Portfolio review for TSP/Fidelity combo

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Portfolio review for TSP/Fidelity combo

Postby TSR » Thu Mar 14, 2013 2:53 pm

Hello friends, this is my first "portfolio review" question, so be gentle. I am pretty confident about most of my situation, but I have fairly specific questions regarding the right blend of stuff. For that reason, I'm not giving ALL of the normal info, but I'm happy to add if needed.

Age: 34
Single
Federal Employment
Tax bracket: 28% (depending on the effect of these darn furloughs)
Contributing the max to TSP and Fidelity Roth
No taxable
Desired Asset Allocation: "age minus ten" (i.e., approx. 75/25 equities/bonds)
Desired international: Comfortable with between 30-50% of equities

TSP (all old 401k funds are now in TSP): low six figures, 100% in the L2040 fund
G fund - 13.52% of TSP/10.6% of total
F fund - 9.23% of TSP/7.3% of total
C fund - 38.9% of TSP/30% of total
S fund - 16.45% of TSP/13% of total
I fund - 21.90% of TSP/17.3% of total
[the above are the only options - all ERs are approximately .025%]

Roth IRA through fidelity: low/mid five figures (approx. 21% of the total portfolio)
FBIDX (Spartan Bond Index - ER .22%) - 24% of Roth/5% of total
FSGDX (Spartan Global Ex-US - ER .18%) - 33% of Roth/7% of total
FSTVX (Spartan Total US - ER .06%) - 42% of Roth/8.8% of total
[all Fidelity options are available]

Questions
You can see that my Roth is sort of a mini-three-fund-portfolio all on its own. I kind of like it that way just so I can watch those numbers fluctuate and internalize the wisdom of that approach. It also allows me to just keep all my TSP funds in the lifecycle fund, which I really like. On the other hand, I might have some convenient options if I don't do that . Here are my (somewhat confusing) questions:

1. Is the I Fund (international) sufficiently bad -- i.e. lacking in emerging markets -- that I should just take a lot out of that fund and move the entirety of my Roth into the Spartan Global Ex-US fund, which does have emerging markets? Obviously I would change other things around in the TSP to compensate. I personally would never have cared about emerging markets if I hadn't joined this site, so part of me is not too concerned about it, but I would welcome your thoughts. One problem with that is that at some point my Roth is going to be a much smaller portion of my total portfolio, so it probably won't account for all of my international allocation. The TSP is also supposedly working on this issue, so it may obviate the problem.

2. MARKET TIMING ALERT - I have poured over every "are bonds evil right now?" thread I can find and I always come away confused. I'm comfortable with my bond allocation and don't intend to change the percentage, but in light of the potential losses in bonds in the near future (don't worry, I don't assume these will be huge -- just gradual), I'm wondering if I should retreat into the relative safety of the G Fund for my entire bond allocation. I'd just like to hear more about whether you folks think the G Fund would mitigate all the future fears regarding bonds for the next several years. I know that's a broad and possibly crazy question.

In other words, both of the above questions ask if something like this would be a better total portfolio:

G Fund - 24%
C Fund - 38%
S Fund - 8%
I fund - 9%
FSGDX - 21% (in other words, always have the entirety of my Roth dedicated to Ex-US)

3. My inclination is just to leave it all as it is (or just change the bond allocation if you think that's a good idea).

Thanks for any advice!
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Re: Portfolio review for TSP/Fidelity combo

Postby Middle » Thu Mar 14, 2013 3:21 pm

1. I don't know what the I Fund is other than you seem to suggest it does not have much in the way of emerging markets. Whether that will perform better or worse than the Fidelity Global Ex US is anyone's guess. But as you have already noted, if you want to make the switch just be sure to adjust elsewhere to make sure that your desired AA is intact.
2. I have no idea what your G Fund is. Is it a fixed income fund? Government bond fund? But again, whether the Spartan bond fund or your G fund will perform better is anyone's guess. The general line of thinking that I have seen is that the outlook for bond funds is not great, but you have them there for the purpose of maintaining a certain AA. If you are still making regular contributions into them then you will be buying them at low prices.

I also have to say that I don't personally like target date funds but in the end it's whatever you are comfortable with.
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Re: Portfolio review for TSP/Fidelity combo

Postby TSR » Thu Mar 14, 2013 3:40 pm

Middle wrote:2. I have no idea what your G Fund is. Is it a fixed income fund? Government bond fund? But again, whether the Spartan bond fund or your G fund will perform better is anyone's guess. The general line of thinking that I have seen is that the outlook for bond funds is not great, but you have them there for the purpose of maintaining a certain AA. If you are still making regular contributions into them then you will be buying them at low prices.


Thanks for your comments. Here's info on the G Fund:

http://www.bogleheads.org/wiki/G_Fund

I think you'll see why it seems unusually attractive right now, but I also think that may make unfounded assumptions about the future of interest rates.
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Re: Portfolio review for TSP/Fidelity combo

Postby hoppy08520 » Thu Mar 14, 2013 6:37 pm

TSR, good questions. If you like the simplicity and peace of mind of all-in-one target date funds, then I wouldn't lose too much sleep over the I Fund's deficiencies (I Fund == MSCI EAFE developed markets index fund). Yes, there are many threads here (and I've written a few) talking about how to put together a portfolio without the I Fund. But what's interesting is if you compare the EAFE index returns with Vanguard's Total Stock Market Index Fund, and the Fidelity FSGDX, you see the returns are not that far off:

Image
The chart above goes back to 1996. Note that the Vanguard Total International Stock Index has changed composition over the years.

The green line is an ETF (ACWX) that tracks the same index as Fidelity FSGDX (I chose this ETF because it has an earlier inception date than the Fidelity fund). You can see there's not much difference between any of these and the MSCI EAFE index (orange).

Where these lines get more interesting is when you look at specific funds for the asset classes that the MSCI EAFE index omits (emerging markets and small-cap stocks):
Image
The yellow line is the Vanguard emerging markets index fund (VEIEX) and the red line is the Vanguard International Small Cap index fund (VFSVX / VSS). As you can see these two funds are quite a bit more volatile than the broader index funds. But they're not big enough to move the needle much with the Fidelity FSGDX or Vanguard Total International funds because they make up a small portion of these bigger indexes. (Emerging markets is 17% of VG TISM; small-cap is ~10% of VG TISM.)

This is similar to comparing returns of Vanguard's Total Stock Market Index fund with a 500-stock index fund -- not a huge difference since they have ~80% overlap. But if you look specifically at a small-cap US stock fund, you'll see much more variation.

Put another way, if you want to juice returns beyond VG TISM or TSP's I Fund, then you probably need to overweight one of these asset classes (small, value, emerging markets) by a pretty big factor.

All of which is to say, I wouldn't stress too much over the I Fund. All that being said, if you ever wind up splitting out your TSP funds for whatever reason, then you might as well leave the I Fund out of it, and perhaps boost G Fund since your other accounts will of course not have the G Fund if you want all/some of your bond allocation in the G Fund.

Disclaimer: Past performance is no guarantee of future results, etc. etc.
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Re: Portfolio review for TSP/Fidelity combo

Postby TSR » Fri Mar 15, 2013 8:05 am

hoppy08520 wrote:All of which is to say, I wouldn't stress too much over the I Fund. All that being said, if you ever wind up splitting out your TSP funds for whatever reason, then you might as well leave the I Fund out of it, and perhaps boost G Fund since your other accounts will of course not have the G Fund if you want all/some of your bond allocation in the G Fund.


This is very helpful. I really appreciate the insightful charts!
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Re: Portfolio review for TSP/Fidelity combo

Postby TSR » Fri Mar 15, 2013 1:51 pm

I'm just going to bump this thread one last time to see if anyone has thoughts about the G-Fund issue. I may post it later as an independent question along the lines of, Does the G-Fund offer protection from what is often perceived as a problematic next five or ten years for bond funds; if so, should one put the entirety of one's bond allocation in the G-Fund if possible?
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Re: Portfolio review for TSP/Fidelity combo

Postby Default User BR » Fri Mar 15, 2013 2:22 pm

As you know, the G fund is a principal-protected fund. Its current rate is 1.5%, which very low compared to corporate stable-value funds, although G has a somewhat greater overall safety. Given your age, I really wouldn't try to guess the bond market. Your fixed-income allocation is relatively small, so what F does in the short term won't make a lot of difference. Should interest rates rise, then the share value of F will fall, but the yield will increase. I would come up with a split between G and F and just ride it. 100% G wouldn't be the worst thing in the world, nor would 100% F. I have had 50/50 between stable-value and aggregate bonds funds in my portfolio.

In the grand scheme, this is going to have much less impact than your stock decisions.


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Re: Portfolio review for TSP/Fidelity combo

Postby TSR » Fri Mar 15, 2013 2:31 pm

Default User BR wrote:As you know, the G fund is a principal-protected fund. Its current rate is 1.5%, which very low compared to corporate stable-value funds, although G has a somewhat greater overall safety. Given your age, I really wouldn't try to guess the bond market. Your fixed-income allocation is relatively small, so what F does in the short term won't make a lot of difference. Should interest rates rise, then the share value of F will fall, but the yield will increase. I would come up with a split between G and F and just ride it. 100% G wouldn't be the worst thing in the world, nor would 100% F. I have had 50/50 between stable-value and aggregate bonds funds in my portfolio.

In the grand scheme, this is going to have much less impact than your stock decisions.


Brian


That is reassuring. If I put the above posts together, it sounds like I can just leave everything the way it is, or I can tinker to my heart's content, but either way I probably won't be making a big difference in a way that is presently predictable.

Thanks!
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Re: Portfolio review for TSP/Fidelity combo

Postby bayview » Fri Mar 15, 2013 2:37 pm

fwiw (not much :)), I have the majority of my fixed income AA in G, nothing in F, and some in an intermediate term mostly-corporate bond fund. That's because I'm still contributing, and even though bonds will be flat for a while, one day they'll be generating income again, and it will be good to have them.

I don't bother with F fund, because if it's close to its benchmark, it's already top-heavy in Treasuries anyway, so there doesn't seem to be that much diversification.

I'm no where near an expert. I just want to have diversification, plus investing for the long run, not just the next decade.
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Re: Portfolio review for TSP/Fidelity combo

Postby hoppy08520 » Fri Mar 15, 2013 2:57 pm

TSR wrote:I'm just going to bump this thread one last time to see if anyone has thoughts about the G-Fund issue. I may post it later as an independent question along the lines of, Does the G-Fund offer protection from what is often perceived as a problematic next five or ten years for bond funds; if so, should one put the entirety of one's bond allocation in the G-Fund if possible?

TSR, I too have gone all over the place in my mind with how much G Fund to have relative to other bond funds (like F Fund).

I have browsed many discussions in this forum on G Fund and people seem to be all over the place, although I'd say there's a bit of a preference for having at least some G Fund in the mix (either 50/50 or 100% G Fund -- much of this depends on where the person is in their life). Unlike other boards, I don't see a lot of "The G Fund has a bad return, I'm going with the F Fund" sentiments on Bogleheads. I think people on this board understand the concept of risk-adjusted returns, and they know that while G Fund doesn't have incredible returns, it has almost no risk, so the fund's risk-adjusted return is favorable (hence the "free lunch" analogy).

Given the lack of firm consensus, I'm guided by the compositions suggested in the Lifecycle target date funds. On the TSP Lifecycle Funds wiki page, there's a spreadsheet showing the "glide path" of the L funds. There are 3 tabs on the spreadsheet. The third one is called "Fixed Income as Percentage" and it shows the relative mix of G Fund:F Fund for each L Fund. In L2040, it's around 55:45 for G:F. Moving to L2030, it goes heavier to G with a 75:25 ratio.

So, not knowing what else to do, I'm basing my own allocation on the L glide paths. I figure the geniuses at the TSP board who assemble the L fund compositions must know more than I do.
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Re: Portfolio review for TSP/Fidelity combo

Postby Investor2 » Fri Mar 15, 2013 8:18 pm

TSR, I've had the same questions.

Regarding the I Fund, as hoppy's charts show, adding emerging markets and international small cap probably won't make that much difference over the long run as they would only be a very small part of your total portfolio. I did add them to my Roth and taxable accounts using Vanguard index funds, because I liked the idea of matching Vanguard's Total International Index.

fwiw, this isn't providing much benefit at the moment, as emerging markets is Vanguard's worst performing stock index fund for both YTD and 1 year time periods.

Regarding bonds, I hold just the G Fund and some I Bonds outside the TSP. The G Fund has no interest rate risk, which is appealing in the present environment. It's relative safety may also allow me to keep a higher percentage of my portfolio in equities, with the same level of risk. (I think some here believe 80% stock/20% G Fund might have about the same risk as 75% stock/25% F Fund, with a higher expected return.) I'm also near retirement, and like the safety of the G Fund for that reason.

However, if you like the L Fund and will stick with it, that's probably an excellent choice for you. (The L funds weren't available when I started investing in the TSP). With the L Fund, you get an expertly determined asset allocation, simplicity, and a way to avoid all the behavioral finance pitfalls, such as performance chasing, market timing, etc., that are very hard to avoid once you start tinkering.
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