4 Reasons TSP G Fund is the Unicorn of Investing

I’ve mentioned the Pluses and Minuses of the Thrift Savings Plan (TSP) here many times.  I’m on record stating that overall I’m a big fan of the TSP.

Recently, Congress passed regulations that automatically enroll new hires in to ‘age appropriate’ Lifecycle (or ‘L’ Funds) based on employee age.  This was done because the G Fund is viewed as being less lucrative or too conservative for most folks.  Before we dive head first in to L funds, let’s extoll the virtues of the TSP G Fund.

Here’s why I like the TSP’s G Fund.

1) G Fund has never had a bad day, and it never will.

G Fund has never gone down.  Not once.  Not even for a few minutes.  Not on the worst day of the Stock Market, not on the worst day of the Bond Market.  G Fund’s value is guaranteed now and forever by Uncle Sam that it will never drop in value.  This is a key benefit, especially if you have belief that Deflation is around the corner.  Gold can’t guarantee this, Real Estate can’t guarantee this, the S&P 500 can’t guarantee this, and the Bond Market Index formerly known as Lehman Brothers Aggregate Index can’t guarantee this.

2) You can’t beat the G Fund’s Rate.

At the time of this writing, the G Fund rate is 2.125%.  Keep in mind that G Fund has the liquidity of a Money Market Fund- You can buy-in to G Fund or sell all of your G Fund any day of the week, any time you wish.  So let’s see what current Money Market Funds are yielding:

4 Reasons TSP G Fund is the Unicorn of Investing


Wow, around 1 Percent.  That’s pretty good.  But wait, there’s a catch-  These are promotional rates at a bank.  You’re not getting this at brokerage or mutual fund house.

Let’s look at what kind of rates you get inside a ‘real’ brokerage account Money Market Fund, because you can’t clear trades in stocks or mutual funds with Ally Bank or GE  Capital Bank.   Let’s check some ‘real world’ rates you get inside a ‘real’ brokerage or mutual fund account (this is the same function G Fund replicates inside your TSP).  Sample Brokerage Money Fund Rates are:

Vanguard’s Prime Money Fund rate (VMMXX, 0.0%), or

Fidelity’s Money Fund rate (FDRXX – 0.0%).

Well that sucks.  I could get that same return shoving money under my mattress.

Ok, let’s work it from the other end.  If today’s Money Market Fund rates are effectively Zero Percent, How far out would you have to lock up your money in order to replicate today’s 2.125% return from the G Fund?  Or in other words, how much liquidity risk would you have to sacrifice in order to get a 2.125% return in a guaranteed (CD) investment?

4 Reasons TSP G Fund is the Unicorn of Investing

Per Bankrate.com, the answer is 5 YEARS.

You’d have to lock up your cash for 5 YEARS in an FDIC-guaranteed CD in order to match the risk-free interest rate you can get in the TSP’s Money Market Fund- the G Fund.   But wait, you’ve only guaranteed the ‘rate risk’ with the 5-year CD,  You’ve sacrificed liquidity (the ability to sell your CD tomorrow) and accepted ‘liquidity risk’ in order to obtain the same return.   Or in other words, you’re sacrificing 1826 days of liquidity in the private CD market in order to match the G Fund’s Money Money Market rate of return.

3)  TSP is highly likely (but not guaranteed) to beat inflation.

Since its inception in 1987, TSP G Fund has outpaced inflation by 2-to-1.

4 Reasons TSP G Fund is the Unicorn of Investing

On a CAGR basis, TSP outperformed inflation by $424 (vs. $208) since 1987.   When you have TSP G Fund available as an investment, the conventional wisdom of the financial media that you absolutely MUST invest in stocks in order to outpace inflation is bunk.  (Note that TSP is exclusively a tax-deferred account, so the there is no incremental adjustment for after-tax returns).

4) TSP G Fund Cheats and has an unfair advantage over the market.

Well, it’s not really cheating, but it is a unique advantage.  By regulation, TSP G Fund is allowed to invest in special Treasury Securities that are exclusively available to TSP.  These special Treasury Securities offer long-term (4+ year) yields at very short-term maturities.   This is how G Fund gives you the returns of a 5-year CD with the liquidity of a Money Market Fund.

In summary, TSP’s G Fund is the best risk-adjusted return you can obtain, anywhere.


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