By Mike Miles
February 12th, 2014 | Uncategorized
Q. I saw you use the term risk efficiency in a recent response, and it made me curious. I have a nice little amount in the Thrift Savings Plan now. I don’t think I will be needing it in the future, except to hand down to future heirs, and so have tried to maintain a 70 percent stocks (35 percent C, 15 percent S and 20 percent I), 15 percent F, 15 percent G ratio. I read in a financial magazine (sometime around 2009) that a 70/30 ratio of stocks to bonds and/or cash reduced the risk considerably over a 100 percent stock portfolio, and didn’t reduce returns significantly. Do you agree, or do you have some other thoughts on what is risk-efficient for long-term growth?
A. Risk efficiency is a measure of how close an investment portfolio lies to the “Efficient Frontier” — the set of portfolios that mix assets together in ways that produce the maximum expected rate of return for the level of risk they produce. I can’t tell you how risk-efficient your asset allocation model is, but I’d guess it’s pretty risk efficient. Note that this doesn’t mean that it’s risk-appropriate. The correct asset allocation will be both.
January 29th, 2014 | Uncategorized
Q. It seems everywhere a person reads, the “expert” advice is to get out of bonds. It’s likely that interest rates will climb soon (they certainly will not go lower), the world is awash in debt etc. Your advice is to substitute a portion of other funds in place of F.
Given the predicted bond climate, why not reduce F Fund allocation to near zero? Is there some reason I’m missing for maintaining an allocation in F above low single digit percentages or perhaps no F fund allocation at all? In other words, if the F Fund is about to incur losses, why not move it all out for the short term?
A. As I have said, and you confirm, I have no objection to substituting G Fund for F Fund in the current interest rate environment. The reason to keep some allocation to bonds is for their ability to hedge stock risk. If the stock market loses 50 percent of its value again (for the third time since 2000), that F Fund exposure will look pretty smart.
January 22nd, 2014 | Uncategorized
Q. I recently decided to shift the corporate bond portion of my overall portfolio into my retirement accounts (i.e., shift my retirement account holdings largely into corporate bonds, and shift my taxable account holdings away from them) since the income from bonds is taxed at a higher rate than income from equities.
Since the Thrift Savings Plan is about one-third of my retirement account money, I took a closer look at the F Fund and I was shocked to see that the majority of the Barclays Capital U.S. Aggregate Bond Index that the F Fund tracks is treasuries.
I think of the purpose of the nonlifestyle funds being to allow TSP participants access to some diversification options to tailor their own portfolio. Why then would F be constructed in a way that it consists of essentially more than half G? If I wanted a portion of my bond holdings to be treasuries, I can always add more G. But if I only want to hold non-Treasury bonds, there’s no way to do it. I can’t go long F and short G.
This makes so little sense that I would bet dollars to donuts that most F Fund investors are unaware of the overlap. I generally hold the TSP design in high regard. Am I missing something?
A. The two assumptions that have inspired your concern are incorrect. First, the G Fund is not a bond fund, it is a cash equivalent, and there is no overlap between it and the F Fund. Second, as of Jan. 17, 2014, the F Fund’s index consisted of about one-third U.S. Treasury debt, and this has been historically typical.
July 24th, 2013 | Uncategorized
Q. How is the Thrift Savings Plan’s G Fund related to bonds I keep hearing about lately being sold off from other bond funds? How is the G Fund different from these funds? Is this bond fund an inflation-protected bond fund? How does this fund guarantee the principal investment? Who takes the loss if yields on bonds purchased are lower when shares in this fund are transferred than on when those shares were bought?
A. The G Fund is backed by the federal government and accrues interest equal the weighted average interest rate for all outstanding U.S. Treasury debt. It is not a bond and does not behave like one. It’s equivalent to cash with a high interest rate.
March 26th, 2013 | Uncategorized
Q. Many experts are indicating that there is a bond market bubble growing. In addition, The Wall Street Journal survey report indicates that interest rates will be going up about a point in 2014. For the next year or two, would it be best to move money out of the F Fund and place it in the G Fund, or move monies out of both funds and place them in market funds like C, S or I? Since both G and F are invested in bonds, will increasing interest rates affect invested funds negatively?
A. I have been substituting G Fund for part of the F Fund allocation in my client portfolios for the past two years.
September 24th, 2012 | Uncategorized
Q. I am 61 and have $200,000 in the Thrift Savings Plan. I’m in process of transferring another $240,000 from an outside discount brokerage firm to my TSP. I would like to transfer all of the $240,000 to the F Fund. With interest rates possibly remaining low for another few years, is this a good move? When interest rates rise, how much will the F fund shares decrease? The bonds it holds are short and intermediate, so I’m assuming it won’t lose as much as if it held long-term bonds, but I’m not clear on how much I could lose.
I’m trying to move from equities to bonds due to my age and plans for retirement, but still make some money. The G Fund has been doing so poorly. What are the risks to the F Fund? I’ve been watching the F Fund now for a few years, expecting it to go down, but so far it’s doing pretty well.
A. With interest rates near zero, I don’t think a 100 percent allocation to the F Fund is a good idea. In fact, I can’t think of a situation when it would ever be a good idea. I suggest that you use the L Fund that most closely corresponds to your life expectancy, or find a trustworthy investment adviser to help you.
December 29th, 2010 | Uncategorized
Q: As the government treasury bond yields go up, does the Thrift Savings Plan’s G Fund share price increase? The opposite would be true of the F Fund, since share prices would be affected in a negative way with rising interests rates.
A: While there are times when the daily return for the G Fund is negative, the monthly and annual change in the G Fund’s share price is always positive.