Current Thrift Savings Plan Allocation and Business Cycle Phase Update – January 2014

This is an archive post. Click here to view the Current Update.


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

The Thrift Savings Plan in 2013

“Financial genius is a rising stock market.” -John Kenneth Galbraith

The TSP Allocation Guide’s first year is in the books. Did I mention that we had a 38.35% return last year while making exactly zero allocation changes? And for those of you who wonder how that stacks up, we outperformed every single other Thrift Savings Plan website, newsletter, and paid service which I am aware of. And in some cases outperformed them by a shocking margin – if I had one of those paid sites (instead of a free, ad-supported site), I would be more than a little embarrassed to be asking people to keep paying a few hundred dollars a year for advice which resulted in a desultory return of 15%.

I am not so full of hubris to think that we came out on top because we are so very clever. The market just did exactly what it is supposed to do in this phase of the economic cycle. Just like it did in 2009 (S Fund up 34.85%), 2010 (S Fund up 29.06%), and 2012 (S Fund up 18.57%). The chronologists among you will have noticed that I left 2011 (S Fund -3.38%) off of that list. In 2011, US GDP growth was positive for three out of four quarters and the market would have performed in line with the other years above, but instead was dragged down by the European sovereign debt crisis.

And while the competitor in me enjoys seeing my slightly awkward, but search engine friendly name on top of the list, I’d also caution that in my view a year is about the shortest time frame I would look at for performance. I will be perfectly content if we are not on top every year as long as our three to five year returns are at or near the top.

The Thrift Savings Plan in 2014

I do not expect to see Thrift Savings Plan returns approaching 40% again this year. But I do expect the US economy to continue to recover and grow, and as a result for the stock market to do well. I don’t expect Congress to do anything especially dumb in the lead up to the mid-term elections (although they could certainly be doing a lot more to stimulate the economy than they are). From the international perspective, Europe and Japan both seem solid and the relative weakness in China should not have a major impact on the US market.

A “correction” or decline of 10% or more at some point during the year is just as likely as it is every year, so let me go ahead and predict that one will happen just so I can point to this when it does and say I told you so. But the timing of that correction is not something we can predict so the value of knowing that those routinely occur is the comfort that we can take from knowing the market also routinely recovers from those corrections in fairly short order. So these unknowns will not effect our Thrift Savings Plan strategy.

The Other Thrift Savings Plan Funds

So I’ve told you that I think we remain in the recovery/expansion phase of the business cycle, and that small caps (the TSP S Fund) typically perform best during this phase. But what do I think about the other funds?

TSP C Fund: I believe the TSP C Fund will perform well over the next quarter, perhaps even on par with the TSP S Fund. But historically, in this phase of the business cycle the S Fund will outperform and you really aren’t diversifying by choosing a slightly different basket of US stocks, so I don’t see any value in splitting my allocation.

TSP I Fund: The economies which underlie the TSP I Fund continue to have very mixed data. High unemployment rates and low GDP growth in Europe leave me unconvinced that the TSP I Fund is likely to outperform the domestic funds. For that reason, I won’t consider the TSP I Fund until I see stronger signs of growth in Europe. The TSP I Fund may well have some strong months going forward, but I don’t see a basis for predictable gains because of Europe’s unsteady recovery. Japan is a different story, and I have taken a position in the Japanese market in my non-Thrift Savings Plan investments because economic growth is strong, and more notably, there is a move to expose more of the 80%+ of Japanese pension funds which are currently in cash (totaling trillions of dollars) to the stock market. If you haven’t read it yet, I’ve got a post on the TSP I Fund which explains under what circumstances it performs well here: The Best International fund of the 1970’s Today.

TSP F Fund: The Fed’s taper of Quantitative Easing will likely result in interest rates continuing to trend up, which will result in negative returns for the TSP F Fund until they stabilize (see the F Fund vs G Fund post for the details on why that will happen).

TSP G Fund: The TSP G Fund would be my safe haven of choice these days, if I needed a safe haven. 1.5% annual return is dreadful, but it beats negative numbers which you might well see with the F Fund going forward.

TSP L Funds (the lot of them): If an investor just doesn’t want to bother looking at things for 40 years, a TSP L Fund would be better than the default TSP G Fund. But I believe we can do better in our Thrift Savings Plan than the mediocre to average returns which the L Funds are engineered to achieve.

The December Numbers

As always, I will quickly run through the key indicator data I used in determining where I think we are in the economic cycle and what it means to me when I am making my Thrift Savings Plan allocation decisions (these indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle):

(1) employment numbers: the Bureau of Labor Statistics released the December 2013 numbers this morning (that’s what I was waiting for before putting out this update). The results were lackluster, to say the least, but still moving in the right direction:

The unemployment rate declined from 7.0 percent to 6.7 percent in December, and total nonfarm payroll employment rose by 74,000.
Unemployment Rate December 2013 - TSP Allocation Guide

(2) money growth: I obtain this data from the Federal Reserve. The December numbers have not yet been released. I will update this section once they are.

In November we saw a slight decrease in the money supply. In the absence of other indicators of potential trouble, I won’t put much weight on single month of contraction. If this trend continues, however, we will have to dig deeper to figure out if this is a signal we should be concerned about.

Money Supply M2 November 2013 - TSP Allocation Guide(3) the stock market: the market continued to climb to new record levels in December. Things have flattened out in the early part of January, but I look at trends across months and quarters, not days or weeks.
S&P One Year Chart - TSP Allocation Guide
(4) yield spreads: I get my data for this section from the Cleveland Federal Reserve. The Cleveland Fed notes “although our approach is somewhat pessimistic with regard to the level of growth over the next year, it is quite optimistic about the recovery continuing.” The yield spread is huge, which indicates a very, very low probability of recession, and it continues to trend in the right direction:

Yield Curve Table - TSP Allocation GuideThe below chart shows the historical probability of recession based on where the yield curve is now:

Recession Probability based on Yield Curve Chart October 2013

(5) Purchasing Managers’ Index (PMI): as usual I went to the Institute for Supply Management and pulled up their most recent report (remember that any number above 50 indicates economic growth):

Economic activity in the manufacturing sector expanded in December for the seventh consecutive month, and the overall economy grew for the 55th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business. The PMI registered 57 percent, the second highest reading for the year, just 0.3 percentage point below November’s reading of 57.3 percent. The New Orders Index increased in December by 0.6 percentage point to 64.2 percent, which is its highest reading since April 2010 when it registered 65.1 percent. The Employment Index registered 56.9 percent, an increase of 0.4 percentage point compared to November’s reading of 56.5 percent. December’s employment reading is the highest since June 2011 when the Employment Index registered 59 percent. Comments from the panel generally reflect a solid final month of the year, capping off the second half of 2013, which was characterized by continuous growth and momentum in manufacturing.

The following table continues to show a strong pattern of improvement in the PMI:

PMI Last 12 Months - December 2013 - TSP Allocation GuideSo again, all of the indicators are pointing in the same direction, and I believe that we remain in the Expansion/Recovery Phase of the Business Cycle for all of the reasons which I described in my earlier post on The Business Cycle Theory of Investing. And so I remain 100% invested in the TSP S Fund.

Individual stock picking for fun (and occasional profit)

I shouldn’t put this in here at all, but everyone else picks a few individual stocks for the new year so I will share a few. This non-TSP talk is just for fun, not at all a recommendation to buy. The vast, vast majority of my investments are in great big index funds, not individual stocks. While I have had some great winners over the years, overall I would have been much better off if I had put all of the money I have invested in individual stocks into those index funds. So this is Vegas money, just for fun. Really.

Two stocks I believe will double in the next year (and which I own):

Large Cap: Facebook (FB). I don’t like the management, and don’t particularly like the product, but they have well over a billion users. And this is the year they go from trying to get as many users as they can to making money from all those eyeballs. Recent articles about how teens aren’t using Facebook anymore don’t bother me, because everyone else in the world is. Facebook will make a lot more ad money selling cars than it will selling lip gloss to tweens. I won’t be in this stock in a few years, but believe it will run up a great deal as they ramp up video ads and other ways to monetize their users.

Small (micro) cap: InSite Vision (INSV). INSV has the patent for a solution which keeps medication on your eyeball much longer than normal drops do. This has huge potential for applications from antibiotics to topical anesthetics. The company has been unevenly managed and never properly funded, but their pipeline is coming together and they should finally start making some money from all of their efforts instead of spending it on trials.

The Next Update

Unless something dramatic happens, I will update this post again during the second week of February after all of the January data comes in. 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 once or twice a day which you can follow: @TSPallocation

How you can help us

We did pretty well for our first year, with exponential growth since we moved online from the short-lived email format back in April. We have had hundreds of thousands of page views and visitors from over a hundred countries (thanks to Department of State and DoD scattering people all over the world). If you find the site useful and want to see it grow and improve, you can help by getting the word out and sharing it with your friends and colleagues who participate in the Thrift Savings Plan using the email and social sharing buttons below.

7 thoughts on “Current Thrift Savings Plan Allocation and Business Cycle Phase Update – January 2014”

  1. Hi. I love your site and I’m always looking to learn in order to grab gains! Questions I have: when you say the “yield spread is huge”, what numbers in that chart show that it is a huge spread? Just need help “seeing” this.
    Second question on job report numbers: What are we looking at for the market to jump? Dec numbers are projected at 203k and I think 7.0 percent. With keeping in mind that really good numbers can force a quicker “QE taper”. What number would we like to see this Friday to jump the markets up 1% but not force a bigger, quicker QE taper? Thanks and I will be following your work and spreading the word.

  2. When I say that the yield spread is huge, I’m referring to the difference between the three month and the ten year treasury rates. I guess by themselves it doesn’t mean much, and only when you look at that spread routinely does it jump out at you as being “huge” or extreme.

    As for what number we would like to see on Friday – you are right that a great jobs report could lead to a quicker taper, but I think the way the market responded to the announcement that taper was going to begin is a good sign that the market prefers good economic data to continued stimulus. I’m not knowledgeable enough to guess the right number to answer your question, but would like to see that 1% you are hoping for.

  3. Thanks for the update for us Fed Officers! You are helping me, and I help other Officers in my Agency when I learn more about investing.

  4. Not quit a 1% gain….
    But it was close.

    Now we need a better week…. Next week.

    When will the Feds talk about the next taper?

  5. Great year fellow S Fund followers. It is great to read and share interest from fellow TSP investors who enjoy watching the markets. In the past when I have told my colleagues I was 100% in the S fund since 2009, they would look at me like I was insane. The S fund was an easy call. My 10 years of work in the financial services industry prior to gov’t service helped. All those hours studying for the Series 7 and CFP exams have finally paid off. These free sites and Dan’s retirement guides have made it easier for everyone.

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