One of the more frequent questions we see from readers reads this way: “How should I spread my investments among the TSP funds?”
Our answer is always the same: “Talk to a financial advisor as we do not provide individual financial advice.”
While we do not provide financial advice, there are a number of people who are engaged in the business of providing financial advice. Obviously, for federal employees, there are many variations of how to invest depending on individual circumstances. These circumstances include the retirement system in which you are enrolled, the length of time until your retirement, your overall financial situation including the amount of debt you have and the assets you have accumulated as well as your personal financial goals.
How TSP Investors Split Their TSP Investments
As of July 2013, this is how TSP investors have invested in the Thrift Savings Plan funds:
- G fund: 39%
- C fund: 26%
- L funds: 15%
- S fund: 9%
- F fund: 6%
- I Fund: 5%
Obviously, TSP investors are quite conservative in their approach to investing. In addition, there are significant swings from month to month as investors move funds around. There are undoubtedly many individual reasons for this but one reason is to take advantage of anticipated upward or downward moves in the stock market—despite studies that show most investors who try to time the market in this way end up costing themselves more money than they would make if they stayed invested and just added to their investments each month.
Here is one example: In May, TSP investors apparently felt bullish and moved money out of the G and F funds and into the stock funds—unfortunately, just in time for the market to go down in June. In May, TSP investors transferred more than $1.6 billion out of the G fund and another $542 million out of the F fund. The biggest gainer for the month was the S fund, with an inflow of $727 million followed by the I fund with $669 million and the C fund with $471 million. (See Down Month for TSP Stock Investors)
Perhaps as a result of stocks going up in June, here is what TSP investors did with their money in July:
- G fund: -$216 million
- F fund: -$785 million
- C fund: +$114 million
- S fund: +$571 million
- I fund: -$75 million
- L funds: +$392 million
So, for those who may have been trying to catch up by timing the market, they moved money out of stocks just in time for them to go down in June. Some may have moved money back into stocks in July. Unfortunately, The Dow Jones Industrial Average and the S&P 500 lost between 3% and 4.5% for the month of August. For those who may have tried to time the market and guessed wrong, which apparently happened to some folks by looking at the TSP figures, they lost in both ends when the market went up and then went down again. (See the TSP monthly returns for August)
One Financial Advisor’s Take on the TSP
Dave Ramsey is a well-known and respected financial guru who has his own radio show and is frequently seen on television dispensing financial advice. He has answered questions from some federal employees about investing in the Thrift Savings Plan. His advice is considerably different in the investment mixture than the approach that has been taken by most TSP investors (refer back to the split among the TSP funds above).
Here is what he has advised investors on their TSP investments:
“The first thing we suggest you have is that you are debt-free except your home before you begin your long-term investing and you have an emergency fund of three to six months of expenses before you being the investing.
Then if your thrift savings plan matches, we start with the TSP up to the match. If it does not, then we start with the Roth IRA outside of there because I would rather have a non-matching Roth IRA that grows tax-free than a non-matching TSP that grows tax-deferred. Tax-free is better than tax-deferred.
…[I]f you’ve maxed out your Roth IRA and want to do some thrift savings plan saving, or if you have one that does match, then you want to look at that for sure and get the match. We recommend that you put in a ratio of 80-10-10 or 60-20-20. That means put 80% in the C fund (common stock fund), the other 10% in the S fund (small-cap stocks) and 10% in the I fund (international).
In the S and I funds, either put 10% in each or 20% in each and then 80% or 60% in the C fund. Put the vast majority of it in the C fund.” (emphasis supplied)
| Fund | TSP Participants’ Current Allocation | Ramsey’s Suggested Allocation |
|---|---|---|
| G Fund | 39% | 0% |
| F Fund | 6% | 0% |
| C Fund | 26% | 80% or 60% |
| S Fund | 9% | 10% or 20% |
| I Fund | 5% | 10% or 20% |
Presumably, the rationale for investing in stocks instead of in the bond funds is that, over time, stocks have performed much better than bonds. You can see from the annual returns for the C fund and the G fund, the C fund goes up and down but, overall, is up considerably more than the G fund despite the ups and downs.
Long term investors in the G fund can be quite certain that their investment is safe in that their principal investment will not diminish even though it probably pays less than the overall rate of inflation (not necessarily the rate of inflation used to determine the annual COLA amount). On the other hand, the actual purchasing power is likely to go down while a stock fund, such as the C fund, will generally exceed the rate of inflation over time and yield much higher returns over time.
Of course the decisions are yours alone to make and the ultimate consequences will be your the result of your own decisions so we wish all readers the best of luck in making the best decisions possible in your retirement investing!
