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Timing TSP Moves Barfield of 25

Timing TSP Investment Moves: Is it Possible?

Chris Barfield

8/26/17

INTRODUCTION

I feel like this massive thing deserves an introduction on what exactly it is. This started out as

an examination of TSP allocation services that seem to be everywhere now. But to make the

results be something more meaningful, I found it necessary to explain how markets work in

general. This led to what amounts to a primer on investments, in addition to the analysis of the

TSP allocation services. One of the more popular feedbacks I get on my newsletters is that I

don’t go into enough detail. So I tried in this one. There are some parts where the math gets

complicated, but there are also some very elementary investment principles included. Hopefully

there is at least something for everyone in it. Here goes…

Although it seems to have fallen out of popularity in recent years, I still remember clearly the days when

many DUSMs, in between court assignments, were glued to computer screens, day-trading their stock

portfolios. Winning stock picks were bragged about and shared routinely. Losers, not so much. For better

or worse (and I’m guessing almost certainly worse), this day trading extended to the different funds of the

Thrift Savings Plan. Most people had an opinion about when to move from the C to the S or I, and would

execute their moves accordingly. Eventually all of this trading activity got the attention of the TSP board

and in 2008 they changed the rules to restrict the number of interfund transfers a member could perform in

one month. The current restriction is two interfund transfers per month, unless the second transfer is to a

fund other than the G Fund. Then, the member is allowed additional transfers INTO the G Fund only. In

other words, no one is ever trapped in a bond or equity fund, with no ability to get into the safe haven of

Treasuries (I’ll explain each fund later for those that don’t understand these terms).

Example One:

On August 1st, Jim’s TSP is 50% C Fund and 50% S Fund. On August 17th, Jim transfers to 100% I

Fund. On August 25th, Jim gets a little nervous due to some anxiety in the European markets and

transfers 100% to the G Fund. Jim has completed he 2 allowable interfund transfers for the month

and cannot make another transfer.

Example Two:

On August 1st, Meghan is 30% C, 30% S, and 40% I. On August 5th, a coworker talks her into

transfering 100% to the F Fund. On August 15th, she decides she’s tired of trying to figure out how

to allocate her balance among the funds, and wants to let the TSP allocate her balance for her, so

she transfers everything into the L2040 Fund. She has completed her two transfers allowed for the

month, but because she is not fully invested in the G Fund, she can do more transfers ONLY TO

TRANSFER INTO THE G. So, Meghan talks to Jim and he convinces her that the markets are

just too unstable now to be in equities. She decides to transfer 100% into the G Fund. This is

permissible because the 3rd transfer is allowed if it is INTO the G Fund. (In Example One, the 2nd


transfer went into the G Fund, so there would be no reason for a third, which is only allowed to

transfer into the G.)

Example Three:

On August 1st, Mark distributes his TSP balance 30% into C, 30% into S and 40% into F. On

August 10th, he transfers the 40% in the F to the C and the S, leaving him with 50% C and 50% S.

On August 15th, he transfers half of the C to the G Fund. On August 20th, he transfers half of the S

to the G Fund. Transactions 4 and 5 are permissible because they are moving money INTO the G

Fund. In summary, you can always move money into the G Fund, even if you’ve made your 2

allowable transfers for the month.

So, why did the TSP Board reduce the number of allowable transfers?

Well, the first reason is one of cost. The TSP is one of the lowest cost retirement plans on the planet. And

they seek to keep it that way. Additional transfers (trades) cost them money, time, and manpower, so they

limited it. Secondly, there’s virtually no reason or benefit to frequent trading of an account like the TSP,

the way it is set up. The funds are index funds (I’ll explain in a minute), so they are tracking huge

combinations of stocks or bonds, making them less volatile than individual stocks or bonds. Also, there is a

delay in the execution of your trades. If you request an interfund transfer during a business day before

noon, it is generally processed at the closing price of that day. If you request it after noon, it is generally

processed at the COB the following day. This makes it extremely difficult to capitalize on small, daily price

movements, which is the goal of higher frequency traders. For example, if you were to place a market order

for a particular stock, say Apple, in your private brokerage account, the transaction occurs almost

instantaneously. If you place the order at 10 am, you could sell at 2 pm, and buy it back at 3:30 if you

wanted, taking advantage of the various price swings in the stock price. The TSP doesn’t work that way.

Your transfer becomes effective at the close of business either today or tomorrow. Unless one is sure of the

closing price of an index fund on the following day, it is difficult to consistently day trade a fund like the

TSP, so higher frequency interfund transfers become almost pointless. We will discuss market timing in

depth a little bit later, but first, let’s talk about the various TSP Fund options.

INDEX FUNDS 101

First let’s clarify some of our terms so we are all on the same page. Investors in general have several options

for choosing where they want to put their money. For many years, you could buy single stocks or bonds.

For example, if you had $10,000 to invest, you could buy $2,000 of GE stock, $2,000 of Coca-Cola bonds,

and $6,000 of IBM stock. Each one of those purchases requires a separate transaction, and therefore a

separate commission. And, even then, you are only in 3 different companies—hardly a strong

diversification.

In 1924, the first modern day mutual fund was created. A mutual fund seeks to solve some of the problems

of buying individual stocks, particularly the high cost, and the lack of diversification. With a mutual fund,

the investor doesn’t pick a particular stock—he simply picks the mutual fund he is interested in and sends

them his check. Let’s assume he has the same $10,000 to invest, so he gives that money to Mutual Fund

Company XYZ. They take his $10,000, put it with the money from thousands of other investors, and buy

perhaps thousands of different companies’ stock. By doing this, the single investor now owns a tiny fraction

of many companies, rather than just a few. This allows him to be diversified at a very low cost. The


managers of these mutual funds sit around and spend considerable manpower trying to decide which stocks

or bonds should be bought, and which should be sold in an effort to make the most money possible for the

investors. This is why these funds are said to be actively managed—there are managers in the mutual fund

company actively pursuing the best investments possible. They may buy and sell different investments

monthly, weekly, or even daily. But, at their heart, remember this, because it’s very important: they are

trying to beat the market. They want to invest in things that are going up more than the market.

A group of very smart investors, who were also extremely accomplished at math, began to realize that it is

very difficult to consistently beat the market. It is also very costly. Remember when I said that mutual

funds may trade weekly or even daily? Every one of those trades requires commissions. These

commissions are paid by the investors. In a mutual fund where the turnover of investments is very high, an

investor may lose a significant portion of his return in fees and taxes that are a result of these numerous

trades. This led to an idea to have lower cost mutual funds that accomplish the same diversification goal,

but without all the fees. So, in 1974, the first index mutual fund was created. An index fund doesn’t try to

beat the market; it buys the whole market. So, it’s performance is correlated to what the market does as a

whole.

Let me explain. We’ve all heard the phrase, “The stock market is up (or down) today”. What we are

saying is that a particular index is up or down for that day. Indexes are separate from individual stocks.

The “market” may crash on a day that Nike stock is up for example. The fact that the market is down,

doesn’t necessarily mean that every single stock is down, only that the index as a whole is down. An index is

simply a collection of a lot of investments. Those investments are averaged in some way and that number is

reported constantly throughout the trading day. There are dozens and dozens of indexes that are

comprised of different investments, meant to track various industries. And more are constantly being

created. They are used by investors, economists, politicians, etc., as a way to mark how well the economy is

performing.

Let’s illustrate this to make it a little more understandable. Perhaps the most common index is the Dow

Jones Industrial Average Index, sometimes called simply, “The Dow”, and abbreviated DJIA. It was

created in May of 1896. The DJIA is an index made up of 30 different stocks. These 30 companies

represent some of the largest, most established in the world: Apple, American Express, Coca-Cola, Home

Depot, Nike, Microsoft, Visa, Walmart, Disney and Intel, just to name a few. The index is designed to be a

way to track how well business in general is (or is not) performing. To accomplish this, there needs to be a

way to track these investments. The methodology is complicated and you’re probably not interested in it,

so suffice it to say that the price of each stock is put into a formula that spits out a weighted average. As of

today’s writing, the DJIA is currently trading at 21,813.67. To give some perspective, in 2008, the DJIA was

at 8,777.39. In 1980, it was 963.99. Imagine if you had purchased $10,000 of the Dow in 1980? It would

be worth $226,285.23 today. If you go all the way back to 1900, the Dow was trading at 68.13. So, you can

see not only a significant growth, but you can also see how it can be used as a tool to track the economy and

individual investments. If the DJIA is up12% for the year, but your Amazon stock is up 45%, then you are

“beating” the market and look like a genius, right?

Hopefully we’ve covered the theory of indexes enough and hopefully you’re still awake. So, why is this all

important? Because, as we’ll see, the TSP funds are all index funds (minus the G Fund). In order to

understand how they work, you have to at least have some basic idea what the heck an index fund is. Now,

onto the funds.


TSP FUND OPTIONS

STOCK FUNDS

The C Fund, aka, The Stock Market

I’ve been asked many times if an investor should be in the G Fund or if they should be in the “stock

market”. As if these are the only two options. As we will see, there are other stock market funds in the

TSP, but this is the one most people think of when they say “the market” or “the stock fund”. The C Fund

is an index mutual fund that seeks to match the S&P 500 Index. (S&P stands for Standard & Poor’s, the

rating agency that owns and trademarked the index). Unlike the DJIA Index, which is composed of 30

companies, the S&P 500 Index is composed of…anyone care to guess how many? That’s right: 500

companies. These are huge companies—some of the largest that are listed on the stock exchanges. No fly-

by-night start-ups in this list. We are talking Amazon, Costco, Delta, Netflix, Nike, Target, Tiffany & Co.,

Tractor Supply, Walgreens, etc., etc., etc. (Yes, one company can be included in many different indices.)

When one allocates their TSP to the C Fund, they are purchasing tiny increments of each of these 500

companies. TSP has to rebalance the allocations to try to match the performance of the S&P 500. That

can get a little complicated if we dig too deep into those calculations, but the C Fund seeks to accomplish

the same return as the S&P 500 Index. What this means is that if the S&P 500 is up 12% for the year, the C

Fund should also be up 12% for the year. It may be 11.95% or it may be 12.1%, but it should be very, very

close. As of today, the S&P 500 Index is trading at 2,440.59. Within the past two years, it has been as low

as 1,829.

It seems this index has become more popular than the DJIA in recent years, as it is a broader composition

of the market than just 30 stocks like the DJIA. If one stock crashes in a given day, the DJIA is more

affected than the S&P 500. That’s pretty simple 1 out of 30 is a lot more influential on the average than 1

out of 500. Also, understand that the S&P 500 can be up one day, when the DJIA is down that same day—

they don’t necessarily move together, and this could be the result of a particular stock in the DOW

crashing.

Often times I hear people say that they are invested in simply the “S&P”. There are S&P 100, S&P 400,

S&P 600, S&P 1500, and others, so it’s not really correct to simply say “The S&P”, or at least it is not really

specific, since there are other indices that are tracking other combinations of stock prices. The C Fund is

the S&P 500 only.

Also, to clarify one thing, I mentioned that the TSP has to rebalance all the stocks each day to match the

performance of the index. The TSP itself doesn’t actually do this. There is not a huge room at the TSP

with thousands of traders buying and selling stocks all day. The TSP contracts out to a mutual fund

company to manage the actual fund. Currently it is BlackRock Institutional Trust Company who manages

the F, C, S, and I Funds.

So in summary, the C Fund seeks to match the performance of the S&P 500 Index. If you want to track the

daily movements of the S&P 500 on your iPhone or whatever app you use, one of the ticker symbols is

^GSPC.


Want to see what you’re buying exactly when you buy the C Fund? Here’s a recent chart showing all 500

companies. The bigger the block, the bigger the company, hence the size of Apple (AAPL), Google

(GOOGL) and GE.

The S Fund, aka The Small Cap

The S Fund is also an index fund that seeks to match a stock market index. In this case, it is the Dow Jones

U.S. Completion Total Stock Market Index. I know, that sounds complicated. Basically, this index tracks

almost the entire stock market of U.S. companies. There are literally thousands of companies in this index,

so the diversification (the spreading out of risk over many different investments) is very wide. What is NOT

included in this index are the companies listed in the S&P 500 Index. In other words, the S Fund can be

thought of as the entire U.S. stock market minus those 500 companies that are in the S&P 500. Another

way of looking at this is if have some of your TSP in C and some in S, you aren’t duplicating your efforts.

No company that is in the C Fund is also in the S Fund.

Because the S&P 500 (C Fund) consists of the largest companies, the S Fund would then, by default, consist

of smaller companies. Which is why you sometimes hear it referred to as a “small-cap fund”.

(Definition time-out: Small-cap means “small capitalization”. Capitalization is basically what the entire

company is worth on the market. If a company has a million shares outstanding and the shares are trading

at $10 a share, the company’s capitalization is $10 million, which is tiny these days-infinitesimal, really.

Generally, any company worth less than $1 billion is considered small-cap in today’s market, so “small” is

somewhat relative.)

A couple of things to remember about the S Fund. If you allocate money to it, you are investing in:

-a huge percentage of the stock market


-U.S. companies

-none of the companies that are also included in the C Fund

-literally thousands of companies

If you want to track the Dow Jones U.S. Completion Total Stock Market Index, the ticker symbol is

DWCPF

The I Fund, aka The International

Unlike the C or S Funds, the I Fund invests in international companies. Like those other two funds, it is

also an index fund. So what index is it seeking to replicate: the MSCI EAFE Index. I’ll break this down a

little bit. MSCI is simply the company that put this index together; it stands for Morgan Stanley Capital

International. It is similar to “Dow Jones” or “Standard & Poor’s”. The EAFE part stands for Europe,

Australasia and Far East. The MSCI EAFE is the oldest international index that is still in use today. It was

created in 1969 and currently is comprised of over 900 companies from 21 developed countries in the

regions listed above. So, what is excluded? Canada, South America, Africa, etc.

Just because it is an international fund, doesn’t mean you might be purchasing shares in the newly formed

Jose’s Emerald Mine, Banana, Coffee, and Cocaine Export, Ltd. These are stocks in developed countries,

such as Germany, Belgium, Switzerland, and Japan. While it is technically international in its scope, you

could almost consider it a European fund. Outside of Europe, the countries represented are few: Israel,

Australia, Japan, Hong Kong, and New Zealand. So although you are investing internationally, it is not as

diverse as one might think. There is some discussion lately of altering this index to include a more diverse

set of countries so that problems in Europe don’t necessarily bring the entire index down, which is what can

(and does) occur currently. On the other hand, a revolution in Venezuela, for example, probably will have

little, if any, impact on the fund, since Venezuela is not included. This fund would be the opposite of what

is termed “emerging market funds”; these markets are not new, they are older, established and more stable.

Investing in the I Fund gives you some diversification since you are buying into companies overseas. You

do have the additional risk of currency fluctuations, however, that you don’t have with the C or S Funds. If

a particular currency gets stronger or weaker compared to the dollar, this can either help or hurt the

performance of the fund. That dynamic doesn’t exist in the C or S Fund, since they are U.S. companies

that (obviously) use the U.S. dollar as their denomination.

If you want to track the performance of the MSCI EAFE, you can do so, by following ticker symbol: EFA.

SUMMARY

Those 3 funds (C, S, and I) comprise the index funds in the TSP where you can purchase shares (stock) in

companies. If you allocate your TSP to one or more of those funds, you are purchasing tiny percentages of

companies. In effect, you become part owner of those companies. And each fund is different. If you

divide your allocations among the 3, you will not be duplicating your investment at all-remember the C

Fund is the largest 500 U.S. companies, the S Fund is all of the U.S. companies not included in the C Fund,

and the I Fund includes only foreign companies. If you are in any of these funds, you are in the stock

market of some sort. This will be in contrast to the next section, which are the two bond funds that the TSP

offers.


BOND FUNDS

As an introduction, and at the risk of instantly glazing over your eyes as you read this, let’s first cover how

bonds work. When you buy a share of stock, you buy a share of ownership in the company. You become

part owner of the corporation, and are entitled to vote and receive part of the profits. Own enough of these

shares, and you control the company. Bonds, on the other hand, are debt issued by a company. When

you buy a bond, you are loaning your money to the company and they agree to pay you back at whatever

percent interest over whatever time period the bond is for. You don’t own any percentage of the company.

An individual bond may look like this: 6s XYZ ’27. That means that XYZ Corporation has issued a bond

that will pay 6% annually from now until when the bond matures in the year 2027. Bonds are usually sold

at $1,000 each when issued. This is called par value. So, if you purchased this bond in 2017 from the

company, you will receive $60 a year in interest until 2027, when they will pay you your annual $60 interest

for that year, plus repay you your $1,000 that you initially gave them back in 2017. It’s a loan, pure and

simple. That’s how purchasing individual bonds work.

There are two ways to make or lose money on a bond: interest and price. Interest is generally a money

maker, i.e., the company pays you the interest, so you make money on that part. However, price can be

another story. Although the bond is issued for $1,000, as that bond is traded back and forth among other

people throughout its life (you don’t have to hold onto a bond until it matures; you can trade it like a stock),

it’s price may be higher or lower than $1,000. This can get confusing because there’s no way of explaining

bonds without discussing inverse yields, premiums vs discounts, and things like yield spreads and yield

curves, so let’s just say that you could make money if you buy a bond at $1,000 and sell it at $1,100.

Conversing, if you purchase a bunch of Starbucks bonds at par ($1,000) and interest rates rise, the value of

those bonds will fall and you may only be able to sell them at $950 each, meaning you’ll lose money on the

price of each bond. However, if you keep them until maturity, Starbucks will give you the $1,000 you

loaned them in the beginning so, like a stock, you only lose money on a bond if you actually sell it,

assuming the company doesn’t go out of business, that is.

Bonds can be issued by companies or governments, as we’ll see. People often speak of “risk” in the stock

market. The “risk” in the bond market is primarily based on whether or not these companies will pay you

what they promised to pay you. The U.S. government bonds (called Treasuries) are generally the safest

since the government won’t run out of money, and even if it does, it’ll simply print more and then pay you.

Large corporations, like Apple, GE, etc., are next, as they probably will pay you, although there’s no

guarantee. You go down the ladder until you get to Fly-By-Night Industries, Inc., who issues you a bond to

fund raise money for their potato-growing project on Mars. Since risk and reward are correlated, generally

U.S. Treasuries pay the least amount of interest-say 4%, while the Mars farming company may have to

promise 30% interest before they can get someone to take a risk on that enterprise.

A bond mutual fund is exactly like the stock mutual fund we discussed earlier—everyone pools their money

together and purchases a bunch of bonds, spreading out risk through diversification. A bond index fund is

then very similar to the stock index fund. Instead of actively seeking to purchase a few different companies’

bonds and trying to beat the overall bond market, a pre-arranged collection of companies’ bonds are

bought.

The F Fund, aka, The Corporate Bond Fund


The F Fund seeks to replicate yet another mouthful of an index, the Bloomberg Barclays U. S. Aggregate

Bond Index. So, what’s included in that? First of all, bonds. No stocks. Secondly, pretty much any kind

of bond that is based in U.S. dollars. This can mean they are bonds issued by the government, U.S.

companies, or foreign companies that are issuing bonds denominated in U.S. currency (yes, that’s a thing).

These bonds can be the straightforward type like we talked about already (i.e., Starbucks issued bonds), or

they can be more complicated affairs such as mortgage backed securities (MBS), asset backed securities

(ABS), and even more complicated instruments like the collateralized mortgage backed security (CMBS).

When you start wanting to know the ins and outs of these types of investments, you probably are interested

in a Master’s in Finance, so I’ll skip explaining all of them. If you want a pretty solid understanding that’s

also entertaining, watch the movie, The Big Short.

Anyway, getting back to the realm of practical, understand this: when you buy the F Fund, you are buying a

bunch of loans. These loans are generally safe, since companies generally repay their loans. However, they

are not guaranteed. Also, due to price fluctuations in the value of the bonds, there is the risk of losing

money there as well. For these two reasons, the F Fund is relatively stable and conservative, but you can

lose money. As I stated before, risk and reward go hand in hand, so because the risk is higher (at least

somewhat) than U.S. Treasuries, the return has the potential to be higher as well. Unlike the G Fund,

which is simply locked in as to the minimum and maximum, the F Fund can rise (or fall) more than the G

Fund.

If you’re looking for a ticker symbol to track this index, you can use AGG.

The G Fund, aka, The Government Bond Fund

Most of you are probably already familiar with this fund, as it’s the safe haven. Many of you who are unsure

what to do with your TSP money just park it here. If you don’t tell TSP how to allocate your contributions,

they automatically put everything in the G Fund for safekeeping. It is a bit different from any of the other

funds (C, S, I, or F) because it is the only one that is guaranteed not to lose money. Although technically

not an index fund in the traditional sense, it operates similarly to one in that it has a set standard of what

government bonds to purchase. It is a collection of U.S. government bonds, also referred to as Treasury

Bills, Treasury Notes, and Treasury Bonds, depending on how long the loan (maturity) is for. There are no

private company bonds in this fund. The risk of default is the same as the risk of default for the entire U.S.

government, (which, I guess, depending on your political beliefs, may range from impossible to imminent).

Basically, it’s the closest thing you can get to a guarantee in the investment world. It’s the benchmark for

security.

Because it’s so safe, there’s not much chance of making a ton of money in it. While the stock market can

go up 30% in a year, U.S. Treasuries will not. They can afford to pay a tiny percentage because they are

guaranteed (remember, risk vs reward). For example, the 2016 return on the G Fund was 1.82%. While

that is very, very low in the investment world, TSP participants can take solace in the fact, that it can never

be a NEGATIVE 1.82%. Also, historically, 1.82% is very low, even for the G Fund. For example, in 1991,

the G Fund returned around 9%. Yeah, I know—9% guaranteed return seems like science fiction in a world

where current savings accounts are paying less than ½ of 1% interest.

An interesting tidbit with the G Fund is that it pays interest based on the average of government bonds of a

4 year maturity, even though they may be invested in shorter term securities. What this means is that you


are getting a higher return on your money in the G Fund than you could if you went out on your own and

purchased government bonds privately. It’s due to the special issuances of Treasuries solely for the G

Fund.

There is no ticker symbol for tracking this since there is no real index. The best way to track G Fund

performance is on the TSP website, where it is updated regularly. Incidentally, you can always track all of

the TSP funds on their website.

If you want to be out of the stock market completely, you want to be in the F or G Fund. If you want to be

completely out of all private markets (stock or bonds), your only TSP option is the G Fund.

The L Funds, aka, the I’m-Not-Sure-How-To-Invest Funds

So, what’s the deal with the L Funds? I will discuss L Funds more in the strategy section, but for now,

understand that L Funds ARE NOT different funds from the ones discussed above. I get this question a

lot. The L Funds were created simply for TSP participants to allow someone else to pick their allocation

strategy. When you purchase the L 2040 Fund, for example, you are (as of July 2017) purchasing: 20.58%

of the G Fund, 6.42% of the F Fund, 39.10% of the C Fund, 12.00% of the S Fund, and 21.90% of the I

Fund. You aren’t getting a new fund, you are simply allocating your money among the 5 existing funds (C,

S, I, F, and G). These allocations change automatically as you get closer to what is referred to as the target

date, which in this case is the year 2040.

For now, just know that the L Fund is not a fund that invests in stocks, bonds, or other things that aren’t

included in the funds we’ve already covered, it’s simply a way of splitting all your TSP money among those

funds in a systematic way.

TRADING STRATEGIES

We’ve talked about your options in the TSP, and if you’ve bothered to read everything up to this point, you

should understand what each investment consists of, so the only question remaining is...How do I allocate

my TSP so I get rich?!

Since you only have 5 investments, and one of them (the G Fund) is never going to make you rich, your

options are pretty limited, all things considered. Unlike a private investment account where you can buy

options, gold bullion, individual stocks and bonds, and even commodity futures like wheat and pork bellies,

you really only have the option of picking large markets of stocks and bonds. This is probably a very good

thing. If TSP options were open to anything under the sun, not only would our administrative fees be super

expensive, no doubt someone would retire after 30 years with nothing, having “invested” in what would

have amounted to little more than speculation, which is a more polite, financially-oriented euphemism for

gambling.

I’ll give my perspective on TSP strategy later, but first I want to discuss some of the commercial allocation

services that are currently available that I know many of you are participating in. If you don’t see your

favorite one on the list, let me know and I’ll add it to my database. If you’re not familiar with a TSP

allocation service, it is a company, or a group of people, or a person with a dartboard, that gives periodic

recommendations for how to divide up your current TSP balance. For example, one of them might send


out an email to their subscribers before an election and recommend 50% in the G Fund, 50% in the I Fund.

Some of these services are free, some charge a little, and some charge a lot. Some seem to have actual,

educated, professional financial people employing a systematic approach to their advice, while others seem

to be just spouting off recommendations no more sound than the ramblings of your crazy Uncle Joe after 3

days of moonshine-infused partying in the infield at Daytona.

Regardless of their approach, they are all seeking to accomplish the same thing: provide a better overall

return by trading in and out of the different funds rather than setting a percentage in a fund (or funds) and

just letting it sit your whole career. They are seeking to beat the market through timing its ups and downs.

They are, in essence, trying to predict the future. And as we will see, predicting the future is pretty darn

difficult.

TSP ALLOCATION SERVICES

Before we start into the actual performance of each one of these things, I want to give a couple of caveats:

1. I am not recommending any of these services. While it may be legal for me to give you specific

advice, I don’t think it would be prudent, without knowing your individual situation. Few pieces of

financial advice can ever be applied categorically across the board to everyone. That goes for these

services. Personally, I do not use any of them; I subscribe to the Warren Buffett school of buy and

hold. I will get into this later. I just want to say that up front lest someone be confused and think

that I am endorsing a particular one over the other.

2. Part of my goal is to educate you in financial matters, particularly when it comes to, shall we say,

financial professionals who show a disdain for clarity, and do so in the name of marketing. One

example of this might be the average annual rate of return. This is a very popular reported statistic.

As an example, a report may say, “XYZ Fund had an average annual return of 8.5% vs the SP 500’s

7.5% over the last 10 years.” Probably many of you have seen this. However, what is more

important is the real, or actual return, over that time period. Average annual return can be higher

than actual return, and as such, it may be used for marketing purposes to disguise the real return.

Don’t fall for it. You want the real rate of return. Or, better yet, you want the calculation that

shows what a certain amount of money became over the period. Such as, “If you had invested

$10,000 in 2007, it would now be worth..X amount of dollars”.

I may be losing some of you in the math here—it’s not important—you can skip this part if you’re

not a math nerd or don’t want to know how this works. For those of you that had a calculator

watch and/or a pocket protector at one time, and want to dive deep, here goes. (I promise it will

have a pretty cool application at the end, and you’ll be smarter than most investors after reading the

next few paragraphs).

There is a concept in math that shows that averaging numbers over time, particularly percentages

applied to a balance, can be different depending upon the method. One can choose the arithmetic

mean or the geometric mean. Let’s start with the more common arithmetic mean. This is what

you would normally do in finding an average. Say you had 3 different percentages—you add them

up to find the total, and then divide by 3. That’s the arithmetic mean. The geometric mean applies

those percentages to the root value and averages the percentage over the time period. To simplify,


it is “the n-th root product of ‘n’ numbers.” On second thought, maybe that doesn’t simplify

anything, so let’s see a practical example:

Assume your favorite TSP trading strategy, the TSP GetRichOvernight!, had the following returns

over three years:

Year 1: -10%

Year 2: -10%

Year 3: +30%

The arithmetic mean would be 3.3% (add the 3 numbers [-10, -10, +30] and divide by 3). Your

TSPGetRichOvernight! may report this return as the average annual return. 3.3% seems positive.

Not great, but positive. Maybe the market only returned 2%, so they can claim they beat the

market. They may even say they beat the market by over 50% (3.3% vs. 2%)!!! Wow! Sign up the

new subscribers!

However, did you really average 3.3% a year? Let’s take a closer look. Assume we started with

$10,000. The first year, we lost 10%, or $1,000, leaving us with a balance of $9,000. Year 2, we

lost another 10%, or $900, leaving us with a balance of $8,100. Year 3, we finally make some

money—we make 30%, or $2,430. This makes our balance at the end of Year 3 a whopping

$10,530. So, wait a second—we only made $530 in 3 years? That hardly seems like 3.3% a year.

$530/$10,000=5.3% TOTAL. The geometric mean (what we ACTUALLY made) is only 1.74% a

year. Hardly the same as 3.3%. Matter of fact, it lost to the market (2% beats 1.74%).

If you actually averaged 3.3% a year, your $10,000 would be $11,023.03 at the end of year 3.

[This is simple to find. Take your initial balance of $10,000 and multiply it by 1.033 three times.

$10,000 x 1.033 = $10,330 at year 1. $10,330 x 1.033 = $10,670.89 at year 2. $10,670.89 x 1.033 =

$11,023.03 at the end of year 3.]

However, by applying the percentages to the balance as they occurred (geometric mean), you end

up far short, at just over $10,500. You will see the annual average (arithmetic) next to the actual

average (geometric) in Appendix I. Some are very close, but some are a point or two different.

(The geometric mean in the finance world is often referred to as the Compound Annual Growth

Rate-CAGR. For those of you that geek out on the math, I will include how this is calculated in an

Appendix. It is useful for evaluating and comparing different investment returns among several

companies.)

So, what’s the point? The point is that when you are looking at stated results from mutual funds,

brokers, financial planners, etc., the best performance number to look at is the CAGR, or the

actual performance of a set amount of dollars. Most mutual fund companies now report this as a

chart showing the hypothetical growth of $10,000 over a 5, 10, or 20-year period. I will also rank

the TSP allocation services later on in this paper by their growth of a hypothetical $10,000 to show

what your account would have grown to. This eliminates the potential trickery of using an average

rate of return.


In fact, when you’re comparing investments, ACTUAL returns always beat whatever other statistic

it is being compared to. Which leads to my 3rd

caveat: Backtesting.

3. Backtesting is an important concept to get because you may look below at this chart and sign up for

TSP Millionaire immediately based on their returns, which crushed every other service. However,

you need to understand that the returns they are showing are not ACTUAL returns. They are the

returns IF THEIR SYSTEM HAD BEEN EMPLOYED OVER THE LAST 10 YEARS. In

other words, TSP Millionaire came up with a system in 2013 and said, “Wow, if this system had

existed since 2007, we would’ve made a ton of money!” The problem with that is that the system

did NOT exist in 2007. It was created in 2013 and retroactively (and theoretically) applied to the

market to come up with the return listed for the last 10 years.

How did they do this? By backtesting. They go back and test their strategy against the market to

see how profitable their system would’ve been. Will it continue to be that successful in the future?

Or did they just find the best strategy of return for a period of time and then attempt to say that that

strategy will continue to work in the future? Since 2013, TSP Millionaire slightly beat the C Fund 2

out of 3 years, but lost to the C Fund in 2016. Prior to that, during the “backtesting” phase, TSP

Millionaire absolutely crushed the C Fund, “beating” it in 2008 by over 50 percentage points

(+16.37% vs -36.99%). The hypothetical money made was a lot more than the actual money made.

And, as I probably don’t have to tell you, it’s pretty difficult to spend hypothetical money.

The takeaway? Be wary of backtested results. Theoretical returns may not turn into actual returns.

Think about it this way: You’re analyzing a group of stocks and you discover that all of the

companies that started with the letter G for the last 10 years did better than every other company.

So, you construct a spreadsheet to test your theory and you indeed find that the “G” companies

appreciated in value on average 15% compared to the market. Now you have a new investment

strategy that you’re going to recommend that people only buy stocks in companies that start with

the letter G. You can explain to them how your theory has beaten the market every year for the last

10 years. How can you prove this? You’ve backtested it. You’ve checked the returns for the past

10 years and proved that the G companies beat the market.

Here’s the question, though: would you actually recommend that strategy to someone? Probably

not. Although there’s no doubt it’s been tried at some point in market history. The strategies listed

below that have been backtested probably have a lot more substantive data backing up their theory

than my silly illustration, but the point is, spotting a pattern in the past is not something, in and of

itself, to build a strategy on. The strategy needs to be based on sound financial principles and then

applied to the past to see if it holds true. It is up to you to decide how sound TSP Millionaire’s

(and others’) strategies are. After all, it’s your money. Understand that backtesting is not a trick or

something shady in and of itself. It is used by the most reputable of analysts to test theories

retroactively. I just want you to know the limitations of it, and also to know that no one actually

made that much money on TSP Millionaire and the other systems that were backtested. They are

theoretical gains only.

RANKINGS


Here are the rankings. They are based on a simple premise: On January 1, 2007, your TSP balance was

$10,000. You selected one of the services below and followed their recommendations until December 31,

2016 (10 years). I calculated your ending balance for each of those services and ranked them as of total

return. I also included their website for you to find more information, what they cost (if anything), and any

relevant notes.

(see next page)


Strategy Name Website Cost 12/31/2016

Bal.

Notes

TSP Millionaire Tspmillionaire.com $132/yr $58,292.92 Backtested 2017-2013

TSP Key Tspkey.com $99/yr $37,324.28 Clear website, current

updates

TSP

FundTrading

Tspfundtrading.com $259.50/yr $32,162.34

TSP Coach Tspcoach.com $60/yr $29,542.02 User-friendly website

TSP Investing Tspinvesting.com $15/mo $29,400.00? Site not updated since

11/16. Returns not listed

for all years. Unsure of

this balance?

TSP Talk Plus Tsptalk.com $179/yr $29,163.89

TSP Talk

Intrepid

Tsptalk.com $300/yr $26,816.16 Started 2008. No return

available for 2007.

Thrift Trading Thrifttrading.com $259.50/yr $23,391.53

S Fund Tsp.gov N/A $21,854.16

TSP Pilot-Aggres. Tsppilot.com $149.95/yr $19,689.44

C Fund Tsp.gov N/A $19,675.09

TSP Folio Tspfolio.com $149/yr $18,383.07 Backtested prior to 2010

TSP Timing-

Bull/Bear

Tsptiming.com $145 Fee $80,582.83 Fee is one-time.

Backtested 2007-2015

TSP Timing-

Enhanced

Tsptiming.com $145 Fee $77,852.56 Backtested 2007-2015

Tsp Talk

RevShark

Tsptalk.com $199/yr $17,265.70

TSP Timing-

Basic

Tsptiming.com $145 Fee $47,793.50 Backtested 2007-2015

L2040 Tsp.gov N/A $16,875.01

L2030 Tsp.gov N/A $16,512.74

TSP Pilot-Stand. Tsppilot.com $149.95/yr $15,840.80

L2020 Tsp.gov N/A $15,710.88

L Income Tsp.gov N/A $14,426.02

TSP Wealth Tspwealth.com Free $14,056.44

G Fund Tsp.gov N/A $12,968.46

I Fund Tsp.gov N/A $11,070.06

Fed Trader Thefedtrader.com Free Unk Does not publish returns

TSP Allocation Tspallocation Free Unk Unable to find returns.

Website is confusing

TSP Safety Net Tspsafetynet.com $149.99/yr Unk Does not publish returns

Sector Timing

Report

Sectortimingreport.com $279/yr Unk Newsletter that does not

publish returns

TSP Strategist Tspstrategist.com $75/yr Unk No published returns.

Started in 2015

TSP Radar Tspradar.com Unk Unk Bad website?

TSP Max Tspmax.com Unk Unk Shutting down operations

12/31/17

TSP Advisor Tspadvisor.com Unk Unk Website does not appear

to be updated


Notes on the Results:

Some strategies do not publish returns. This seems odd to me. A service wants you to pay them so

that they can tell you how to beat the market, but they don’t actually show you that they have the

ability to beat the market? No thanks.

The Buy-and-Hold Strategies of the S Fund or the C Fund, (i.e., you don’t trade, you just invest

once and forget about it), beat many of the strategies over the last 10 years, some that even charge

annual fees!

The L2050 was not included because it has not been around for the full 10 years.

Probably the stunner to me, is the G Fund, which is as riskless an investment as you can get, earned

over twice what the I Fund earned in the same period, with the I Fund being at a much higher risk

level. ($2,968.46 gain vs. $1,070.06 gain).

The returns published by the strategies are not always able to be verified. Did they really make

18% that one year? Some subscribe to third-party verification services, others do not. Do your

homework.

Some of the websites are virtually incomprehensible. On a few, I spent a lot of time just trying to

find the returns or some information on how the strategy is employed. Many do not explain their

actual strategies. For example, are they making educated decisions, or simply throwing darts at a

board. Really, all of us have opinions on what the market will do. The question is whether our

opinions are based on solid financial data.

There are probably other services out there that I didn’t find. If you know of one, send it to me

and I’ll update the list.

Please do not sign up for one of these services simply based on my report of their results! You

have to do your research. Ask for references, try to find someone who has used them and is

satisfied, etc. For many of you, your TSP balance will be your largest, single asset. Don’t trust it to

an internet site you know little about.

I will include the actual annual returns for each of these services for the 10 years at the end of this

paper (Appendix I) so you can see how they performed annually.

A word on costs. I have not listed any fees associated with the TSP funds, because you don’t pay a

subscription service. But they are not exactly free. They each have expenses that come out of your

account each year. They are very low compared to many other mutual funds, but they are not

exactly free. Each fund has a different cost. The average for 2016 was .038%, which means you

pay approximately $.38 a year for every $1,000 balance you have. Have $300,000 in your account?

The expense fee for 2016 was roughly $114.00, which is virtually nothing in the financial world.

So, how do the L Funds work?

I said I’d get back to the L Funds. They are, in a sense, very much like the allocation services above. But

you don’t take an active role in moving the balances around—they do it for you. Unlike the above services

that may send you a newsletter or email telling you to rebalance your TSP account to 50% C and 50% I, the

L Fund automatically adjusts your balance.


They also don’t adjust it based on what they think the market is going to do, but rather how long you think

it will be before you are going to use that money. In other words, it is based on your time horizon, not on

what the market is doing or not doing.

These types of funds are often called “Target Funds” because you have a target date that you will want to

use the money. You invest like you don’t need the money until your 55, but when that day comes, you’re

smashing the piggy bank and buying the beach house. Or paying for college. Or retiring. Target funds

work like that and here’s why:

There is a generally accepted principle in the financial world that the longer the time is that you don’t need

your money, the greater the risk you should be willing to bear. The reasoning is simple. Let’s say you have

a savings account for little Mikey to go to college and he’s a senior in high school. If you have that money

invested 100% in the stock market and another 2008 happens, where you lose 30% of the balance, well

then, maybe Mikey’s going to have to defer those plans for Notre Dame and start looking into local HVAC

schools. Conversely, if you’re 25 and saving for retirement at 55, a 2008 in the next couple of years won’t

really derail your plans, as you have a 30-year time frame for your investments to recover.

The closer you get to needing the money, the less risk you can afford to take with that money. Being 100%

in the C Fund at 22 is no big deal. Being 100% in the C Fund at 55 is an entirely other story-can you afford

a potential 20-30% drop in your balance right before you head into retirement?

That’s how the L Funds work. You pick a year that you expect to be withdrawing your money. (Most

people misunderstand this and pick the year they are planning on retiring. That’s wrong. If you are retiring

at 49 and are sure you’re not going to be withdrawing the money until you’re 60, you’ll be too conservative

for 11 years.) As of this writing, you can choose among the following L Funds:

L Income

L2020

L2030

L2040

L2050

Each one of these funds takes your contribution and allocates it with more risk in the longer one (2050) and

less risk in the nearest one (2020). The L Income is allocated in such a way as to make it very, very low

risk, and is designed for those who are already withdrawing their money and want the remaining balance to

be invested automatically in less risky assets. It is currently 74% in the G Fund, 11% in the C Fund, and the

rest spread among the remaining funds. The L2050 on the other hand is 43% in the C Fund, 24% in the I

Fund, 14% in the S Fund, 12% in the G Fund and a little over 5% in the F Fund. So, you can see, as you

move from many years before you are withdrawing the money until the time when you’re actually

withdrawing the money, the TSP moves your balance automatically from more risk/more potential reward

to less risk/less potential reward.

This may appeal to some people who are in the ultimate “set it and forget it” mode. One could literally

choose an L Fund at 25 years of age and never make any adjustments, knowing that the TSP is


automatically rebalancing it every quarter throughout your career. I am not necessarily recommending this

approach one way or another; I’m simply saying it is possible.

The various percentages of each fund change each quarter. You can go on to www.tsp.gov to find the

current composition for any of the L Funds.

So, what’s the drawback to just investing in the L Fund? You may not be content with the percentages

allocated to the different funds. For example, as I mentioned before, the L2050 currently has 24% in the I

Fund. Personally, I am not happy with this as I am not happy with the performance of that fund and I

would not want to tie up a quarter of my TSP in it. But, if I were in the L2050, I wouldn’t have a choice—

my money goes where they say it does. So, there is a control issue to work through when you’re deciding

on the L Funds. Do you want more control? Or are you happy just letting someone else handle allocations

because you don’t want to be bothered with all of these investment decisions? Basically, there’s something

for everyone in the TSP, and the L Fund may be for you, or it may be something you’re totally against

because you can do better making your own decisions.

Finally, to close out this section, it looks like the TSP will be creating more L Funds in the future that are

based on 5 year increments, rather than 10 year increments, something TSP participants have apparently

been asking for.

Another Common Allocation Strategy

100 Minus Age

A longstanding rule of thumb regarding investment allocation very common in the financial world is

determined by subtracting your age from 100 to find what percentage of your portfolio should be in stocks.

For example, if someone was 30 years old, 100-30=70% in stocks, while the rest would be in bonds. If a

person was 60 years of old, they would be 40% in stocks (100-60) and 60% in bonds.

For a 35-year old TSP participant, that would mean that 65% of her balance would be in a combination of

stock funds (C, S, or I), while 35% would be in G and/or F. Not really a bad strategy. It provides a

framework with which to operate in (very important so you don’t get derailed by feelings), and it becomes

more conservative as you age.

However, in recent years this strategy has come under criticism for being too conservative, primarily for two

reasons. One, people are living longer than before, so therefore, their money needs to last longer than

before. Two, bond interest rates are extremely low these days so that a large percentage of a portfolio

dedicated to bonds will mean literally just an increase of a few percentage points, hardly enough to grow

wealth and fight long-term inflation.

As such, the rule has been modified by many financial advisors to currently be 110 or even 120. If we apply

the 120 starting point, the 35-ear old, would now put 85% of their portfolio in stocks, and only 15% in

bonds. A 60-year old, would be 50/50.

Rebalancing

http://www.tsp.gov/


Rebalancing is not so much an allocation strategy in and of itself, but rather a necessary component to most

allocation strategies so it needs to be discussed.

Rebalancing is the act of moving your money around within your different investments to put them back

into the allocation strategy you wanted. Let’s walk through it. Assume you decided to go 60% stocks and

40% bonds. After a year, because the market has done exceptionally well, your 60% stocks has actually

grown to be 73% of your entire portfolio. While you wanted to be 60/40, you are now 73/27. So, to

balance this out, you would transfer money from your stock balance (let’s say the C Fund in this example)

to the G Fund, so that when you are done, you are rebalanced back at your initial goal of 60/40.

This does a couple of things. One, it encourages you to monitor your accounts, which is necessary if you’re

determining your allocations yourself. Secondly, you lock in some of your gains that you’ve made on the

stock side of your portfolio—always a good thing.

On the flip side, let’s say the stock market crashes and because you’ve lost such value in your stock

portfolio, you’re percentage is no longer 60/40 but rather 40/60. To rebalance, you would transfer a

portion of the G Fund to the C Fund (or S or I, depending on your strategy), so that it is rebalanced 60/40.

This means you are “buying” the market when it is low, which is the basic premise for making money in the

market—buy low, sell high.

So, how often should you rebalance? Depends on your allocation strategy. If it’s one based on age,

obviously as you age, you need to be moving money from stocks to bonds. If it’s not based on age, but

rather the percentage you feel comfortable, then most advisors would say you rebalance once a quarter or

once a year, or when your percentages get out of whack from where you want them—say 5 to 8 percent off

from your desired goal.

Risk

We can’t talk about allocating investments without talking about risk. There are a lot of risks involved in

investing. Some common ones that come to mind are the stock market crashing, companies going out of

business, and losses due to fraud (remember Bernie Madoff?). There are also other risks that may be less

noticeable, but just as important. One of them is inflation risk. Long-term inflation (45+ years) has

averaged just under 4%. That means that each year, you are, in effect, losing 4% of your money. You may

not see your actual balance go down, but the purchasing power of that money is nonetheless lower.

To illustrate that, let’s say that you put $10,000 in cash under your mattress in 1971. That $10,000 today

would really only buy somewhere around $2,000 worth of goods, depending on the type of goods and who’s

inflation number you accept. Another way of looking at it is that when you retire, you will need more

money than you need now to maintain the same standard of living. This just makes sense—things are getting

more expensive. A car in 2030 will almost certainly cost more than a car in 2017. (By the way, where are

the flying cars we were promised in the 80’s?!) In recent years, inflation has been comparatively low,

although many are predicting an increase in the coming years. Who knows? The point is, inflation exists

and it is eroding the true value of your investments every year. This is the main reason that equities

(stocks) need to be at least part of an investment portfolio. Typically, equities increase more than bonds

over time, because the companies themselves grow, and benefit from increased prices in the form of

increased revenue that gets passed on to the stockholders (you and me).


It is not necessary to go into extreme depth of the various types of risk and how to counter them. However,

what is extremely necessary is that each of you understand the different risks, have a plan to counter them,

and are comfortable with the steps you are taking to do so. And this is a very personal decision. Although I

would encourage everyone to be at least somewhat in the stock market (or the C Fund for our purposes), I

have spoken with federal employees that were scared to death of the market and kept everything for their

entire career in the G Fund.

I’m the other extreme. If I had everything in the G Fund personally, I would not be able to sleep at night,

knowing that I’m missing out on potentially large gains in the market, while barely keeping ahead of

inflation. So, spend some time determining your own risk tolerance. If your current investing strategy is

keeping you up at night, regardless of your allocation, you’re doing something wrong. Become more

educated on the risks and rewards of the different funds, speak to a financial planner you trust, and then do

what you are comfortable with. If you can only sleep at night by being 100% in the G Fund, then do that,

but understand the potential gains you are giving up. Conversely, I know there are some of you out there

that won’t be able to sleep at night with 100% in the C Fund because it’s not making as much as this new

TSP Millionaire you just read about. Again, invest how you are comfortable, but please understand the

various risks you are taking.

So, what’s my investment strategy advice?

I promised I’d go into what I personally do. I also said I won’t give blanket investment advice to everyone

so some of you might be disappointed but hey, it’s not like I’m charging you for this information! Here are

some of my recommendations, primarily based on mistakes I’ve seen when working with federal

employees. So, I guess it’s more a list of what not to do.

1. Don’t be concerned about which allocation service is beating other allocation services if you aren’t

even contributing 5% to your TSP. You want to beat every service out there that has ever existed?

Contribute 5% of your salary. You will make a guaranteed 100% on your money, year in and year

out. No service or professional investor can come close to that return. While we’re on the subject,

let me explain how the match works since I hear so much confusion on it. The government

automatically puts in 1% of your salary, whether you contribute or not. That’s not a matching,

that’s the automatic. Next the government will match dollar for dollar your next 3%. If you

contribute 3% to your TSP, the government will give you 3% match + the original 1% for a total of

4%. Above the 3%, the government will match $.50 on the dollar for percents 4 and 5. So, if you

contribute 5% to your TSP, the government will match 3%, then .5% for each of percents 4 and 5,

which means they match 4% on your 5% contribution. But, we have to add the 1% automatic in

there since they are contributing that. This brings their total contribution to 5% (4% matching and

1% automatic).

2. Time is a bigger investment multiplier than an allocation service, no matter how good. Money

contributed today is worth way more than money contributed a few years from now. Don’t believe

me? Look at this example:

Conner and Meghan are both 23 and just started working. Conner decides that although money is

tight, he’s going to save $2,000 a year. He does this for 10 years. And then he stops and never


saves another dime. Meghan, on the other hand, is busy with other things and doesn’t get serious

about saving until the time Conner stops, 10 years later. At this point, they are both 33. Conner

has some savings, Meghan has nothing. So, she realizes she needs to get serious about things so she

starts putting away $2,000 a year and never stops. She continues through her 30’s, 40’s, 50’s and

60’s. When they both turn 70, Meghan is surprised to learn that, although she contributed $2,000

a year every year for 37 years, she never caught up to Conner, who only contributed for 10 years

and then never contributed anything else. Why? Because of time.

Let’s look at the math:

After 10 years of contributing $2,000 annually at 8% (let’s use this consistent rate for each person to

be fair), Conner’s investment is worth $28,973.12. Meghan’s, you’ll remember is worth zero at this

point, since she will be starting later this year. 37 years later, Conner’s investment is now worth

$499,659.58. At that same time, Meghan’s investment will be worth only $406,140.64. How can

that be?! Conner only contributed $20,000 total, while Meghan contributed $74,000! Meghan

contributed over 3x what Conner contributed but never caught up. And, here’s the thing—she

never will. Einstein referred to compound interest as the most powerful force in the universe.

Compound interest takes time to work.

The bottom line: invest now. Don’t wait to invest more later and worry about some service helping

you catch up. A little invested now is worth a lot invested later.

3. Timing the market based on feelings is the same as doubling down in blackjack because you feel

the next card will be a 10. Constant in and out of the market in an effort to time the movements

because of rumors of war, oil prices, how you feel an election is going to go, what the latest guy on

CNBC said, etc., almost always produces frustration and regret. I remember the recent election

and the incredibly large (and irrational!) swings on election night as people flooded out of the

market, only to miss out on some of the biggest gains in years.

If you are someone who has moved your TSP balance around, in and out of the market, over

years, in an effort to maximize your gains, I’d like you to do a little exercise to shed some light on

your performance. Fair warning—this may be an ego check. Login to your TSP account and pull

up each of your annual statements for the last 10 years (2007-2016). On each statement, it will

show ‘Your Personal Investment Performance”. Make a note of that for each year. That’s how

much you earned that year. Next, take a hypothetical $10,000 and multiply it by each annual

percentage rate return for each year from 2007 to 2016 (starting in 2007) and see what you turned

$10,000 into in 10 years.

For example, if you earned 5.41% in 2007, take $10,000 x 1.0541 to get $10,541. Next, take

$10,541 times your 2008 return. Whatever that is, take that times 2009 return, and so on. When

you finish with your 2016 return, make a note of how you managed your $10,000 and where you

fall on the chart above. This will give you an exact idea of how well your current strategy is

working compared to simply buying and holding the TSP funds.

I’m not an especially big proponent of timing the market. It’s simply proven too difficult even for

investors way more skilled and experienced than I. I’ll let one of the greatest investors of all time,

John Bogle (the founder of Vanguard), sum it up, “After nearly fifty years in this business, I do not


know of anybody who has done it [market timing] successfully, and consistently. I don’t even know

anybody who knows anybody who has done it successfully and consistently”.

4. Don’t worry about the short-term ups and downs. This leads to stress and thoughts of jumping in

and out of the market (See #3 above). The TSP is for you in your retirement. Even if you are 55

years old right now, that money is still somewhat for the long-term (people routinely live into their

80’s now). Develop a sound, conservative allocation plan, and stick with it, regardless of how the

bipolar Wall Street is panicking on any given day. Arguably the greatest investor of all time,

Benjamin Graham (who taught Warren Buffett how to invest), pointed to this as the single greatest

error that keeps investors from being successful in the market. “The primary cause of failure is that

they pay too much attention to what the stock market is doing currently.” Let’s say you have your

TSP from 25 years of age to 75 years of age. 50 years. That’s over 18,000 days. Will there be

some serious down days out of that 18,000? Undoubtedly. But, has the market ever been lower at

some point than it was 50 years earlier? In other words, has there ever been a 50-year period in

which the market went DOWN? No. Not even close. The point is focus on the long-term.

5. These principles lead me to my strategy, which is a simple one—buy the market and hold on

through the long-term, riding the ups and downs. As such, I am 100% in the C Fund and have

been for some time now. There were times in the past, where I tried to time the market with

varying degrees of success. Certainly not with enough success to justify the time and energy

expended on it. And certainly not with any consistency. As such, I buy the market. As I get closer

to withdrawing the money, or as interest rates move up and make bonds more attractive, I will

move more into bonds (both the F and the G). For now, I am a buy and hold C Fund investor. I

know there will be corrections. I anticipate one coming soon in the market. I think the market is

somewhat pricey now, but I don’t know when or how much, and I feel very strongly that the market

will recover from even a large crash, by the time I am planning on using my TSP money. I am not

espousing this strategy for everyone reading this. You have to be comfortable with your own plan.

I tis simply an example of what I do for transparency’s sake.

I prefer to spend investment time and energy on identifying particular stocks to purchase in my

private account and let the market (the TSP) take care of itself. Identifying individual companies to

invest in, and determining appropriate valuations, is a paper for another day. This is already long

enough. But, unlike trying to time the entire market, which is your only option with TSP funds,

there are methods and individuals that have been shown to consistently beat the market as a whole

by investing in solid companies at good prices. For those of you that want to take an active role in

investing, perhaps individual stocks or mutual funds may be more appropriate (and profitable) than

attempting to trade in and out of your TSP funds. I’d highly suggest speaking to an investment

advisor on the matter.

So, why don’t I use any of the allocation services above?

Well, several reasons. First of all, I see no reason to use any that don’t at least beat the market. And I

certainly wouldn’t use any that don’t even tell me how well they do. That eliminates a lot of them

immediately. Next, I’m not interested in any that are backtested, no matter how high their stated returns


are. I want to see long-term consistency of ACTUAL returns. I also don’t want to have to struggle with

websites that seem unprofessional, and vague as to how they apply their methods, or anything else that leads

me to question the validity of their system, or who is running it. That leaves just a few services left. And I

may research them a little more since this whole project has gotten me curious. However, I have a certain

issue of control and I don’t see myself just turning my decision making over to a company that charges two

hundred dollars a year for their service. So, I will research a few and see if I deem one worthwhile to

allocate a portion of my balance to their strategy.

Conclusion

If you’ve made it this far, congratulations are in order. Much of this was like a college finance course, but I

hope it was somewhat useful to you. I tried to be simple enough for those that don’t really know much

about the TSP, while still being sophisticated enough for those of you already knowledgeable and interested

in taking the next step. Hopefully you got at least something out of it.

Sorry there are no get rich quick trading strategies included in it. That may be a disappointment for some.

But, if I knew the future, I wouldn’t be typing this to start with.

So, what are the main takeaways I should leave you with?

1. Invest. Invest now. Invest now at least 5% and move up from there. Aim to max out one day.

2. Know what you are investing in. Learn everything you can about your TSP and monitor it.

3. Develop a plan. Either with a financial planner or on your own. And stick to it-this is not the time

to be emotional.

4. Don’t chase the latest hot return. Read and study everything before you use an allocation service.

5. Know your time horizon. It will help to keep you focus when others are freaking out.

Lastly, here are a few stats in case you’re wondering how your TSP balance stacks up against other federal

employees (as of January, 2017). There are about 5 million participants in the TSP.

2.8 million of them have balances less than $50,000.

1.4 million have balances between $50,000 and $249,000.

413,000 have balances between $250,000 and $499,000

120,000 have balances between $500,000 and $749,000

35,000 are in the next tier from $750k to $1 million

9,600 have balances of over $1 million

And the top balance in TSP? $5.4 million.

I sincerely hope each one of you becomes one of the TSP millionaires!

Chris


Further Suggested Reading

The Millionaire Next Door by Thomas J. Stanley. Eye-opening book on the habits of actual millionaires.

Spoiler alert: they drive Fords and live in modest homes.

The Total Money Makeover by Dave Ramsey. There is no point in worrying about your TSP if you are

living paycheck to paycheck and drowning in credit card debt.

The Intelligent Investor by Benjamin Graham. Warren Buffett (you know, the world’s second richest man)

said this is the single greatest book on investing ever.


Appendix I

Allocation Services Returns 2007-2016 NAME 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Value of $10k Avg Return CAGR

TSP Timing-Bull/Bear 10.45 22.95 38.99 27.34 11.35 19.13 37.08 16.69 31.28 20.36 80,582.83$ 706% 23.56 23.20

TSP Timing-Enhanced 11.38 14.84 38.99 27.34 11.35 19.13 37.08 19.69 31.28 20.36 77,852.56$ 679% 23.14 22.78

TSP Millionaire 11.69 16.37 53.91 26.17 21.90 22.96 18.72 14.47 2.49 10.63 58,292.92$ 483% 19.93 19.28

TSP Timing-Basic 1.74 (19.13) 35.40 40.65 26.60 7.86 30.36 13.52 23.01 22.71 47,793.50$ 378% 18.27 16.93

TSP Key 12.43 0.74 13.86 30.71 7.80 20.25 34.60 10.07 0.37 14.87 37,324.38$ 273% 14.57 14.08

TSP FundTrading 16.27 10.59 36.87 15.63 5.54 (2.15) 15.42 14.69 10.39 4.73 32,162.34$ 222% 12.80 12.39

TSP Coach 10.30 (7.10) 16.90 25.00 (0.80) 24.20 35.30 11.90 1.80 3.90 29,542.02$ 195% 12.14 11.44

TSP Talk Plus 21.32 (6.14) 6.62 35.16 (10.27) 20.62 28.56 11.98 7.84 5.77 29,163.89$ 192% 12.15 11.30

TSP Talk Intrepid N/A (5.53) 20.94 29.18 8.44 13.13 15.39 12.91 11.82 1.66 26,816.16$ 168% 11.99 11.58

Thrift Trading 9.32 (7.56) 23.30 14.54 5.07 (4.60) 12.54 22.73 13.07 4.70 23,391.53$ 134% 9.31 8.87

S Fund 5.49 (38.32) 34.85 29.06 (3.38) 18.57 38.35 7.80 (2.92) 16.35 21,854.16$ 119% 10.59 8.13

TSP Pilot-Aggressive 2.10 (15.40) 19.60 21.40 (0.70) 12.00 17.80 6.00 2.40 10.40 19,689.44$ 97% 7.56 7.01

C Fund 5.54 (36.99) 26.68 15.06 2.11 16.07 32.45 13.78 1.46 12.01 19,675.09$ 97% 8.82 7.00

TSP Folio 7.60 2.64 10.74 11.25 2.63 6.49 15.50 8.75 (6.93) 5.75 18,383.07$ 84% 6.44 6.28

TSP Talk RevShark 5.33 (10.21) 4.98 4.15 4.66 10.88 18.32 10.01 2.55 7.79 17,265.70$ 73% 5.85 5.61

L2040 7.36 (31.53) 25.19 13.89 (0.96) 14.27 23.23 6.22 0.73 7.90 16,875.01$ 69% 6.63 5.37

L2030 7.14 (27.50) 22.48 12.48 (0.31) 12.61 20.16 5.74 1.04 7.07 16,512.74$ 65% 6.09 5.14

TSP Pilot-Standard 4.20 (6.10) 8.60 7.50 4.30 7.40 10.30 4.40 2.00 5.40 15,840.80$ 58% 4.80 4.71

L2020 6.87 (22.77) 19.14 10.59 0.41 10.42 16.03 5.06 1.35 5.47 15,710.88$ 57% 5.26 4.62

L Income 5.56 (5.09) 8.57 5.74 2.23 4.77 6.97 3.77 1.85 3.58 14,426.02$ 44% 3.80 3.73

TSP Wealth (2.01) (10.57) (2.00) 19.40 (11.50) 9.50 25.10 3.40 (4.99) 15.10 14,056.44$ 41% 4.14 3.46

G Fund 4.87 3.75 2.97 2.81 2.45 1.47 1.89 2.31 2.04 1.82 12,968.46$ 30% 2.64 2.63

I Fund 11.43 (42.43) 30.04 7.94 (11.81) 18.62 22.13 (5.27) (0.51) 2.10 11,070.06$ 11% 3.22 1.02

TSP Investing Returns not listed for all years. Unsure of the reliability of the CAGR

Yellow Cells Indicate Highest Return for that Particular Year

Red Numbers Indicate Negative Returns

CAGR=Compound Annual Growth Rate


Appendix II

Compound Annual Growth Rate (CAGR)

CAGR can be found by taking the ending balance divided by the beginning balance, raised to the power of

the quantity (1-n), where n=number of years the balance grew, and subtract 1 from the final answer.

In formula form, it looks like this (EV/BV)^(1/N)-1

In plain English, it looks like this:

Let’s take the top ranking, TSP Millionaire. The ending value is $58,292.92. The beginning value was

$10,000. It was invested for 10 years. Therefore, we take $58,292.92 and divide by $10,000 and get 5.83.

Next, we raise that to the power of (1/10) and get 1.19. Subtract 1 and we arrive at .19 or 19%. (This is

rounded, the actual amount is 19.28%).

This is a valuable formula to find out exactly what your compounded return has been on any given

investment, so that you can compare investments in an apples-to-apples fashion.

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