By Mike Miles
December 2nd, 2013 | Uncategorized
Q. I have reverted back to a more conservative Thrift Savings Plan allocation: 67 percent G Fund/33 percent C Fund. I put in the maximum, including the maximum catch-up and, with match, it’s nearly $30,000 per year. My balance at 60 when I retire in five years should be between $500,000 and $600,000 depending on the return. I am estimating a 4 percent return.
I am wondering about keeping this asset allocation and taking monthly payments starting near 4 percent or slightly higher at age 60. Is a distribution with 70/30 as indicated above a bad idea? I like the conservative allocation and feel fairly comfortable with it. But some people say taking monthly payments out of TSP is a bad idea. Any suggestions?
A. It’s impossible to judge what’s best for you from the information you’ve provided. I can tell you that your asset allocation model is risk-inefficient. That is, you could achieve a higher rate of return for the risk you’re taking.
Adjusting your allocation to 20 percent C Fund, 8 percent S Fund, 2 percent I Fund, 30 percent F Fund and 40 percent G Fund will stay within your preferred 70 percent debt/30 percent equity constraint while increasing sustainable TSP lifetime withdrawal rate by about 20 percent.
Greater increases could be achieved by shifting toward more equity-heavy allocation models.
November 18th, 2013 | Uncategorized
Q. I’m 32 years old, have been contributing to the Thrift Savings Plan since 2005. I have 40 percent in my C Fund, 30 percent in S and 30 percent in I. Is this a good contribution allocation? I want to be as aggressive as possible, but I am also looking at moving most of my gains to the G Fund due to the fact the market may be headed in the same direction as 2009. If I want to protect my gains with the means of buying back at a lower price, what would be your recommendation be on rebalancing the money in my account and adjusting percentages on new money coming in?
A. You’re asking me how to implement your investment strategy. If you don’t know how to manage it, why are you using it in the first place? What do you know about that asset allocation you’re using? How is it likely to behave? What is its expected return? What is the standard deviation of those returns? How do these characteristics support or threaten your lifetime financial plan?
As I’ve pointed out many times, your question is like asking me how work the controls on your care without telling me where you are, where you want to go, what stops you want to make along the way, when you’d like to get there, what kind of car you’re driving or how much fuel you have in the tank. Your investment tactics should be based on an investment strategy which includes cash reserve and asset allocation targets, securities selection and transaction timing algorithms.
I don’t manage portfolios the way you are managing yours because there is too much uncertainty that could be avoided. The best advice I can give you is to recommend that you identify the investment allocation that will support your lifetime financial goals with a minimum of risk and then rebalance to that allocation on a regular fixed schedule — at least once per year and not more than four times per year.
November 17th, 2013 | Uncategorized
Here are the five basic Thrift Savings Plan funds in order from the highest to the lowest rate of return for the month of October: C Fund (4.60%), I Fund (3.38%), S Fund (2.94%), F Fund (0.89%), G Fund (0.19%). And here are the year-to-date results: S Fund (31.13%), C Fund (25.34%), I Fund (19.43%), G Fund (1.52%), F Fund (-0.78%).
Interesting? Maybe to some. Useful? I don’t know how.
As an investment manager — or TSP participant, as you are more commonly known — you are responsible for making, or delegating the making of, a massive series of decisions. Some of these decisions, like whether you contribute to the Roth or the Traditional TSP accounts, will most likely wind up being relatively insignificant. Others, like the distribution of your money among the available funds, will be instrumental to determining your financial future. As I’ve written before, making sure that the important decisions are the best they can possibly be is your primary objective as an investor. If you’re not sure which are the critical decisions, you’d be safe to make sure that every decision you make is the best it can be.
This brings me back to the question about the usefulness of historical performance data for the TSP, or any other, investment securities. Is it of any real value? I don’t believe it is. There is no strong evidence that this information, at least in the short run, is useful for predicting future results. You can’t go back and make decisions based on it. So, what good is it? Really, it’s no good at all. In my experience, it causes problems and leads to bad decision-making.
Two wrong-headed mistakes are often made. The first is the incorrect belief in the “due theory.” This is the fallacy that the probability of an independent event occurring goes up as the event does not occur: “I’ve just flipped 10 heads in a row, so the odds of flipping a tail on the next try are greater than 50 percent.” Not true!
The second, and I think more common, mistaken belief for investors is the momentum of inertia theory. This is belief that an independent series of events is likely to continue on its current path: “I just flipped 10 heads in a row, so the odds of flipping a head on the next try is greater than 50 percent.” Wrong again.
Sure, you can find historical records that support either of these theories, but that doesn’t mean they make any sense. You can find support for just about anything through back-testing large, randomly generated data sets, and a series of unpredictable events often shows surprising runs of luck, good or bad. Patterns appear to show up just about anywhere you look for them, even in random data.
Finding a pattern in history and predicting one in the future are two very different things.
As an investment manager, your job is to be concerned with two things: Where you are today and how best to get where you want to be in the future. While the past has put you where you are today, you don’t need to know anything about the past to assess your current position. And the kind of historical data published for specific investment securities, like funds, is not needed for use in making decisions about how to proceed in the future. In short, this information is useless to you in managing your TSP account or any other investment account.
Even the effect historical data tends to have on investors is unreliable, if not outright dangerous. Many of the investors I’ve talked with over the years tell me they feel great when their account values have risen quickly or steadily to a new high. Likewise, they feel bad when their account values have fallen. These effects tend to make them want to invest more, or more aggressively, on the heels of good market results and withdraw their money from risky assets after bad results. Data on investor behavior confirms this behavior. Unfortunately, it is irrational and harmful. It is rational to become more cautious as prices and values rise, and more confident in your investing as they fall. The key to successful investing lies not in tracking the price history of investment securities, but in understanding and accommodating the probabilities of their future prices. Done right, it is a prospective, rather than a retrospective, exercise. So, it’s OK to be entertained by what happened yesterday. Just don’t make the mistake of confusing this with what will most likely happen tomorrow.
October 28th, 2013 | Uncategorized
Q. I am 65 years old and retired from government service in March. I have about $ 400,000 in my Thrift Savings Plan account, with over $150,000 in G Fund. (For the record, I also hold about $70,000 in the F Fund, $90,000 in the C Fund, $50,000 in the S Fund and $40,000 in the I Fund.)
I am considering transferring $40,000 from the G Fund to L2020 to make my TSP portfolio a bit less conservative and also as a reflection of long-term price expectations on the bond market.
Do you consider this a wise move? If so, is $40,000 enough/too much? (Incidentally, I do not intend to withdraw from my TSP until I am required to do so in 5½ years.)
A. Wise? It sounds like a shot in the dark to me. What is the expected rate of return for this portfolio? How likely is it to produce returns that differ from the expectation? Given these characteristics, what is the probability that this portfolio, along with the way you’ll manage it in the future, how likely is it to support your financial goals? Can you afford to take less risk and still achieve your goals? Without knowing the answers to these questions, you’re flying blind.
October 22nd, 2013 | Uncategorized
Q. I am fairly new to investing in the Thrift Savings Plan, having been active in it for about three years. I am 31, with about $3,800 and contribute about 13 percent of my pay into the L2040. When I started, I had 60 percent G Fund/40 percent C Fund. Am I going the right direction when I moved into the L Fund?
October 21st, 2013 | Uncategorized
Q. I am a FERS retiree. I was told before retirement to put all my Thrift Savings Plan into the G Fund before and during retirement. Is this sound advice? I was thinking of putting a small percentage also into the C Fund. What are your thoughts on this matter?
A. It’s a bad idea if the G Fund’s expected rate of return is not sufficient to support your financial goals. Otherwise, it would be lowest-risk way to get where you want to go.
October 21st, 2013 | Uncategorized
Q. I’m 53 years old and plan to retire in 10 years. My current Thrift Savings Plan balance is $131,000, and I’m 100 percent allocated into the L2040 fund. I’m very aggressive in my investing. Should I allocate my TSP 60 percent C Fund, 20 percent S Fund and 20 percent I Fund instead of the L 2040 fund, which allocates in all of the funds to include the G and F funds?
A. You’re the investment manager, so you’ll need to use your process for determining the correct allocation of your TSP funds. If I were responsible for the decision, I would want quite a bit more information and analysis before deciding on the right allocation to meet your needs with a minimum of risk.
October 7th, 2013 | Uncategorized
Q. I’m retired from the military after 28 years. I have been working for the Defense Department since March 2008 and have 17 percent going into the Thrift Savings Plan. As of right now, I have 71 percent in the C Fund and 29 percent going into the S Fund. Should I leave the contributions where they are during the government shutdown? I have friends advising me to move 70 percent to the F Fund and 30 percent to the G Fund. Not sure if that is the right move.
A. Neither of these asset allocations is remotely risk efficient. My advice is that you find a trustworthy, cost-effective financial adviser and get the job done right.
September 30th, 2013 | Uncategorized
Q. I am covered under FERS. After I retire, may I:
a). Continue to deposit funds into my Thrift Savings Plan?
b). Move money among the various funds, e.g., from F to G, from C to L2040, etc.?
A. After you retire, the only way to deposit funds to your TSP account is to transfer them in from an IRA or other qualified retirement plan. You may continue to manage your TSP investment, as in the past, for as long as you retain the account — potentially for life.
September 18th, 2013 | Uncategorized
Q. If I have Thrift Savings Plan funds in both G and C funds when I am required to begin taking required minimum distributions at age 70½, can I specify which funds the RMD are taken from? (My concern is that the C Fund may be at a low due to market conditions, and withdrawals may be better to defer till the market improves.)
A. TSP distributions are always taken proportionately from your various holdings at the time. I don’t see the rationale for your concern, though. Your account will be allocated exactly as it was before the withdrawal. If you don’t like the allocation, you can rebalance it. Alternately, you could invest the proceeds from the withdrawal in the equivalent of the C Fund in a discount brokerage account and be right back where you started.