Comparing TSP Strategies

The author examines a couple of different investment strategies for the TSP and some of the pros and cons of each approach.

Editor’s note: This is part 3 of a 3-part series on TSP investing.

Managing TSP investments is something that is discussed frequently in federal circles, but it can be hard to get objective advice for your particular situation.  The first step in the process of managing what you have is to determine your risk level and an appropriate allocation, which I’ve covered in another article.  Once that allocation has been determined, though, a certain percentage of the TSP funds will be devoted toward “growth” investments.  Those are the C, S, I and to some extent F funds, which carry additional risk along with the potential for higher returns.

The decisions regarding this more aggressive portion of the allocation are important, and can have a large impact on your future savings.  Unfortunately, if you ask 10 people what their thoughts or recommendations are, you are likely to get 10 completely different responses.  This article will break down the two largest schools of thought, “buy and hold” investing and using an “active management” strategy, and give some of the arguments behind them.  The ultimate decision, though, rests with each individual investor.

Buy and Hold

The basic rationale for pursuing a buy and hold strategy is that you are content to make the “average” return for a given type of fund, and are relying on having the right type of investment mix to benefit you over the long term.  The primary benefit of this strategy is that it can reduce or eliminate the emotional part of the decision making process.  The argument is that if a certain allocation was appropriate three months ago, it should still be appropriate now, regardless of what the market did in the meantime.

Studies of investor behavior have actually backed this argument up.  A commonly-cited DALBAR study of investor behavior for 2011 (a year with incredible volatility in the markets, and a good case study of its effects) gave the following results for average achieved returns in the private sector:

  • S&P 500 Index (C fund equivalent):  2.12%
  • Investors in typical equity funds:  -5.73%
  • Barclays Aggregate Bond Index (F fund equivalent):  7.84%
  • Investors in typical bond funds:  -1.34%

For both stocks and bonds, typical investors in these funds did significantly poorer than the markets themselves did.  The reason was that they moved in and out of the different types based on market movements, and did so with negative results.  The same study also found similar results when comparing longer term samples, with a typical 4-5% lag for investors behind their corresponding funds.

A “buy and hold” investor, however, would have achieved the same result as the benchmark, without the effort of having made the changes throughout.  This strategy is very commonly recommended, and used by many TSP investors.

Active Management Strategies

The alternative to the buy and hold approach is to actively manage your investments.  In the case of TSP, that typically means moving funds from the C, S, and I funds to the F or G funds and then back, trying benefit from market movements.  The two-trade monthly limit is also a factor, and should be considered when deciding on an active strategy.

There are many different variations on the active approach, including these and many others:

  • Momentum-based strategies based on price trends or moving averages
  • Predicting the effects of political negotiations or elections
  • Staying invested only for certain days of the year
  • Following the advice on the latest financial news show
  • Using signals from a dedicated TSP investment website
  • Playing hunches

Some people have had great success with actively managing their portfolios, while others have done very poorly.  More often than not, active managers have runs of both good and bad returns.  For example, an active manager may have gone into the G fund in 2008 and saved themselves from much of the decline in the market, but they may also have stayed in the G fund for part of 2009 and missed much of the rebound.  Many active strategies also struggled in 2010 and 2011, reacting at the wrong times to the high levels of volatility.  Others, however, took advantage of the market swings to generate profitable returns.

The key point to remember is that no strategy is foolproof or works in every type of market.  If you are intending to pursue an active approach to your TSP, it is best to follow a plan that is not based on emotion, and have the commitment to stay with that plan through all types of markets.  Active management also requires a significant time commitment to monitor your investments and make adjustments as necessary.

Your Decision

It is impossible to make recommendations to any individual without knowing their complete situation, including how the TSP fits into the overall picture.  There are, however, a few things that apply in general:

  • If you don’t have the time, energy, or desire to actively manage your portfolio, you should stick with a buy and hold strategy.
  • If you choose to actively manage the TSP, stay with your strategy and put forth the necessary effort to follow it.
  • With either approach, avoid letting emotion drive your decisions.

Good luck!

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About the Author

Jason Visner is a financial advisor with Brook Federal Advisors, and works with federal employees to optimize their retirement benefits. The process starts with a complimentary analysis of the complete federal benefit package, and then builds an overall retirement plan on that foundation. He can provide recommendations on FERS or CSRS annuities, survivor benefits, military/LEO service, FEHB, FEGLI, TSP, IRAs, annuities, and social security. He can be reached at 262-456-5514 or