A Look Forward at Thrift Savings Plan Investing in 2015

2015 road ahead for TSPThe growth of the US economy largely continues to strengthen and I believe the stock market will in all likelihood end the year higher than where it started. I think small cap stocks will slightly outperform large cap stocks, and US markets will outperform most established and emerging international markets. These beliefs are based on the performances of the US and foreign economies over the past quarter.

The Impact of Low Oil Prices

Low oil prices are not good for everyone, but they are more good than bad for investors who hold general, diversified funds such as the TSP S and C Funds. In general, low oil prices will be good for the US economy, freeing consumers to spend their gas savings on other things which will lead to growth in other sectors. It will also be good for Europe and Japan, although to a lesser extent because the weakening of the Euro and Yen means gas in those places is still nearly as expensive for them now as it was six months ago before the oil crash.

Stock Market Volatility

I don’t really see a basis for the opinions of the financial media pundits who say the market will be more volatile in 2015 than normal, but there will certainly be volatility along the way as the price of oil and other external factors cause short term swings. I don’t see ISIS or Russia or any of the other current “crises” having more than a temporary impact at any point in the next 12 months. As at the beginning of every year, I will confidently predict we will see four or five 5% corrections, and probably a 10% correction at some point (because that happens pretty much every year). With history as a guide, I am convinced the timing of those corrections isn’t predictable, and that the market will recover and move higher in each case within a matter of weeks.

The China Risk

Chinese construction - TSP Allocation GuideThe wild card out there, and the greatest threat I see to global stock markets including our own, is China. At some point in the next few years, China is likely going to undergo a financial crisis which will make the 2008/2009 US meltdown look like a relative blip. China’s development has been funded by very low interest, cheap loans. These loans were never repaid though; instead they were simply rolled over into new loans again and again. The money doesn’t exist to pay these loans off, and with interest rates rising and tighter lending requirements in place it will become increasingly difficult to roll them over.

As a result, the Chinese financial system is in a precarious position. The Chinese certainly realize the predicament they are in and they are trying to create a way for these loans to transition to a sustainable model, but I don’t believe it will be possible without a severe restructuring of their financial system with companies bankrupted, banks failing, and a collapse of the Chinese real estate market. When this takes place, it will send shock waves through markets throughout the world, and it will likely more damaging to the Thrift Savings Plan stock funds than the European debt crisis in 2011. When and if this occurs, I will certainly be scrambling for the safety of either the TSP G or F Fund.

Thrift Savings Plan Fund Allocation

At this point, I expect I will remain 100% invested in the TSP S Fund for at least the first quarter of the year. At some point in 2015 I believe it is likely I will move to a split with the TSP C fund as we move further into the grey area between business cycle phases. That may come sooner than later as the dollar continues to strengthen against virtually every other currency, which historically has favored large caps over small caps.

2015 is also a year in which the TSP I Fund may see a relatively small allocation from me at some point (probably 15-20% at the most) depending on how things play out in Europe and Japan. The European Central Bank (ECB) will begin its form of Quantitative Easing shortly in an effort to prevent deflation in the Eurozone by buying over a trillion Euros worth of bonds over the next few years. The form this QE is taking will drive the value of the Euro down, which will make it easier for Europe to export goods. I don’t believe the European economy will really make a full recovery until Germany gives up its austerity demands and debts are restructured for the basket cases like Greece, but even just tipping growth back in the right direction could result in a strong move in the European markets. They aren’t moving in the right direction yet; it was announced just today that Germany tipped into deflation.

Tokyo neon TSPAGJapan has an easier time of managing its solo economy in contrast to the Europe with its 19 separate and very different economies. But Japan’s recovery has stalled over the last year and it remains to be seen whether Abe can restart it.

Coming Up

In my next post I will talk about non-TSP investing in 2015 and how I am approaching the various opportunities which the market appears to be presenting me over the next few months. Hopefully I will get that out in the next few days.

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9 thoughts on “A Look Forward at Thrift Savings Plan Investing in 2015”

      1. is there a reason you choosing to invest in 100% in the S fund than the C% fund since it appears the C fund was outperforming the S fund?

        1. The C Fund’s performance relative to the S Fund’s over the past few months doesn’t have any impact on my investing. Based on which business cycle phase the indicators show we are in, the S Fund will typically do better than the C Fund.

  1. Above, you state “As at the beginning of every year, I will confidently predict we will see four or five 5% corrections, and probably a 10% correction at some point (because that happens pretty much every year)…and that the market will recover and move higher in each case within a matter of weeks.”

    When the economy is in “Early” or “Mid” phase of the business cycle, the chance of a severe market correction (20%+) should be minimal, right? When in these phases, if investors waited for a 5% correction to get into the market, then got out after the market recovered, they could see a 15-25% increase in their portfolio each year when the economy is in these 2 phases of the business cycle. Why toy with economic trends in these 2 cycles if corrections are so frequent and a major correction is unlikely (buying at a 5% correction should be relatively safe)? An investor could shift strategies to follow your business cycle investing strategies when in the late or recession cycles. I know this strays from your economic only long term model, but am interested to hear your thoughts on the reliability of such a strategy. Thoughts?

  2. There are plenty of people who try to execute just such a strategy in their Thrift Savings Plan. It is harder in practice than in theory, however, because the market never neatly moves up or down 5%. If you have your money out and are waiting for that 5% drop, you might well miss a 15% gain. And if you buy automatically when it drops 5% (which I don’t necessarily think is a bad idea, I will almost always put any spare money outside the TSP to work in that situation), you might well see the market continue down another 5% before it rebounds.

    It is more active than I want to be. There might well be some years when I would be able to do better than sticking with my buy and hold strategy, but I suspect there would be some others when the market is up significantly and I would trail it because I sold after each recovery.

    The general trend of the market is up, so I would typically much prefer to be fully invested in my Thrift Savings Plan than waiting on the sidelines.

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