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 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.
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.
August 13th, 2013 | Uncategorized
Q. I had the same concerns as the person who you answered Aug. 8. He is trying to follow a bucket strategy and not sell off equities in a down market. I think there is a way to do this in the Thrift Savings Plan, but it is more complicated than I like. Suppose you have $400,000 invested equally in G, C, S and I. Assume your required minimum distribution is $12,000 or $1,000/month and it is paid on the first of each month. On the last day of the month, before 1200 Eastern time, transfer $300,000 to the G Fund. Money transfers on the last day of the month. RMD of $1,000 pays on the first. After 1200 Eastern time, transfer $100,000 each to the C, S and I funds. Do this 12 times and you will have taken $12,000 from the G Fund and maintained your position in the equity funds. If the equity funds are up, move $12,000 to the G Fund, calculate your new RMD and repeat. If they are down, sell nothing, recalculate RMD and continue as before. This meets the rules of the TSP that allow two interfund transfers per month and minimizes the time that you are not fully invested in equities.
A. This is a lot of effort for nothing, and a “bucket strategy” is nothing but a repackaged asset allocation model. You could accomplish the same ends by simply rebalancing to the appropriate asset allocation model periodically during the year as your withdrawals accumulate. Doing it every month should not be necessary to keep things on track. This is a case of the “tail wagging the dog.”
August 9th, 2013 | Uncategorized
Q. I have eight years and nine months of government service and had my entire Thrift Savings Plan contribution in the G Fund until about two weeks ago. I had around $50,000, and I moved that $50,000 into 40 percent C Fund, 40 percent S Fund and 20 percent I Fund, and moved my contribution from 100 percent G Fund to 50 percent S and 50 percent I. I am 34 and have probably 25 to 30 years of service left. How would you rate my contribution move?
A. To rate it, I’d have to clearly understand your goals for the money and then estimate the probability of it meeting those goals. Given that the allocations you’ve chosen are risk-inefficient, they could likely be improved.
August 8th, 2013 | Uncategorized
Q. I understand why you defend leaving your money in the Thrift Savings Plan because of low expenses, security, protection from lawsuits, etc. However, how do you address the issue of “locking in losses” when withdrawing money in retirement from the TSP? For example, in an IRA, I can have (for a basic portfolio) a cash fund, an income fund and an equities fund. I know I can do this in the TSP, as well, G/F/C or S, but the primary difference is when I go to withdraw my money, in the TSP it comes out of all of these funds equally vs. an IRA which I can take money just from my cash fund and, if the stock market had a bad year, don’t touch that money for that year. I can’t do that in the TSP and I would immediately lock in my losses when I take out the money from the TSP. Please furnish your opinion.
A. Add to the list of pros the fact that the G Fund is likely much better than your IRA’s cash fund. The disadvantage you perceive is an illusion. There is no such problem as “locking in losses.” The real issue is whether your portfolio is in or out of balance. You should be establishing a cash reserve to fund your withdrawal needs and then rebalancing the remaining portfolio to the asset allocation model you’ve selected each time you rebalance. For example, suppose that your account contains $105,000 at the beginning of the year, you plan to withdraw $5,000 during the coming year, and you’ve settled on an asset allocation of 30 percent C Fund, 20 percent S Fund, 10 percent I Fund, 20 percent F Fund and 20 percent G Fund. You would rebalance your account at the beginning of the year to $30,000 C Fund, $20,000 S Fund, $10,000 I Fund, $20,000 F Fund and $25,000 G Fund. Notice that the G Fund is overweight by $5,000 to support the cash reserve. Each time you rebalance, you simply set aside the next year or two’s worth of withdrawal needs as cash reserves and then rebalance what’s left to the appropriate percentages, adding the cash reserves to the G Fund target. This approach can be used in the TSP account or any IRA, and there is no problem of locking in losses.
August 8th, 2013 | Uncategorized
Q. I am 39. I contribute 12 percent of my salary to the Thrift Savings Plan. I have 50 percent in the L Fund and 10 percent each in G, I, S, C and F. I plan to retire around 62. Is this a reasonable contribution distribution?
A. On its own, it’s not risk-efficient. If you don’t have a good reason to use this allocation, then it’s not reasonable.