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 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 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 16th, 2013 | Uncategorized
Q. Regarding “Government default and TSP rollover” posted Oct. 15: He asked whether he should roll over his account to USAA and you said you wouldn’t. Could you explain more on why you wouldn’t and the benefits of leaving it in the Thrift Savings Plan account?
A. The TSP’s lower costs and access to the G Fund make it the best retirement investing vehicle available anywhere. You can configure portfolios with better risk-adjusted expected rates of return in the TSP than anywhere else. Of course, using the TSP’s attributes to your advantage is requisite to the choice.
October 15th, 2013 | Uncategorized
Q. My co-worker told me she moved all of her funds to the G Fund. She has 16 years in service and is 45 years old. How will she know when it is time to move these funds back into more aggressive funds? I was giving this some thought for myself but did not know how to decide when would be the right time to move these funds back to more aggressive funds. I’m staying put for now since I don’t plan on taking anything out for another 10 years or more.
A. You should ask her this question. Portfolio management is the process of evaluating and acting on a long series of many decisions. Ideally, this process will move you from where you are now, Point A, to your ultimate goal, Point B, while passing through a series of intermediate points along the way. The quality of each decision is dependent upon the quality of all of the others. This means that to evaluate the quality of a particular decision, such as moving everything to the G Fund, you not only have to know something about the investor’s lifetime goals but also something about how they will make the various investment decisions they’ll face in the future — like when to move out of the G Fund. Making an investment decision outside of the greater context is nothing more than blindly guessing and hoping for good luck.