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

THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.

05/24/2016

Let me start by apologizing for the problems many of you have had accessing the update over the past few months (particularly last month). The lesson here is that shared hosting from my provider was perfectly fine, if a bit slow, when the website had a thousand or so visitors a day. But as our community has grown, and especially when traffic spikes up dramatically on the days I post an update, that system has not been able to keep up.

TSPAG new serverSo I threw a bunch of money and time at it. After upgrading to a faster service, a quadrupled monthly web hosting bill, and a few days of frustrating tinkering, there should not be any problems when you try to access the page. The website is still as ugly as ever, but is on a faster server, is stripped down to the essentials, and should load much more quickly. I am still working out some of the bugs from migrating to the new server, so if you do encounter any problems with it, please do let me know.

And if you missed last month’s update, I do think it really was one of my more important ones. You should read it. http://www.tspallocation.com/current-thrift-savings-plan-allocation-business-cycle-analysis-april-2016/

Sell in May and go away?

TSP allocation guide May 2016At this time every year, I start getting emails and message board questions asking why I don’t sell my TSP stock funds and move to the TSP F (or G) Fund for the summer, since everyone knows that all the stockbrokers go to the Hamptons, volume goes way down, and the stock market loses ground during that period every year. And after last summer (S&P 500 down 7.4%), I expect even more of the same.

There are a number of variations on the adage, but they all revolve around selling near Memorial Day and buying back into the stock market after Labor Day. It’s a cute theory, but how has that actually played out?

From 1970 to 2015 (so let’s call that the modern stock market), the S&P 500 has been up 30 times during the summer months, and declined 15 times. So two years out of three the market is up during that dreaded period.

To be fair, stocks were up 5.6% during the up years, and down 8% during the down years, so that evens things out a bit in terms of total return. But on average the S&P 500 has gained 1% during each of those 45 summers.

Now 1% doesn’t sound like very much money – that’s only a penny per dollar invested. It sounds like such a negligible sum that it might be worth sitting out the summer months just so you don’t have to worry about it.

And that brings us back to fun with math. What if I told you that in a very realistic scenario, that 1% a year could turn into a half million dollars by the time you were ready to spend it?

math-plus-funTo work those numbers, let’s go to our Investor.gov compound interest calculator at https://www.investor.gov/tools/calculators/compound-interest-calculator

Once we get there we will start with $1 in current principal (to simulate being a brand new employee), $1500 monthly addition (which is probably a little high for a new employee), 30 years to grow (which reflects a nice long government career), an interest rate of 8% (which is fully 2% under the S&P 500’s average during the period 1928-2014), and we will compound that 12 times per year. That gets our TSP to $2,235,550 after 30 years. Not bad.

Now just make one little change – turn the 8% into 9%. That results in a Thrift Savings Plan balance of $2,746,129 – a difference of $510,579. And roughly 19% more than the guy who didn’t do the math.

TSP performance year-to-date:

(through market close on 05/24/2016)

• TSP C Fund:  2.52%
• TSP S Fund:  1.30%
• TSP I Fund:   -1.20%
• TSP G Fund:  0.74%
• TSP F Fund:   3.39%

And the TSP LifeCycle Funds are very average for 2016 so far (just as they are engineered to be), ranging from 1.08% to 1.32%.

This Month’s Economic Numbers:

In this section I will 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: the unemployment rate in the United States remained flat at 5.0 percent in April, while total non-farm payroll employment increased by 160,000. I obtain this data from the Bureau of Labor Statistics.

TSPAG employment May 2016Purchasing 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 this month’s reading of 50.8 is also well above the 43.2 which indicates an expansion of the overall economy:

Economic activity in the manufacturing sector expanded in April for the second consecutive month, while the overall economy grew for the 83rd consecutive month.

The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (50.1 percent) corresponds to a 2.2 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for April (50.8 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually.

And here’s a snapshot of the last 12 months:

TSPAG PMI May 2016Yield spreads: The yield curve increased in April (and has remained steady in May), which is a good sign for those of us who don’t want a recession. The Cleveland Fed is my usual source for analysis in this section, but those slackers haven’t updated their analysis this month.

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 January to February. The growth rate is what is meaningful here, and you can see that rate remained strong in the chart below:

Money Supply M2 in the United States increased to 12652.20 USD Billion in April from 12567.20 USD Billion in March of 2016.

TSPAG money supply May 2016Conclusion

All of which leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am maintaining the bulk of my investments in the TSP 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 (which is the whole point of this exercise) is low.

And the TSP I Fund

TSP advice I fundThe TSP I Fund is watching Europe right now, and Europe is watching the UK. British voters will go to the polls on June 23rd for a referendum on whether or not to leave the European Union. It is a simple question for most economists – the consensus is the British economy will suffer if they leave the EU and almost certainly tip into recession. But British voters are also very concerned about border controls these days, and many believe that the only way they can keep terrorist and undesirable migrants out is by breaking away from the EU.

Current polling has the UK remaining in the EU, which should be good for a relief rally. At this point European stock valuations are more than 2% lower than those in the US, so the TSP I Fund should have a little ways to run once the uncertainty over the bloc’s cohesion is settled. The TSP I Fund will likely be very volatile in the next month, but I’m sticking with my 15% allocation because I believe that longer term (over the next year) the I Fund has a better upside potential than any of the other funds.

I don’t do a full breakdown in this space, but I watch the indicators for Japan, the UK, Germany, France and Switzerland (which comprise the bulk of the TSP I Fund) in an attempt to divine the direction that index will go over the medium and long term.

Recommended Reading for TSP Investors

This month’s recommended book is an international bestseller from a few years ago, Thinking, Fast and Slow by Daniel Kahneman, a renowned psychologist and winner of the Nobel Prize in Economics. In this book, Kahneman explains how our brains have evolved and the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. The impact of overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the profound effect of cognitive biases on everything from playing the stock market to planning our next vacation―each of these can be understood only by knowing how the two systems shape our judgments and decisions.

This is the most interesting book I have read in a long time, but don’t take my word for it, it was a New York Times bestseller, winner of the National Academy of Sciences Best Book Award,  New York Times Book Review best books of 2011, Globe and Mail Best Books of the Year, The Economist‘s 2011 Books of the Year list, and one of The Wall Street Journal‘s Best Nonfiction Books of the Year 2011.

The Next Update

Unless something unexpected happens, I will send out my next update about this time next month. 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 a few times a week at: @TSPallocation

What’s in it for me?

TSPAG May 2016I 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 help 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!

21 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Analysis – May 2016”

    1. Good idea, I will create a page with that information. It used to be so easy because I went years without changing my allocation after I started the site.

  1. Wondering what your take is on the ‘F Fund’? I moved some there because as I looked, it’s been a consistent performer for quite a bit, though the bulk of my funds have been in C for about a year.

    1. Interest rates should start moving up, and the F Fund should consequently do poorly. But I’ve been saying the exact same thing for the past three years and it hasn’t happened yet.

    1. Yes, closely tied to what the Fed does – they have kept rates artificially low for the past few years, and now want to raise rates but are going very slowly for fear of knocking over the house of cards.

  2. Is it bad that I just copy your allocations to the T? 85 percent C fund, 15 percent I fund….and prior to that 100 percent S fund. Guess if I go down, at least it’s comforting to know others are going down with me. lol. Thanks for your service.

    1. I am sure there are some folks who do that, but it makes me very uncomfortable. I’m a very general resource and haven’t considered your specific circumstances. But good luck to both of us.

  3. So, thought I was (sort of) following your lead by making monthly transfers (Jan, Feb, Mar, Apr and May), from 60% S, 20% C and 20% I to 85% C and 15% I. Unfortunately, all I was doing was making contribution allocation changes, not interfund transfers. My distribution of account is currently 45.35% L2030, 3.14% C, 49.34% S and 2.17 I. Any suggestions on how to proceed?

    1. With as unpredictable as the market has been over the past year, you may very well have done better than I did with that distribution, so you may want to keep it.

      As for your current situation, I can’t give individual advice, but in similar situations when I wanted to move to a different allocation I have both moved all at once (when I felt strongly about the change), and moved into other funds slowly over time (as I did over the past six months) when I didn’t feel there was a compelling reason to choose one over the other.

  4. Just wanted to stop by and give thanks for the time and effort you put into providing us with such great information and knowledge. Much appreciated!

  5. Go into your TSP account at tsp.gov and do interfund transfers now to match your contribution allocations. TSP will sell anything you have that is now 0% and buy using the percentage of total funds into C and I. Doesn’t recoup the past but will make the contributions and what you currently have match.

  6. I plan on doing an Age-Based In-Service withdrawal in the near future. I’ve thought about it for years before coming to this decision. One of the reasons I’m doing this is because of the very limited distribution rules the TSP imposes when the employee retires and needs their money. Another reason, and I think you’ve mentioned it before, is the limited investment vehicles the TSP offers. I’ve been investing and trading for more than 27 years now, and feel confident in what I am about to undertake. Do you have any experience with other government employees who have made this move, and if so how has it worked out for them?

  7. Thanks. I’m 52 years of age and have been a federal employee for 28 1/2 years. Am eligible to retire now but will probably hang on a 4-5 more years and hopefully build the TSP as much as possible. Kids are grown (almost) with still one left who is half way through college.

    1. I think you’ll have a big penalty on your FERS annuity if you don’t wait until you are 56. I suggest talking with a retirement counselor in your personnel department

  8. My friend just sent me this link. I’m impressed with the article. The number one most important number is the non-farm payroll number that comes out the first Friday of every month. As the author states, 160,000 more people were employed, and therefore paying taxes and spending money on the economy, money they didn’t have the month before. I didn’t really follow PMI before, but the way it is presented in this report shows me I should be following it.
    I have done very well with TSP, better than my individual stock picks. I got out of C Fund in 2007 when the S&P 500 was 1208 and got back in again in March 2009 when S&P 500 was 808, for about a 40% gain compared to staying in C Fund as G Fund was paying 4-5% during that period. I have found the best way to beat the market is to go to G Fund during the downturns. It’s impossible to know the top and bottom of a downturn, but all you need to do is move to G Fund for part of a downturn to beet the stock market. Last year I beat the S&P 500 by 6.25%. This year (as of 5/27 close of business) I’m beating the S&P 500 by 6.39%. Currently I’m 100% in S Fund. S Fund moves up faster when stocks are going up, and moves down faster when stocks are going down. Our economy is showing amazing strength. Despite losing many good-paying jobs in the oil patch due to lower oil prices, and a higher dollar value making it more difficult for exporters to compete, we are still creating around 200,000 more jobs a month. The price of oil is coming off a double bottom, which is a bullish sign. As the price of oil goes back up, more good paying jobs in the oil patch will come back. The Fed is about to raise interest rates. Many may think that raising interest rates is bad for the economy and will cause stock prices to go down. That thought process seems logical, but past history proves that it is wrong. The reason it is wrong is because the Fed raises interest rates to keep the economy from overheating, which means in the long run stocks are probably going up. While I’m bullish right now, I still need to keep an eye on things. I’ll still keep an any eye on the non-farm payrolls, PMI, political situation, and the rest of the world. Other than this website, I also suggest listening to Cramer’s Mad Money if you have a paid TV service (I currently don’t and miss Cramer). Cramer isn’t always right, but he is honest about how he feels. Nobody can get it right all the time. Listening to Cramer will give you information about the whole picture and market sentiment.

  9. I have a question that has not occurred to me before now. I know that the current allocation is 85%C 15%I on both the distribution and the contribution but what happens when the distribution drifts over into for example, 86%C? Do we redistribute or leave as is?
    I pretty much stay in step with the recommendations on this site as they seem as good as anything I could come up with anyway and the results have been very nice. I keep trying to tell my coworkers at the VA to take a look but they look at their TSP account with fear. A good number are not even contributing the minimum 5% and they convince themselves that they cannot afford it so that they feel good with their decision. It’s too bad I don’t know of anyway to project the results from this site from the beginning of a typical employees career to when they retire. I’d like to show them what happens with various contribution percentages over time and why the G fund is not the safe harbor they think that it is.

    1. I am most often only invested in one TSP fund at a time, so I don’t typically need to rebalance. I do rebalance whenever I change my allocation. And absent any changes I would just rebalance about once a year.

      It is people like your colleagues I worry the most about. We have done an incredible disservice to much of our population by taking away pensions and forcing people with no education, experience or aptitude to make investing decisions for themselves. Big win for Wall Street in the short term, but we will all be paying for generations of destitute retirees.

      1. You nailed it right on the head. We don’t teach personal finance in schools. I imagine how better my life would have been if I understood what the rules of the road were before I got on the road.

  10. Just finished looking at the indicators update you mention and I am seeing improvement in all but one of them; the yield curve prediction is slightly worse but still not bad. I anticipate your prediction to remain in the current cycle and to keep investment allocations the same.

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