TSP Lifecycle funds beat the Competition

Every year I get the statement from TSP providing an update on my Portfolio’s performance for the last year.

2022 was not a good year… to put it mildly.

But I’m not feeling too bad or pessimistic, as a simultaneous dip in both the stock and bond markets has not happened in over 50 years (the last time both the AGG Bond index and S&P 500 were down in the same year was 1969).    There’s plenty of articles on how and why this happened, and what a rare occurrence this SHOULD be.

Fortunately, the TSP and FRTIB saw this coming.  TSP divested its Lifecycle Funds away from the Aggregate Bond Index (you know it as the TSP F Fund) back in 2015.

As a result, the ‘bad’ year I saw in my TSP Lifecycle (target date) fund could have been much worse if I had my money in an equivalent target date fund with Schwab, Vanguard, or Fidelity.  Here’s a look:

The TSP L2030 Fund has a 60/40 Stock/Bond mix, so I compared to the Fidelity and Schwab target date funds with similar allocation percentages.   L2030 dropped by -10.32 percent in 2022, but Fidelity and Schwab funds with similar stock/bond mixes lost MORE…. as much as almost -17 percent.

The ‘Secret Sauce’ for TSP is the fact that TSP uses G Fund for most of its Bond allocation, where private-sector target date funds use the AGG Bond Index (which is called F Fund in TSP).  The F Fund/AGG lost -12.83 percent in 2022, so the bond allocation that Schwab, Fidelity, and others use as a ‘shock absorber’ in target date funds to compensate for stock market corrections did not do the job in 2022.

On the other hand, TSP Lifecycle Funds largely use the G Fund as the ‘shock absorber’, and as we know the G Fund has “Never Had a Bad Day” (quoted from former TSP Director Greg Long, which is still the truth).   The allocation to G Fund is why TSP Lifecycle Funds did not crash as hard as their private sector target date fund peers in 2022.

Will TSP Lifecycle Funds miss out on an AGG/Bond market rally in 2023?  Only time will tell.  But I’m keeping my defined-contribution retirement assets with TSP, for lots of reasons mentioned on this website.

For those of you who want a TSP refresher/further reading:

4 Reasons TSP Has the Best Target Date Funds

G Fund is the Unicorn of Investing

$231 for the Mutual Fund Window may be Worth It

46,000 reasons TSP is better than your 401k