THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
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.
So 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?
At 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?
To 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.
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 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:
Yield 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.
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
The 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.
- Japan: Japan indicators summary page
- United Kingdom: UK indicators summary page
- France: France indicators summary page
- Switzerland: Switzerland indicators summary page
- Germany: Germany indicators summary page
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
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