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 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 23rd, 2013 | Uncategorized
Think you can accurately predict the future? It seems that many Thrift Savings Plan investors do. TSP-related message boards and online forums are filled with posts from participants who are obsessed with trying to position their accounts to either take advantage of, or defend against, this or that anticipated turn of events.
In some cases, this is smart; in others, it’s not. In the case of rising interest rates, for example, the current environment makes higher future rates all but certain. This unusually high probability, along with the availability of an attractive substitute for bonds in this environment, make substituting some G Fund for F Fund a smart move.
On the other hand, trying to game a congressional action — or inaction — that tends to affect various economic factors, is not so smart. Consider what you are assuming when you make anticipatory investment decisions in these cases. Market prices move in anticipation of future events. These moves are driven by the expectations of a large number of very sophisticated players — the vast majority of whom are professionals with a deep supply of resources and experience who are doing everything they can to handicap the probabilities of future events and position their portfolios accordingly. Assuming that the market will fall as a result of a future event is only a safe bet if the rest of the market’s players have failed to recognize the possibility of this coming to pass. By the time you recognize a risk, the market is likely to have done so and adjusted securities prices accordingly.
Why would an intelligent investor wait for the actuality to buy or sell when it’s in their best interest to do so before the fact? To reliably profit from predictions, you have to know important information before others.
If your financial success depends on avoiding short-term losses, you’re not doing it right. A much more reliable — and less stressful — approach is to design your investment plan from the start to tolerate the inevitable losses it will endure. I accept that certain risks are unavoidable and design investment strategies around them. Short-term loss is one such risk.
When it comes to investment management, there are only two mistakes you can make. The first is being too aggressive — that is, taking too much risk. The second is being too conservative, or taking too little risk. That sounds simple enough, but too much or too little risk compared to what?
Many investors judge the risk they perceive relative to their ideal of never suffering a loss. I can’t count the number of TSP investors I’ve interviewed over the years who’ve described their investment goal as “to make as much money as possible without ever losing money!” This is ridiculous unless your lifetime financial goals can be realized with the returns produced by the G Fund. If so, that’s where your money should be.
Most investors I’ve encountered are not in this position, however. Fulfilling their financial goals will require more growth than the G Fund can provide. And, with this additional growth potential comes the risk of short-term loss.
Ironically, what some investors do to try to shield themselves from the risk of short-term loss increases the risk of long-term failure. Assuming that your TSP is properly allocated, moving to a portfolio allocation — say, 100 percent G Fund — to anticipate a negative economic event, will mean that your portfolio is too conservative to meet your long-term needs, so you can’t stay there. If you’re wrong, you’ll miss out on gains that might be important to your long-term success.
Whether you’re right or wrong, you’ll be in a position of having to decide when to shift back to the right asset allocation model. Using this logic, you may as well have left the stock market in 1998 and not come back since — the time period during which a properly diversified and managed portfolio has doubled in value.
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 9th, 2013 | Uncategorized
Q. What would happen to the Thrift Savings Plan investments, specifically the G, F and I funds, if the government can’t raise the nation’s debt ceiling before the Oct. 17 deadline for default? Are we looking at another financial meltdown like we had in 2008?
A. The G Fund will hold its value. The other funds are vulnerable to loss in value. So far, however, the stock markets aren’t predicting disaster. They’re in good shape as of today – still near their multiyear highs.
You should accept that predicting future market behavior is a risky thing to do. If your financial success hinges on your ability to correctly time markets, you’re not doing it right. There are better ways to make your investment decisions. I encourage you to find one with better odds of success.
October 9th, 2013 | Uncategorized
Q. If the government doesn’t raise the debt ceiling, what does that mean in practical terms for the TSP G Fund, and for government bonds and securities, in general? The G Fund is backed by the good faith and credit of the government, but if the government doesn’t have the ability to pay its debts, even for a short time, does that mean that the G Fund could have a zero return for that period?
A. Interest rates could rise and bond values could fall. Higher interest rates are generally bad for the F Fund and good for the G Fund. It’s possible that the government could fail to deliver on its promise to G Fund investors, but this does not appear likely at this point.
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 16th, 2013 | Uncategorized
Q. I’ve been in the government for four years (retired Army) and have invested in the Thrift Savings Plan since 2009. I plan to retire from the government in 2020 with 11 years of service (I’ll be 58).
My TSP portfolio is diversified but certainly heavy in the C and S funds. To avoid the losses all experienced several years ago, what are the recommended allocation moves, within funds, that one should take during what appears to be a stock market selloff that has started in August?
A. Unless you plan to withdraw and spend all of your money within the next few years, you should be in all five TSP basic funds all of the time. Ideally, you should identify and use the asset allocation scheme that will support your particular set of goals with a minimum of risk. This can’t be done without some rather complicated analysis. In that absence of certainty – or even a reasonably good idea – of where you should be, I recommend a mix of something like 30 percent C Fund, 20 percent S Fund, 10 percent I Fund, 20 percent G Fund and 20 percent F Fund. This is kind of like recommending that you fly your plane straight and level without knowing where you are or where you’re going. It might not get you there, but it’s the safest bet without more information.