Wizard of Odds

By • December 4, 2012

While driving through a small town in Kansas recently (don’t ask me the name – too small to remember), I noticed a small storefront named, “Wizard of Odds.” It made me smile to wonder what might be inside a store with such a mysterious sounding name. Unfortunately, it was Sunday and the store was closed, but a peek in the window showed an assortment of knicks, knacks, and everything in between.

The name, Wizard of Odds, got me thinking about the odds for returns over the next few years when saving and investing your hard-earned

money. Since the election, what are the odds that Congress will resolve the fiscal cliff dilemma before the end of the year? What are the odds of another recession? What are the odds that you can get the perfect TSP allocation?

The common theme in the questions federal employees are asking when contemplating how to allocate their Thrift Savings Plan and other retirement accounts is, “How do I protect my savings and still get a decent return?”

This is a tricky enough question that we might have to return to Kansas to interview the wizard himself; however, there are some likely scenarios, although certainly not forgone conclusions. Let’s start with the fiscal cliff. This term was coined to encompass the entire landscape of looming sequestration, elimination of the Bush tax cuts, and future budget and entitlement program discussions.

With the same players in place who couldn’t previously figure out a way to resolve these issues, most DC insiders now project a 50/50 chance of resolution prior to the deadline. As disastrous as running off a cliff sounds, even if Congress doesn’t resolve the financial issues by December 31, there won’t be an overnight crisis. The markets may react negatively, since any kind of market (stock, real estate, commodity) doesn’t respond well to uncertainty. But the government won’t shut down, Wall Street will continue about its business, and the bigger problem of the burgeoning $16 trillion debt will still remain.

Other headwinds causing complications include the U.S. Federal Reserve’s commitment to continuing to keep interest rates low (now estimated until mid-2015), and their ongoing QE3, 4, 5… This will keep U.S. Treasuries (which the G Fund’s return is based on) in the 1.5% – 2% range.

So, where exactly, can you look for higher returns? There’s an old saying – if there’s no yield, stop reaching for yield. In other words, the only way to get a higher return is by taking more risk and if that’s unpalatable, then you have to simply take lower yield and preserve your assets. The TSP’s F Fund offers the potential for higher returns than the G Fund, but it comes with more risk. Probably not a lot more risk as long as interest rates remain low, but an investment in the F Fund certainly requires monitoring of interest rates. Year-to-date returns for the F Fund (as of 11/23/12) were 4.13% vs. 1.32% in the G Fund.

And what about the U.S. equity markets, represented in the TSP by the C Fund and the S Fund? Opinions on when the next recession might occur range from it’s already beginning to sometime in the 2014-2015 range (no certainty here from the “wizard”). Notice, there are few who think there won’t be one anytime in the somewhat near future. With U.S. corporate earnings down overall, where will corporate profits come from? U.S. corporations have weathered the storm after the 2008 recession reasonably well by cutting expenses drastically and stockpiling cash. The #1 problem businesses report is not the possibility of higher taxes or the ability to hire a competent workforce, but sales/revenue. Without sales to drive future earnings, the corporate earnings engine may be stalling. YTD returns for the C Fund are 14.39% and the S Fund are 13.68% (both as of 11/23/12). This gets each of these funds near or slightly above their late 2007 highs.

So, can we look internationally for some help (known as the I Fund within the TSP)? Consider that the I Fund bases its return on Morgan Stanley’s Capital International EAFE (Europe, Australasia, Far East) Index. This index covers the equity markets of 22 countries with an allocation of 65% in Europe and 35% in Australasia/far east (as of December 2011). With the European Central Bank copying the U.S.Federal Reserve’s policy and buying the debt of its failing members, there may be issues facing Europe that are worse than what we’re seeing in the United States. And then there’s China, where they need 7% growth just to sustain their economy (by comparison, we only need about 4% in the U.S.). After an industrial revolution, many Chinese who were working on infrastructure projects in southeast China have been asked to move back to their agricultural roots in western China – at a much lower earning level. Guess who doesn’t want to go? The I Fund has had a YTD return similar to the C and S Funds at 12.67% (again, as of 11/23/12).

Where does that leave the average TSP saver (most federal employees don’t consider themselves investors – they’re just trying to put enough away to enjoy retirement)? Your allocation decision requires investigation, determination, and a strong constitution. For the next few years, the “boom” years of the ’90’s are likely a vague, things were better in the old days memory, or as they say in the Wizard of Oz, “I’ve a feeling we’re not in Kansas anymore.”

© 2014 Ann Vanderslice. All rights reserved. This article may not be reproduced without express written consent from Ann Vanderslice.

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About the Author (  |   )

Ann Vanderslice has been working with federal employees to help them achieve retirement success since 2002. She is a popular speaker nationally on topics of interest to federal employees such as “Choosing the Best HealthPlan for You and Your Family” and “Allocating Your Thrift Savings Plan in Volatile Markets.” Her retirement practice operates out of the Denver Federal Center in Lakewood, Colorado.

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