Labor Statistics:

Total nonfarm payroll employment increased by 271,000 in October, and the unemployment rate was essentially unchanged at 5.0 percent. Job gains occurred in professional and business services, health care, retail trade, food services and drinking places, and construction.

TSP Allocation Guide - UnemploymentAt this point we are at full employment and really can’t expect huge new jobs numbers each month. Instead, economists will look at more nuanced data such as wage growth and number of workers reentering the workforce to try to figure out if things are going in the right direction.

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 50.1 is within that growth range, but just barely. It is worth noting it is the lowest number we have seen in more than a year and it has been trending in the wrong direction, but my expectation is that the sentiment reflected in this number has more to do with the August correction than real economic concerns:

Economic activity in the manufacturing sector expanded in October for the 34th consecutive month, and the overall economy grew for the 77th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business. The October PMI registered 50.1 percent, a decrease of 0.1 percentage point from the September reading of 50.2 percent. Of the 18 manufacturing industries, seven are reporting growth in October.

TSP Guide - PMI


Yield spreads: For some reason, the Cleveland Fed has stopped publishing their yield curve and recession probability piece, so this month I instead went to the New York Fed to get this information. The New York Fed places the probability of a US recession based on the yield curve in the next year at 3.36%:

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) has not been updated since September, so that won’t factor into my calculus this month.

TSP S Fund Conclusion:

All of the indicators are still pointing in the same direction. I believe that we are between the Recovery phase and Growth/Prosperity 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 85% invested in the TSP S Fund. Because I think we are in the grey area between phases, I would be just as comfortable with any mix of the S Fund and C Fund for that 85% of my allocation. And in fact, if I didn’t hold a very sizable percentage of my non-TSP assets in C Fund equivalents, I would have almost certainly moved perhaps 40% to the C Fund by now. This is not to say that I believe the S Fund and C Fund will perform on par with each other, just that I don’t believe the business cycle theory of investing gives us strong guidance in either direction at this point.

The TSP I Fund: 

I currently have 15% of my Thrift Savings Plan allocated to the TSP I Fund. You will recall that when we talk about the I Fund, 70% of it is made up of large cap stocks from Japan, the UK, Germany, France and Switzerland:

TSP I Fund_-_country weights

It isn’t nearly as simple to look at all of the constituent bits of the TSP I Fund as it is to look at the US economy and draw a conclusion as to where they average out to be in their respective economic cycles. But we can try to get a close approximation by looking at the key economic indicators for the big five players in that universe. Note that there is not necessarily as strong a correlation between these indicators and growth in each of these countries as there is in the US. I’m not going to go into detail on each one, but I will include a link to the Trading Economics country summary pages which is what I rely on for a snapshot. As I look at these, I tend to focus on GDP growth rate, Unemployment, Money Supply Growth, and PMI:

And after looking at those numbers and factoring in the stimulus efforts of both the European Central Bank and Japan, I’m comfortable with allocating a portion of my Thrift Savings Plan to the TSP I Fund.

Investing outside the TSP:

I haven’t talked about individual stocks for a long time, but there has been some action in a few which we highlighted as interesting in my 2014 and 2015 crystal ball predictions, so I thought I would give a quick synopsis. As always, individual stocks (particularly highly speculative ones like these) are for my Vegas money, not for my retirement savings.

The two speculative stocks I predicted might double in the January 2014 update:

  • InSite Vision (INSV): This was one of the very speculative penny stocks which I thought was a potential double. This experiment has mercifully come to an end, as INSV has been bought out by Sun Pharmaceutical at 0.35/share. A 15% return over almost two years is not really what I had in mind, but it is a relief after seeing INSV dip to as low as 12 cents a share.
  • Facebook (FB): FB was trading at $54 on 1/2/2014, and it closed at $108 last Thursday, so we officially got our double. I don’t think this one is speculative anymore. They have done a masterful job of transitioning to mobile and monetizing during that period, and now they have an opportunity to monetize their two mega-aquistions, Instagram and WhatsApp. I don’t expect growth to continue at the rate it has, but I believe there is still significant upside from here.

And the two speculative stocks I predicted might double in the Look Forward at Non-TSP Investing in 2015:

  • Sberbank of Russia (SBRCY): this one traded at $4.04 at the beginning of the year, and was at $6.66 on November 4th. I will take 40% in less than a year, particularly considering that I thought that in order for SBRCY to do well, (1) Russia would have to pull back geopolitically in order for sanctions to be removed (instead they have doubled down in the Ukraine and joined the conflict in Syria), and (2) oil prices would have to rebound. Neither of those things have happened yet, so I think this one still has a long ways to run and I wouldn’t be surprised to see it over $10 a share a year from now.
  • Sequenom (SQNM): $3.70 at the beginning of the year, $1.74 at the end of last week. Ouch. But I still believe SQNM has the potential to become a billion dollar company (it is currently valued at $206 million), so I will maintain my tiny investment.

Recommended Reading:

Two books which I plowed through during my spare time in the last month which I think are worth taking a look at depending on where you are in life:

Get What’s Yours: The Secrets to Maxing Out Your Social Security: Bad decisions about which Social Security benefits to apply for cost some individual retirees tens of thousands of dollars in lost income every year. The authors explain Social Security benefits in an easy to understand and user-friendly style. Particularly timely as Congress has been monkeying around with file-and-suspend in the most recent budget deal and that tactic will disappear in 2016.

The Power of Habit: Why We Do What We Do in Life and Business: this one is on the personal development side of the house, but is a great read and much better than the typical self-help nonsense in books about habit forming.

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 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?

kitten who wants you to share the TSP Allocation GuideI 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. 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!

16 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – November 2015”

  1. Would you also move the balance from the I fund to the S fund? I have had my allocation in the S (50%) and the I (50%)fund since 2006.

    1. No, I like having a small allocation in the I Fund right now. I’m not convinced it is going to outperform the TSP C Fund or S Fund, but it has the potential to do very well.

  2. I am young and just started my career and have been following your site for the past few months. I would like to know what do you recommend (book wise) to a young person without any knowledge of this stuff that is interesting in investing in stocks. Is there a book or guide that helps with the step by step process?

      1. Great stuff. Ever since I have followed your system of 85S and 15I, I have already made a little over $200 just the last few days. Thank you so much. My life has changed forever and looking forward to millions in the future.

  3. Great update! Glad to read your assuring words! I had considered moving some of my S fund to the C fund last month, but I think it was right that I kept my money in S (after all, it’s all paper losses until you actually pull out, right?). Looking forward to December’s update!

  4. Hey, I just found this site and am intrigued with all of the information here. I’ve been with the feds (LEO) for a couple years and have about 27 years til mandatory retirement. Currently, I have the max TSP contribution and am in the L2050 fund. Would you recommend waiting to transfer to the different funds when the business cycle fully changes to the next business cycle or do it DURING the current cycle?

  5. I just started following your advice today. I have a small amount in TSP and started about 3 years ago in the G fund and small in the I fund. Since I have read information on your site today I switched to 85 S and 15 I. I am ready for this adventure with you!

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    I follow a site that posts which percentage you should put into each fund monthly. Do you provide this as well or are you suggesting the 85(s) 15 (I) for an extended period of time? Also…. You have to change both contribution allocations and the interfund transfer percentages as well Correct? Just want to make sure I’m right..I’m new to this site. Thanks!

  7. I have been following your site for a while now and it has really opened my eyes on investing. Definitely still a novice, but slowly learning more and more. Thanks for all the great advice.
    I have my TSP but I also have a Roth IRA mutual fund with USAA and after reading through the intelligent investor by Benjamin graham (book you recommended- great book) I am trying to move my investments into funds with lower yearly expense costs (the ones I am in right now are over 1.2%). Usaa has two index mutual funds. One is the S&P 500 index fund member (USSPX) and Nasdaq 100 index fund (USNQX).
    I was wondering what are your thoughts on the Nasdaq and its current state, would it be worth investing in the Nasdaq index? Also since I am already invested in the S&P 500 through my TSP via the C fund would you recommend putting some money into basically the same index but through USAA?

    Thanks in advance

  8. i agree. we need an update badly. I have been 85 s and 15 I and I am waiting for the turnaround. we need an update fast. hoping for a santa rally

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