Change in TSP Allocation – July 2015

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

07/19/2015

Bottom Line Up Front

After more than five years of being 100% invested in the Thrift Savings Plan S Fund, I am going to make a change this week to 85% TSP S Fund and 15% TSP I Fund. (This change is to both my contribution allocation as well as where my existing balances are invested.)

I have made the decision to move a portion of my TSP allocation to the I Fund because I believe that the odds are it will outperform all of the other Thrift Savings Plan funds over the next year. I have only moved a relatively small portion to the TSP I Fund, however, because I also believe there is a lesser but still very real possibility that the I Fund will significantly underperform the TSP S Fund over that period.

This is the change I really started discussing back in the A Look Forward at 2015 post, but I explained back in the February update why I wanted to hold off until the Greek crisis was resolved.

The Big Disclaimer

First off, please let me be clear that a change in my Thrift Savings Plan allocation should not ever directly result in a change in yours. I post on here to share ideas and to generate discussion, so I encourage readers to consider whether what I’m doing makes sense and comment on that below, but then to look at all the other sources of investing information out there and to consider their own situations before making any decisions.

Greece

Thrift Savings Plan I Fund - Greek VoteGreece should largely be behind us for another three years until the current bailout expires and the Eurozone goes through the whole exercise again. Greek voters overwhelmingly rejected a non-existent deal based on promises by the Greek PM that a “No” vote would strengthen their bargaining position. European leaders then made it clear they were not going to continue to throw good money after bad in keeping Greek banks afloat and that Greece was on the way out of the Eurozone unless they agreed to everything which was being demanded of them. Greek leadership saw the specter of a total collapse and agreed to a deal which was much worse than the hypothetical one which their voters had rejected just a few days before.

Isn’t politics great?

Resolving the Greek issue does not, of course, cure all of Europe’s ills, and Europe makes up only a part of the TSP I Fund, so this doesn’t necessarily mean smooth sailing for the I Fund going forward.

How did I chose 15%?

That is not an arbitrary number, but it is very specific to my situation – to the overall size of my savings and to the mix of investments I have outside the TSP. We all have different mixes of investments, wealth captured in other types of assets such as our homes, and varying tolerance for volatility in our investments which weigh in setting our Thrift Savings Plan strategy. If I didn’t already have as many speculative investments outside the TSP as I do, I might well be selecting an allocation closer to 70% S Fund and 30% I Fund, and if I was more cautious by nature I might only be putting 5% or 10% into the I Fund.

The TSP I Fund

I would encourage you to go back now and take a look at this updated post in which I explain the TSP I Fund in some detail and talk about when I think it is a good investment: The Role of the TSP I Fund in TSP Allocation Strategy.

You will recall that when we talk about the I Fund we are really talking about Japan, the UK, Germany, France and Switzerland:

TSP I Fund_-_country weights

And we are talking about large company stocks currently apportioned in the sectors below:

TSP I Fund_-_sector weights

Key TSP I Fund Economies

It isn’t nearly as simple to look at all of the constituent bits of the TSP I Fund as it is to look at the US economy and draw a conclusion as to where they average out to be in their respective economic cycles. But we can try to get a close approximation by looking at the key economic indicators for the big five players in that universe. Note that there is not necessarily as strong a correlation between these indicators and growth in each of these countries as there is in the US, but it is worth discussing them as a point of comparison with where the US economy is. I’m not going to go into great detail on each one, but I will include a link to the brilliant Trading Economics country summary pages which is what I rely on for a snapshot as the last bullet for each one. A good way to look at those summary pages is to pull the US economic indicator summary page up in a separate window and compare line by line to get a good sense of where things stand compared to the United States:

Japan:

  • GDP growth rate: Japan ended 2014 badly, but has trended in the right direction in the first two quarters of 2015.
  • Unemployment: Japan has a pretty solid safety net and always has a negligible unemployment rate. To the extent that it matters, it has fallen from 3.6% to 3.3% since the beginning of the year.
  • Money Supply Growth: after some huge growth in March and April the growth rate has tapered off but is still moving in the right direction.
  • PMI: PMI has largely hovered within a half a point of 50 since March, with a June report of 50.10.
  • Japan indicators summary page

United Kingdom:

  • GDP growth rate: second quarter numbers aren’t released yet, so relying on Mach numbers which showed a decline.
  • Unemployment: the UK is within the full employment range at 5.6%.
  • Money Supply Growth: has trended up in a regular, orderly fashion.
  • PMI: PMI has fallen since the beginning of the year (along with most of the rest of the world’s), but has stayed above 51 so no cause for alarm here.
  • UK indicators summary page

France:

  • GDP growth rate: second quarter not yet reported. Positive for the three quarters before that with a nice jump in the first quarter of this year.
  • Unemployment: France continues to struggle here, with unemployment generally flat since the beginning of 2013 and currently at 10.3%.
  • Money Supply Growth: ragged, but generally an upward trend.
  • PMI: up the last three months in a row and back above 50 now at 50.7.
  • France indicators summary page

Switzerland:

  • GDP growth rate: second quarter not yet reported. GDP growth contracted in the first quarter of 2015.
  • Unemployment: very much at full employment with a rate of 3.1%.
  • Money Supply Growth: Switzerland has been trying to control its currency through various means including money supply, so this is not a factor.
  • PMI: upward trend the last five months in a row and now back exactly at 50.
  • Switzerland indicators summary page

Germany:

  • GDP growth rate: second quarter not yet reported. Ragged, but generally positive with six of the last ten quarters solidly positive and only two solidly negative.
  • Unemployment: at full employment with a very flat, consistent rate of 4.7%.
  • Money Supply Growth: solid consistent growth going back several years.
  • PMI: at or above 51 every month in 2015, currently at 51.9.
  • Germany indicators summary page

And because I like yield curves and pictures so much, here are just about all the economies we care about in one picture so you can see how they relate to the US:

TSP I Fund yield curve

And for one last comparison, here is a link to the Greek economic indicators so you can see what the numbers look like for a country in recession (remember that no Greek stocks are in the TSP I Fund at all).

So where do all those numbers leave me? From an economic standpoint, the stronger economies above are roughly at the same point in their recoveries as the United States, while the weaker ones (France in particular) are some distance behind.

Other Factors

Monetary policy gives an advantage to the countries which dominate the TSP I Fund. With the exception of the UK which has recently hinted about raising central bank interest rates, both the Eurozone and Japan have enacted stimulus programs which (1) have the effect of lowering interest rates (to encourage companies to borrow to invest in capital expenditures and hiring, but which also encourages investors to borrow to invest), and (2) weaken their currencies against other major currencies (principally the US dollar), which makes their exports cheaper thereby stimulating growth. I’m not saying that all of that is going to work, but strong action by central banks can generally move their economies, at least over the medium term.

Valuations: A comparison of relative valuations is another factor for me here. Right now the price earnings ratios of TSP C Fund and TSP I Fund are as follows:

  • TSP C Fund (using VOO ETF as a proxy): 20.79
  • TSP I Fund (using VEA ETF as a proxy): 15.94

I compare the I Fund to the C Fund because they are both large cap funds with a closer historic parity. I like the TSP I Fund from a valuation standpoint compared to the US alternatives. I think it has room to expand several percentage points as investors’ faith in the European recovery is renewed, whereas the C Fund is several points over its historical average P/E ratio.

Conclusion

With all of the above factored in, I’ve decided that the I Fund has a place in my current TSP strategy.

This is an excellent time to note that because I am so publicly moving some of my funds into the TSP I Fund this week, it will almost certainly go down over the short term. That’s just how these things work. I’m not worried about the next week or the next month – if it is down six months or a year from now I will be concerned.

The Rest of the July Update

There have been no major changes in any of the economic indicators since last month, so I am still reasonably content to keep the balance of my Thrift Savings Plan balance in the S Fund. I am a little bit concerned that small cap valuations are about 10% higher than their average, so it is worth keeping a weather eye on that going forward and I may well move some of my balance to the TSP C Fund if I start to feel we are entering a bubble.

TSP Allocation Guide’s performance year-to-date:  6.08% (through market close on 07/17/2015)

Year to date Thrift Savings Plan fund performance:
•    TSP C Fund:  4.46%
•    TSP S Fund:   6.08%
•    TSP I Fund:    9.27%
•    TSP G Fund:  1.06%
•    TSP F Fund:   0.16%

Recommended Reading for International Investing

This month’s recommended reading deals specifically with international investing: Own the Globe: How Smart Investors Create Global Portfolios, by Aaron Anderson is the only book on the subject which I can remember being impressed with. If you know of another worth taking a look at, please let us know by sharing in the comments below.

And Finally…

If you found this post useful, or even just interesting, please help me by sharing with your friends and colleagues who participate in the Thrift Savings Plan through an email, tweeting it, or liking it through the social media buttons below. Thanks very much!

(If you didn’t go back and read the overview post on the TSP I Fund earlier, this might be a good time: The Role of the TSP I Fund in TSP Allocation Strategy.)

 

33 thoughts on “Change in TSP Allocation – July 2015”

  1. With all the info on this site I could tell it was time for a shift to the I fund. Thanks you have gotten me doing my own research.

  2. When changing your TSP allocation, do you also do an interfund transfer to match this change? I am very new to all of this and unsure how this works, any input is appreciated

    1. I believe he has stated in other posts that when he gives an allocation it refers to the his existing balances as well as future contributions.

  3. +1 I’m also wondering if you did an interfund transfer to reflect the change in allocation or if you are just making all future allocations into the I Fund. By the way thanks for the information your guide has been great so far!

  4. This change is to both my contribution allocation as well as where my existing balances are invested (I have done an interfund transfer). Thanks for pointing out that I left out that language this month – I’ve added it back in above.

  5. “Greek leadership saw the specter of a total collapse and agreed to a deal which was much worse than the hypothetical one which their voters had rejected just a few days before.”

    They rejected a five month extension. Current deal is for three years so I am not sure that the deal is much worse. We will see where the world will be in three years. Perhaps more countries will be ready to admit their debts are also unsustainable.

    1. This was definitely a band aid solution because I do not believe that any amount of restructuring is going to make the Greek debt repayable. Unless they strike oil in the Aegean Sea in the next three years, they are going to be back to the same place. Neither side was ready to push the button this time, but I’m not sure that will be the case in 2018.

  6. I have only been investing for 11 months, I enjoyed your article, and feel that a move might work for me. However, with such a little amount in my account, is it worth it? should I stay in the C until I hit a good number to dived between the 3 accounts. For example, ride the C fund for 5 years, then divide the amounts by C, S, I? I have only been able to contribute 5% but am upping this amount another 5% in August when I obtain my raise. Any input would be great!!! Enjoy reading your advice.

    1. Drew,

      Whether its $1 or $100,000, it will always be best to place your money in the fund(s) earning the highest return. If you feel the I/S are going to outperform the C, make the move.

      Phil

      1. What he said. Time is the most important factor in investing, so even just a 1 or 2% difference in annual return now turns into a lot of money down the road after that difference compounds for a few decades.

  7. Question
    – You have 9.27% YTD performance for the I Fund but the TSP website has it as 6.52%. The TSP website has (3.95%) for the last 12 months.

    Did I miss something? Even the C and the S Fund percentages are different.

    Thanks for the good read.

    1. Do,

      The TSP website only updates their numbers on a monthly basis. The 6.52% YTD for the I-Fund on the TSP site was as of June 30 ($25.7970).

      Paul is presented YTD 9.27% with July 17 numbers ($26.4624).

      So just remember that any numbers on the TSP site won’t include the current month’s performance.

  8. I have moved my funding as well and would like TS Paul’s opinion. My current allocation is:
    75% TSP S fund
    15% TSP c fund
    10% TSP I fund

    I hold like beliefs in the newsletters regarding the different phases and believe that the spread above will hold true, of course until a larger percentage will be moved from I to C.

    1. I’m close, because I believe we are in that grey area between phases right now and there isn’t a clear choice. But I have a large amount of TSP C Fund equivalent investments outside the TSP, so I have my large cap exposure elsewhere.

  9. You may believe the I Fund is going to significantly outperformed the other TSP Funds over the next year. At this time the I Fund has a negative 3.95% for past12 months. However when the I Fund does outperformed the other TSP Funds you will get the increase on the Rate of Return.

  10. Sorry but your page on the Greek economy is a little complex for me, could you provide the summary of the five main indicators as you do for the US and the other European Countries.

    Secondly could you provide what $10,000 invested since the TSP started would amount to if the investor had followed the Business Cycle Investment Strategy you use?

    Thank you,

    1. (1) The key things which stood out to me with respect to the Greek economy are the incredible shrinking economy (GDP has shrunk more than 30% since 2009), the unemployment rate (long-term unemployment is close to 20%), and manufacturing PMI (46.9 is fairly atrocious).

      (2) The $10,000 invested would be very hypothetical as the Thrift Savings Plan started out with just one fund and others were added over the years. Changes in phases of the business cycle are not an exact science, so there are a lot of different possible numbers you could come up with. Just avoiding the significant market downturns during clear recessions over the years would result in more than doubling any buy-and-hold-forever result, and being invested in the TSP F Fund when interest rates were slashed in an effort to stimulate the economy would have added significantly to that.

      That’s a long way of saying I don’t know, but it would have made a huge positive difference over any buy-and-hold or diversified strategy. If anybody wants to take a crack at roughly calculating that, it would be very interesting to see how you arrive at a number.

  11. I am new to this tsp. When you use contribution allocation, does that effect your share price? I know the Interfund transfer does reflect a new share price during the transfer. But how about just moving your money across funds?

    1. If I understand your question correctly, you pay whatever the price of the fund on the day your purchase is made whether you are buying with new contributions or selling one fund and buying another (which is really what happens when you do an interfund transfers).

  12. Thanks for the hard work on the site!

    Just changed my TSP from 100% S Fund to 80% S and 20% I Fund for both existing balance and future contributions.

    I have no other investments and was considering something similar to TS Brians 75% TSP S Fund, 15% C fund 10% TSP I fund; but am not sure if now is the time to start putting in to the C fund. I am a new hire working with under 15k for now (putting 15% in), so not as major risk as someone who is closer to retirement as far as banking 20% into the I fund goes…

    Thanks again for the information. Knowledge is power.

  13. Outside of your IRA/TSP, when do you determine is a good time to invest into individual equities? I’ve been reading a lot about P/E ratios and Schiller’s P/E ratio lately and am somewhat worried about furthering my positions in the individual equity markets vice maintaining them in my savings account. Understand that market timing is a fools game, but the P/E ratio is the staple by which stocks are cheap or expensive. How do you go about deciding one way or another?

    1. It very much depends on the type of stock. P/E ratios are something I look at when I am considering an established company in a relatively predictable sector – so if I was comparing different oil companies or banks or retail chains for example. But most of my individual investments are in fast growing companies in emerging sectors like technology or biotech, and in those the P/E doesn’t matter to me – I’m worried about earnings growth, market adoption, and momentum when I look at those companies.

  14. Thank you for your advice. I appreciate the science (economic findings) behind the madness. Your insight is highly valued and I have already sent multiple coworkers your way.

  15. TS Paul,

    Do you have a sense how how the recent devaluation of the chinese yuan will affect investments into the I-Fund. i understand that the main players are: the UK, Germany, France and Switzerland; but, given the influence of the chinese market on the global economy, is this news good for TSP investors or does this have unforseen consequences on current investment strategy, whether they are in the I-fund or other?

    Recently, I have changed my investment portfolio based on recommendations made on this website and my own independent research: 80% G-Fund & 20% i-fund. Wondering if your opinion has changed, in light of the more recent news,

    Any insight would be greatly appreciated. Thanks again.

    -Mikel

    1. Hi Mikel

      I will address the Chinese currency devaluation in some detail in the next update (which I hope to get out this weekend). The short answer is that this obviously wasn’t great for any of the Thrift Savings Plan stock funds (C, S or I) in the short term, but I don’t think this will have a significant impact over the medium term, and is very unlikely to have any long term impact. More this weekend when I get some computer time.

      Thanks, TS

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