Ketawa wrote:Maybe when I get around to it, I will tabulate the difference for every year.
I did this, and the results were actually very surprising to me.
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F Fund G Fund VUSTX Combination Difference
2004 4.30% 4.30% 7.12% 5.24% 0.94%
2005 2.40% 4.49% 6.61% 5.20% 2.80%
2006 4.40% 4.93% 1.74% 3.87% -0.53%
2007 7.09% 4.87% 9.24% 6.33% -0.76%
2008 5.45% 3.75% 22.52% 10.01% 4.56%
2009 5.99% 2.97% -12.05% -2.04% -8.03%
2010 6.71% 2.81% 8.93% 4.85% -1.86%
2011 7.89% 2.45% 29.28% 11.39% 3.50%
2012 4.29% 1.47% 3.47% 2.14% -2.15%
2013 -1.68% 1.89% -13.03% -3.08% -1.40%
F Fund outperforms the combination by 0.35% annualized. Now I'm in the awkward position of defending my theory, but I'll gladly do it.
One issue is that F Fund still has a slightly longer duration than the combination. During a 10 year period of overall falling interest rates, this would give the F Fund a slight boost, but not a lot. I use the 2/3 and 1/3 combination solely for ease of calculation.
Years where the combination lagged badly, like 2009, 2010, and 2012, are when corporate bonds did extremely well. Vanguard Intermediate-Term Investment-Grade (VFICX) is in the same ballpark in duration, 5.3 years. It returned 17.73% (!!!) in 2009, 10.47% in 2010, and 9.14% in 2012. It's pretty clear that the corporates in the F Fund propped it up in those years. I'll take a look at a more complicated combination of funds: 40% G Fund, 20% VUSTX, 40% VFICX.
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F Fund G Fund VUSTX VFICX Combination Difference
2004 4.30% 4.30% 7.12% 4.75% 5.04% 0.74%
2005 2.40% 4.49% 6.61% 1.97% 3.91% 1.51%
2006 4.40% 4.93% 1.74% 4.43% 4.09% -0.31%
2007 7.09% 4.87% 9.24% 6.14% 6.25% -0.84%
2008 5.45% 3.75% 22.52% -6.16% 3.54% -1.91%
2009 5.99% 2.97% -12.05% 17.73% 5.87% -0.12%
2010 6.71% 2.81% 8.93% 10.47% 7.10% 0.39%
2011 7.89% 2.45% 29.28% 7.52% 9.84% 1.95%
2012 4.29% 1.47% 3.47% 9.14% 4.94% 0.65%
2013 -1.68% 1.89% -13.03% -1.37% -2.40% -0.72%
The combination outperforms by only 0.12% annualized, not a huge difference. But I still stand by my statements that G Fund is superior. You could make a case for holding a separate corporate bond fund to increase your diversification. I'm still not a big fan of this; VFICX currently has an SEC yield of 2.58% and duration of 5.3 years. 5 years of duration and lower credit quality for a yield premium of 50 bp isn't a great deal either. I would rather hold a slightly higher allocation to equities, like I mentioned earlier. Plus you sacrifice valuable space outside the TSP which could be used for emerging markets, small caps, REITs, or whatever asset class of your choice.
Don't confuse strategy and outcome. This exercise has only been looking at fixed income for the last 10 years, so we don't even know how it interacts with a portfolio of equities or over a longer time period.
I'll also point out that the TSP recently changed the Lifecyle target retirement funds so they only have a tiny sliver of F Fund. Almost all the fixed income allocation is to the G Fund.