I’m going all in on the TSP this year, and here’s why.
First, the TSP Modernization Act was just signed in to law. The biggest change in this law is that the TSP is finally becoming flexible on retiree and separated participant withdrawals- Allowing anyone to make multiple partial withdrawals following separation from federal service. This finally brings the TSP on par with 401k plans from the 20th Century, which have allowed Qualified Retirement Plan participants to take all, none, or some of their 401k money- At any time and at any value- after leaving employment. TSP finally recognized the fact that lack of withdrawal flexibility in retirement was driving participants away from TSP when feds retire or separate.
|Related: The TSP’s (former) Fatal Flaw|
Second, I’ve looked at my historical performance in my Brokerage and Retirement accounts over the last 10 years and I am less than impressed. I have finally come to the humbling realization that I am below average. I cannot outsmart the market.
We all like to think we are above average, but I have finally come to the realization that I am no smarter than an algorithm that creates a Mutual Fund with a 50% stock index and 50% bond index allocation. Over the past 10 years I have kept my expenses low, trading costs low, and my investments diversified over, but the best of my investing ‘wisdom’ has failed to beat the dumbest fund on the planet- a 50/50 stock/bond balanced index fund. Over the past 10 years, my investments made 4.00 percent, while a 50/50 balanced fund made 5.22 percent:
Recent articles in Financial Times and ETFstream quote Bernstein firm’s research that state there are 43,000 stocks in existence world-wide, but more than a million indices trying to slice up these same 43,000 stocks one million different ways. And these are just PASSIVE indexes, it does not count all the Active fund managers out there making a million separate bets on (once again) the same 43,000 stocks available world-wide. Making matters even worse, Bernstein estimates there are only 3,000 stocks available that have any respectable amount of liquidity, further reducing the number of ice cream flavors asset managers can scoop from when they make their index fund sundae. This is heavy, but scary stuff.
Third, since I’ve finally come to the realization that I’m not smarter than a 50/50 index fund manager, I figure the best balanced fund I can get is the one with the lowest fees – so i should choose one of the TSP Lifecycle Funds (L Income, L 2020, L2030, etc).
TSP funds charge $0.38 per 1,000 invested. The next closest competitor is Vanguard, which charges $1.30 per 1,000 invested. ‘Average’ target date fund fees run around $4.30 per 1,000.
As an added bonus, it would be really cool if this Balanced/Lifecycle fund contains an ultra-stable money market fund that somehow provides you the safety and returns of a 5-year CD.
Oh yeah, there is such a Unicorn- It’s called the G Fund, which is the active ingredient in all of the TSP Lifecycle Funds.
|Related: Why TSP G Fund is the Unicorn of Investing|
Why am I enamored with using the G Fund as the ‘safe’ cash inside of a Target Date/Lifecycle fund? Because it always enables the TSP Lifecycle Funds to re-balance and buy what is on sale, without liquidating securities at Fire Sale prices in order to do so.
So, say the stock market crashes? … Ok, the Lifecycle Fund re-balances itself by liquidating G Fund assets (which have NEVER lost a dime and have NEVER had a bad day) and purchases more stocks ‘on sale’ through the C-Fund to keep the asset allocation correct with the Lifecyle allocation model.
…So, say interest rates rise and bond prices take a nosedive? No problem… the Lifecycle Fund liqudates G Fund assets (which- once again- have NEVER lost a dime and have NEVER had a bad day) and buys more bonds through the F Fund to keep its asset allocation correct with the TSP Lifecycle fund allocation model.
|Related: TSP’s FRTIB views the F Fund as Ticking time Bomb|
I could go on and on with how a TSP Lifecycle fund sells the G Fund to buy the I Fund and the S Fund ‘on sale’ during market dips, but you get the picture. Every TSP Lifecycle Fund has this secret weapon – The G Fund. G Fund is the world’s highest-yielding money market fund that is also federally guaranteed. Any time one market sector tanks, each TSP Lifecycle Fund always contains plenty of ‘dry powder’ in the form of G Fund assets- Ready to use as a fat stack of high-yielding cash to snap up sectors when they are out-of-favor.
So this year I’ll be rolling my IRA assets BACK in to a TSP Lifecycle Fund, because:
- TSP will soon allow much more withdrawal flexibility,
- I’m not smarter than the market,
- TSP Lifecycle funds have the lowest fees of any target-date fund, and
- TSP Lifecycle funds are the best target-date funds available based on their cash-equivalent fund (the G Fund).