This is an archive post. Click here to view the Current Update.
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.
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 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:
And we are talking about large company stocks currently apportioned in the sectors below:
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:
- 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
- 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
- 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
- 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
- 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:
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.
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.
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.
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.)