Diversification

This topic contains 4 replies, has 3 voices, and was last updated by  Robbie 5 years, 5 months ago.

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  • #10784

    Robbie
    Participant

    I am new to the website and find your insight very beneficial so thank you for looking out for us! I find it hard for me to allocate everything into one fund, however, I don’t want to miss out either. I don’t plan on retiring for 20 years, but I am a little conservative. I currently have my TSP allocations as 30% in the G, 44% in the S (following your direction on the business cycle), 20% in the C and 6% in the I. I don’t have anything in the F as bonds aren’t doing well. I guess my question is (and maybe you’ve answered this in a previous post) that by putting all funds and contributions into one single fund considered diversified? I mention diversification because every financial adviser I’ve listened to recommends diversity in retirement funds/assets. I also know that other investors think outside the box and their opinions may be more aligned with doing something different. I’ve recently been reading a ton of books on investing/personal finance etc, but I am still a beginner. Any assistance or thoughts you can provide to give me a piece of mind would be greatly appreciated. Also, thank you for explaining the business cycle in the guide, I found it very intriguing.

    #10805

    William

    Robbie,

    I, like you, enjoy scanning this site for informative details from TS Paul and participants.

    Let me take a stab at answering your question. The S fund is more or less an index fund that mirrors the Russell 2000. If you do an internet search for that index you’ll see what the index is comprised of and quickly realize there is plenty of sector diversification as related to small capitalization companies. There are pharmaceutical, retail, semiconductor, Financial Services, Technology, Health Care, Producer Durables, Consumer Discretionary type companies. Plenty of diversification among sectors. So in a sense you are diversified but only amongst the small-cap segment of the U.S. equity universe.

    Hope that helps

    #10814

    Robbie
    Participant

    William,

    I appreciate you taking the time to answer my question. I’ve recently developed a great new interest in personal finance and have been drilling myself with it for a few months now. My coworker recommended this site and I’ve enjoyed learning about the business cycle strategy of investing. Thanks again!

    #10947

    TS Paul
    Keymaster

    Hi Robbie

    Great question, and sorry for the slow response – I have been pressed for time and getting the update out took up the little time I had to devote to the website lately.

    My belief is that at any given phase of the business cycle, there will typically only be one fund indicated (ignoring the TSP I Fund for this purpose).

    Diversification might make sense in a truly passive investing strategy, although even if you never make any adjustments at all, being all in stocks will result in a higher return over the long term than being in a mixed portfolio. The idea behind being diversified is it prevents a large loss when the stock market goes into recession. This works because bonds move in the opposite direction when stocks go down, so you wind up not losing as much overall. That sounds like a positive, but the same dynamic which keeps you from losing the maximum on the downside, also keeps you from going up to as high as you can go when the market goes up.

    Because I believe I can safely be out of the market before a significant recession based crash by monitoring where we are in the economic cycle, diversification doesn’t make sense in my circumstance.

    Let’s take your 30% in the G Fund, for example. If the market had tanked last year, that 30% would have been safe and earned 1.5% or whatever the G Fund returned. That would have protected that 30% from whatever decline the market suffered. But because the market went up about 38%, you missed out on about 36% worth of returns on that portion of your TSP. For every $100,000 you had in G Fund, that would have been $36,000 in missed gains. That is pretty significant.

    Financial advisers preach diversification because they are afraid they will lose all their clients when the market declines unless they can point to a portion of their holdings which went up during the same period. In their view, average is better, even if they understand their clients would be better off over the long term not “protecting” a large portion of their funds. They have learned that the inaccurate “slow but steady” and “conservative” themes sell better with a fearful majority of investors.

    The TSP Allocation Guide www.TSPallocation.com

    #11036

    Robbie
    Participant

    Greatly appreciated Paul and thank you for taking the time to respond to me! I think you’ve commented on it in other posts and I think I’m just the typical investor who is trying to determine how conservative or aggressive I should be. The more I learn the more all of this the more it will sink in. Thanks again and keep up the great work!

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