Current TSP Allocation and Business Cycle Phase Update – October 2014


what, me worry?Sorry for the very late update this month – work has been busy to say the least, and I haven’t had the few hours to pull together the charts and content I usually post. I will be very brief this month and forgo all that so I can get something out and address the recent market volatility. If this is your first time reading the site, please do check out some of the past updates so you can see how we typically discuss the various indicators I follow when making my TSP allocation decisions.

For those of you who have been reading me for a while, it will come as no surprise that I scoffed at the talking heads on TV who opined that the market was down earlier in the month because of Ebola or ISIL or any of the other scary events in the news which have no measurable impact on any developed economy, much less that of the United States. Ebola and ISIL are still very much with us, facts ignored by those same pundits as they make up more nonsense to explain the resurgence in the market over the last week.

My belief is the downturn we saw prior to this week was largely a reaction to the September economic numbers coming out of Europe, which appears to be teetering on the brink of recession. That volatility dragged on much longer than the typical random corrections we see five or six times a year, so I am content to blame it on Europe (although we will never really know). The Eurozone’s PMI dropped to 50.5 last month, which is right on the dividing line between predicting growth and recession. Europe may well not fall into an actual recession (and I tend to doubt that it will), but the numbers do indicate to me that it is likely that Europe will remain anemic at best for at least another few quarters.

I have been pounding the drum about the slow but steady US recovery since I started this blog, so why does Europe matter to us? It does because (1) the markets overreact to everything, and (2) we are part of a global economy, and when Europe gets poor, it can’t afford to buy US exports.

Exports comprise roughly 13% of US GDP. That is minor compared to the 25-30% of the GDP of many other developed countries. But compare that to the 5% of US GDP which exports accounted for just 30 years ago. If Europe dips back into recession, it will have a substantial and measurable impact on the earnings of US companies, which will create a drag on our markets.

When Europe does turn positive, however, the TSP I Fund should do very well. The big gains in the stock market come at the beginning of economic recoveries, not when the economy is humming along at full capacity (witness the 30% plus gains we saw here in the US during four of the last five years). So when Europe does finally turn the corner, I expect we will see double digit returns in the I Fund (assuming Japan doesn’t crash).

Economic Indicators:

Very quickly, the numbers from last month (without the typical charts and explanations – if you are a first time reader, check out the evergreen content on the homepage for an explanation of why we look at these indicators):

Unemployment dropped again in September, falling under 6% and into the top of the “full employment” range.

PMI: 56.6% (a drop from August, but still well above the levels at which we get concerned about the prospects for recession)

Yield curve: the yield curve steepened in September, dropping the probability of recession in the next year to under 2%.

Current Allocation:

I remain 100% in the TSP S Fund. I nearly pulled the trigger and moved half to the TSP C Fund a few weeks ago as I feel we are on the cusp of changing phases in the Business Cycle. I expect that I will make that move before too much more time passes. I believe the US economy will continue to strengthen for the foreseeable future if Europe doesn’t tank, but the US markets will see much more moderate growth as the US reaches full employment and the Fed pushes interest rates higher next year. The TSP C Fund outperforms historically under those circumstances, but I am not quite there yet. I will talk more about that in the next update (assuming I am back to having weekends and evenings again next month). I would be interested in hearing what you think in the comments below or on the message board.

That’s it for tonight. As always, none of this is investment advice and I don’t want for you to do what I do with your TSP just because I am doing it and I know all the investing buzzwords. My goal is to create a forum for discussion, and I describe what I am doing and why to try to stimulate that discussion. If you enjoy that discussion, please subscribe so you know when I post a new update, and share the site with your friends using the social sharing buttons below.

Good luck out there.

19 thoughts on “Current TSP Allocation and Business Cycle Phase Update – October 2014”

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    class="comment byuser comment-author-dandan even thread-even depth-1 parent">

    We almost had you convinced 🙂 I really need to start paying attention to Europe/Other countries more. Good general explanation of how we are all inter-connected. I assume when referring to Europe, same as EU (European Union)…..that greedy Switzerland not playing nice with others 😉 How do those economies within the EU affect one another?

    I believe to be a little preemptive and buy up something before the masses migrate. If you know eventually we will head that way then why not jump the gun for a more 50/50 split for now?

    1. There is definitely an argument to be made for buying when the level of fear is the highest. I tend to be cautious with the I Fund in my TSP because there are so many moving parts, so I really have to be convinced before I change my allocation to include it. I am much more aggressive with my other investments.

    1. It did, but that’s cherry picking a date range. Pick any year or longer period over the last five years and, with the exception of 2011, I’m confident the S Fund crushed the L2020.

  2. I know you like to stay in the scary one but I have felt a little more comfortable with c/s split for the last 4 Months or so. Looking to retire soon but not expecting to touch the fund till MDA of 70 1/2 in about 8 1/2 years. Really enjoy the information you share.

  3. It has been a little nerve wracking watching the S Fund go up and down. When you are ready to move 50% to C please let us (me) know. I like what you say and what you do. I’m clueless and don’t mind following. Thanks for your dedication to this site…. BTW new follower (4 months)

  4. I am 61 and will probably retire next year but will not touch my TSP until 71-1/2. Been civil service for 4-1/2 years investing 10% into TSP. 50% C fund, 25% S and 25% I. The S fund has definatey outperformed but I think I am well positioned for the. Ext business cycle.

  5. I thought about pulling the trigger too based on this month’s economic indicators, but am holding off to see what the numbers look like next month. I’m not worried about monthly returns on the funds. Keeping track of returns less frequently than quarterly doesn’t make sense to me. I’m so glad I don’t have cable and don’t read silly click-bait articles, I can’t imagine what pseudo-financial nonsense they’re coming up with to increase audience share.

    Thank you again for this site. Hope you can enjoy some downtime soon!

  6. Isn’t there a good argument to have a position in the I fund given the relatively low share price? Buy low, sell high and all that? You mention your “other investments” – it would be useful for your readers to understand your overall portfolio strategy as they may be making decisions on their TSP allocations based on your advice and their TSP account may be their only retirement plan apart from Social Security and a pension.

    1. For the most part my non-TSP investments mirror what I am doing in the TSP (if I’m in S Fund in the TSP, for example, the bulk of my non-TSP investments will be in various small-cap or micro-cap ETFs). In my non-tax advantaged accounts I may front run what I am doing in the TSP with new money (so for example I have been putting new money into large-cap funds over the past year so I don’t incur the tax consequences of selling the small-caps when I do decide the phase has changed). I do need to do a better job of explaining exactly where my non-TSP investments are for the folks who are interested and will work on doing that as the TSPAG evolves.

      As for getting into the I Fund now – buying out-of-favor sectors is definitely a very sound investment strategy knowing that eventually they are going to move back towards their historical averages (revert to the mean). But I hate losses, so my preference is not to put money at risk while waiting for that happen when I’m not convinced that Europe and Japan are going to get their respective acts together over the next few quarters.

  7. Thank you for posting. Very informative and helpful. I think the the situation in Europe is very, very, dicey and I agree with you on treading cautiously into the I Fund…

  8. I hope you find your evenings and weekends, try to remember where you had them last. I’m starting to understand how you make sense of the economic indicators, but I still have some work to do. Your analysis and methods make a lot of sense, thank you so much for allowing us to peer beyond the curtain, it’s always better when one can see how things work. I do watch the business news everyday, however I don’t get all bent out of shape anymore. I’m still in the S Fund and concerned about how much higher it can go, yet it keeps on going. I don’t think you changed your allocation since I found this site, when was the last time you did so ? And do you have that update archived or was that prehistoric ?

    1. Last allocation change was Spring 2009 – years before the blog was started. It has been a very good run. I don’t think it is over yet, but returns will likely be much more average going forward.

  9. I had been exclusively in the S fund since Jan 2011 but very recently adjusted to a 50/50 allocation between the S & C funds. I feel the rotation into large cap stocks has started to gain momentum and may shift more into the C fund in the very near future.

  10. With news of the ECB looking to start stimulus soon, and China committed to growing its markets by lowering interest rates, is it time to invest money in the I fund?

    1. The I Fund is a developed markets fund and China is considered an emerging market, so it really isn’t represented in the I Fund at all. Japan and Europe dominate the I Fund and both seem to be stuck in neutral right now, so I’m having a hard time pulling the trigger on investing in the I Fund. At some point it is going to have a good run – I’m just not sure I’m smart enough to avoid all the volatility before that happens.

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