Ask The Experts: Money Matters

By Mike Miles

Moving TSP funds

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Q. I plan to retire under FERS in December 2020 at age 66. All my investment is in the G Fund, $350,000, as are my allocations at 100 percent. I was advised to move 60 percent to the C fund and 40 percent to the F fund ASAP with the same allocations. I consider this a risky and aggressive move considering my situation, the economy, and that the S&P is overdue for at least a 20 percent correction by the end of this year. What do the experts advise. Read the rest of this entry »

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F fund fluctuations

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Q. I have approx. $270,000 in my TSP account, all in the F fund. When the AGG is up .01, I lose about $100. Why?

A. I suspect you are either seeing the effect of lag between the reporting of results between the index and the F Fund, or it is the result of investment expenses.


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Risk efficiency

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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.

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F Fund

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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.

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G Fund

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Q. In your recent column “4 keys to TSP success,” you mentioned, regarding asset allocation, to “diversify your holdings among cash, stocks and bonds to hedge the risk lower.” I agree with this approach wholeheartedly, but ask where in the TSP to keep “cash”? There is no money market option, just the L funds (which I don’t use, preferring to personally allocate my investments), and the G, F, C, S and I funds.

By the way, I took everything out of the G Fund and ceased all future allocations to it when there was a proposal by our leaders last year for the federal government to be able to borrow against it. Do you have any update or comment on this proposal?

A. The G Fund is a cash equivalent with an above-market rate of return. It’s as safe as anything you’ll find.

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F Fund and G Fund

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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.

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Moving balances between TSP funds to avoid market downturns

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Q. Does the Thrift Savings Plan allow one to shift all of his C Fund balance to the F Fund to wait out an expected downturn in the S&P 500? I know one generally should not try to guess the market, but if one could stay ahead of downturns and upturns (in theory), would it be more profitable over the long term (10 to 20 years) to shift out of C to F temporarily rather than suffering through market downturns (as in 2001-02 and 2008)? I guess it’s like selling high and buying back in low, assuming one’s timing was spot-on.

A. This is allowed, but as you point out, not a reliable investment strategy. You could do better.

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TSP withdrawals and investments

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Q. I am a civilian FERS employee who will retire this summer at age 59 with 35 years of civil service.  After retiring, I intend to start monthly withdrawals from my Thrift Savings Plan account ($2,000 per month). Even though I will have begun making monthly withdrawals from my TSP account, can the remainder of my money in the TSP continue to be invested in the various funds (G, C, F, S, I) and continue to grow via earnings within these funds?

A. Yes.

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F Fund

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Q. I purchased the Thrift Savings Plan F Fund in September 2012 and, by Dec. 31, it had risen from 15.84 to 16.01, basically matching my expected returns. However, in 2013, it lost 1.63 percent of its value. It had never lost before in the 10-year listings of annual returns. How is it possible the lose money? Interest rates have been low for many years now and any 1- to 3-year bonds would have reflected these record low interest rates at bond purchase time. Why is the fund losing?

A. When market interest rates rise, the value of existing bonds falls. If the decrease in the market value of the bonds is greater than the interest they pay over a given period, a loss occurs. Losses in market value are an inherent risk of owning bonds.

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Reallocating funds

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Q. I will be retiring in January. I have approximately $180,000 the G Fund. Should I consider the one-time withdrawal to a money market account that is FDIC-insured so I can have some liquidity in my cash flow?   Could you recommend such a fund? Could you recommend any restructuring of my Thrift Savings Plan to accommodate current federal reductions in the stimulus program?

A. Yes, should consider taking a withdrawal from your TSP account to provide needed liquidity, but only if no other resources are available to do the job. The best place for liquid cash reserves in this economy is FDIC-insured bank savings.

To mitigate bond risk in today’s low-interest rate environment, I suggest that you substitute some G Fund for some of the F Fund in your asset allocation scheme.

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