2008 Financial Crisis

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    I’ve learned a lot from your site and greatly appreciate you providing this information. I’m 100% S Fund and seeing the benefits in my returns. I don’t know if it’s fair to ask the following question because the 2008 crisis was so unique, but I figured it wouldn’t hurt to ask.
    Using the Business Cycle Theory of Investing, were you able to see the 2008 Financial Crisis approaching in time to switch to the G Fund and avoid losses?


    TS Paul

    Hi Bob

    Great question. I am resolute about not claiming unverified returns from before I started the website, so rather than telling you what I did back then, let’s look at the indicators someone more hypothetical following this strategy would have been looking at.

    I generally use http://www.tradingeconomics.com to look back at historical economic data. It is a great resource.

    The stock market – we saw the first sizable dip in about December 2007, followed by a second big dip in June 2008. In September 2008 the market plummeted.

    The unemployment rate bumped up in December 2007 and January 2008, stabilized, and then started a sharp rise in June 2008.

    Money supply M2 was useless as an indicator during that period as it continued up throughout.

    GDP growth showed itself to be the trailing indicator which it is, with the 1st and 3rd quarters of 2008 down, and the second quarter up. That down first quarter was a major warning signal.

    And finally, the treasury yield spread became very tight beginning in 2006 as the housing bubble burst and became inverted at the start of 2007 which strongly indicated that a recession was likely. It started to spread back out at the beginning of 2008 as the Fed frantically dropped the fed funds rate, but at that point it was too late.

    With the treasury yield spread as a warning that a big problem was on the horizon, someone following this strategy would have been very focused on the stock market and unemployment blips in late 2007 and early 2008 and probably at a minimum would have gone to a 50/50 stock Fund/F Fund split at that time. Once they saw the GDP growth rate go negative in the first quarter and the strong rise in unemployment starting in June, our hypothetical fed would have gone to bonds until the economy showed signs of turning around and missed the big drop in early fall.

    All in all, I think someone being fairly moderate with this strategy would have lost about 10% in the early market drops, but would have missed out on the catastrophic fall in the second half of 2008 and profited from the rise in bond values as interest rates were slashed. And as soon as the indicators showed signs of a recovery they would have been back into the S Fund and seen returns of 30%+ for three of the past five years, 18% in 2012, and one essentially flat year (-3.3%) in 2011 due to the Eurozone crisis.

    Hope that made some sense. TS

    The TSP Allocation Guide www.TSPallocation.com

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