Question about Govt. TSP: G vs. F Funds

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VictoriaF
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Post by VictoriaF »

tarnation wrote:The Voluntary Contribution Program allows most CSRS folks to contribute after tax money up to 10% of their aggregate pay. This is basically 10% of your total pay over your work history and can be put in all in one lump in one year. Once you get the money in there, you can get it to a traditional, and now that there are no conversion limits, to a Roth IRA. So basically if you've got the cash, you can super size your Roth.
There were some shows on it on the WFED show "for your benefit". Here is a Zurndorfer article for more info. http://www.myfederalretirement.com/public/481.cfm
Moved to new threadhere
I am in the FERS system and cannot take advantage of VCP. But I am curious what will we be able to do with Roth TSP once it's there, apart from contributing new money.
- If we have "traditional" TSP, will we be able to convert portions of it into Roth-TSP?
- Will we be able to transfer Roth-IRA, e.g., from Vanguard, to Roth-TSP?

I thought that such conversions and transfers would not be allowed, at least, not when Roth TSP starts. Your message seems to imply that VCP is not just an opportunity to increase TSP holdings but also to increase Roth TSP holdings.

Victoria
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tarnation
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Post by tarnation »

VictoriaF wrote:
tarnation wrote:The Voluntary Contribution Program allows most CSRS folks to contribute after tax money up to 10% of their aggregate pay. This is basically 10% of your total pay over your work history and can be put in all in one lump in one year. Once you get the money in there, you can get it to a traditional, and now that there are no conversion limits, to a Roth IRA. So basically if you've got the cash, you can super size your Roth.
There were some shows on it on the WFED show "for your benefit". Here is a Zurndorfer article for more info. http://www.myfederalretirement.com/public/481.cfm
Moved to new threadhere
I am in the FERS system and cannot take advantage of VCP. But I am curious what will we be able to do with Roth TSP once it's there, apart from contributing new money.
- If we have "traditional" TSP, will we be able to convert portions of it into Roth-TSP?
- Will we be able to transfer Roth-IRA, e.g., from Vanguard, to Roth-TSP?

I thought that such conversions and transfers would not be allowed, at least, not when Roth TSP starts. Your message seems to imply that VCP is not just an opportunity to increase TSP holdings but also to increase Roth TSP holdings.

Victoria
I think the answers to your questions are no and no. I'm sorry to cause any confusion. My post is only about the VCP.
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riptide
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Re: Question about Govt. TSP: G vs. F Funds

Post by riptide »

I was able to find a chart on bogleheads that showed the last 10 years of tsp and it clearly shows the F fund outperforms the G fund. The G fund return is pitiful.

For further TSP analysis, see: http://www.flickr.com/photos/ghost_of_a ... 479558116/
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Ketawa
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

You should learn more about how the G Fund and F Fund work before dismissing the G Fund returns as pitiful. The G Fund is a legitimate free lunch in investing. There are plenty of other threads and posts on the board about this topic.
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Re: Question about Govt. TSP: G vs. F Funds

Post by placeholder »

G fund is safe and conservative and it provides the safety by guaranteeing the principal which protects against downside risk but sacrifices upside potential with shifts in interest rates in similar fashion to stable value funds in 401ks but it has a correspondingly low yield that is based on the average of longer Treasuries.
rokidtoo
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

I took the return, standard deviation, and correlations for the C Fund, G Fund, F Fund, and the Vanguard Short Term Bond Index Fund (VBIRX) for the last 10 years (2004-2013) and put them into the VisualMvo mean variance optimizer. Considering an approximate 60/40 stock/bond allocation, I obtained the following results:

G Fund/C Fund; 6.91% nominal return; 11.16% standard deviation
VBIRX/C Fund; 6.97% nominal return; 11.16% standard deviation
F Fund/C Fund; 7.48% nominal return; 11.16% standard deviation

Although the G Fund might look like a free lunch in isolation, it doesn't necessarily outperform in a portfolio. In general, it appears increased risk, e.g. the F Fund, offers the opportunity for increased return at the same level of volatility in a 60/40 portfolio.
Last edited by rokidtoo on Mon Nov 10, 2014 11:47 am, edited 1 time in total.
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Re: Question about Govt. TSP: G vs. F Funds

Post by nash031 »

If the purpose of a bond allocation is to reduce overall risk in a portfolio, the G fund is the best option. For the 15% of my portfolio that is bonds, 10 or more is G fund, because it does exactly what I want the bond allocation to do. I care not about the return. If I want more return, I increase my stock allocation.
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Ketawa
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

The F Fund has a longer duration and benefitted from falling interest rates. It doesn't make a lot of sense to compare it to a fund that has zero duration. The F Fund also has a lot of Treasuries that yield less than the G Fund. Why would you want any of those Treasuries in your fixed income portfolio?

2/3 G Fund and 1/3 Vanguard Long-Term Treasury Fund (VUSTX)
Duration 5.3 years (G Fund 1 day, VUSTX 16.0 years)
SEC Yield 2.38% (G Fund 2.125%, VUSUX 2.89%)

vs

F Fund (or Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX))
Duration 5.7 years
SEC Yield 2.15%

The first combination has less duration, higher yield, and higher credit quality. It will beat the F Fund in most years.

For example, look at 2011. The G Fund returned 2.45% while the F Fund returned 7.89%. A strong case for diversifying by holding the F Fund, right? Well, VUSTX returned 29.28%. The 2/3 G Fund and 1/3 VUSTX combination would have returned about 11.4%, a difference of 3.5%.

I was curious about an example in the opposite direction. 2013 was a year where the G Fund (1.89% gain) did better than the F Fund (1.68% loss). It also happens to be the worst year in the last 10 years for VUSTX (13.03% loss). The 2/3 G Fund and 1/3 VUSTX combination would have lost about 3.1%, lagging the F Fund by 1.4%. That is less than half the 2011 difference of 3.5%. Maybe when I get around to it, I will tabulate the difference for every year.

This isn't actually an endorsement of the 2/3 G Fund and 1/3 VUSTX combination. I don't think it makes sense to add 5 years of duration to my fixed income portfolio for only 20 bp in expected return. I would rather slightly increase my equity allocation, as the G Fund has zero volatility. You can hold more equities with the G Fund and have the same level of risk.
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tadamsmar
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

riptide wrote:I was able to find a chart on bogleheads that showed the last 10 years of tsp and it clearly shows the F fund outperforms the G fund. The G fund return is pitiful.

For further TSP analysis, see: http://www.flickr.com/photos/ghost_of_a ... 479558116/
Mercer Consulting creates the allocation for the TSP L Funds. Mercer allocates some to F, whereas virtually every Boglehead goes all G and no F.

So far, Mercer''s approach is winning.

Recently, Mercer did reduce the F allocation, but they have not eliminated it.

I personally think Mercer has it right, but this really only applies to the L Funds' limited options.
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Ketawa
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

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.

Code: Select all

         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.

Code: Select all

          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.
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Re: Question about Govt. TSP: G vs. F Funds

Post by Trek9 »

Ketawa wrote: I would rather slightly increase my equity allocation, as the G Fund has zero volatility. You can hold more equities with the G Fund and have the same level of risk.
Dumb question, but whats the easiest way to determine how much you could/would increase your equity allocation due to the lack of volatility in G Fund?
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

VGfan11 wrote:
Ketawa wrote: I would rather slightly increase my equity allocation, as the G Fund has zero volatility. You can hold more equities with the G Fund and have the same level of risk.
Dumb question, but whats the easiest way to determine how much you could/would increase your equity allocation due to the lack of volatility in G Fund?
I would guess you could look up some historical volatility data, although volatility is only one measure of risk. Rick Ferri has some numbers on his web site. Let's say equities are 15% and bonds are 3%. A 50/50 portfolio would be 9%. Using the G Fund, a 60/40 portfolio would have similar expected volatility.
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Re: Question about Govt. TSP: G vs. F Funds

Post by trueblueky »

In the last 12 months, G is up 2.33%, so comparable to the best 5-year CD with no early withdrawal penalty.

F has done better than that this year, but lost money in 2013. The two are not comparable. F has risk, and should outperform in the long run. G has no risk.

I have some of each, as do the TSP L Funds.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

VGfan11 wrote:
Ketawa wrote: I would rather slightly increase my equity allocation, as the G Fund has zero volatility. You can hold more equities with the G Fund and have the same level of risk.
Dumb question, but whats the easiest way to determine how much you could/would increase your equity allocation due to the lack of volatility in G Fund?
The easiest way is probably not easy enough!

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fortyofforty
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Re: Question about Govt. TSP: G vs. F Funds

Post by fortyofforty »

Well, here we are, four years on. How are things working out with my fellow TSP investors? I have now put my "bond" holdings in the G Fund, exclusively. Is that a mistake? Should I split it between F and G? Is G a good place to be, with the "bond" allocation in my TSP, or would F be better for diversification (if not safety)?
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

fortyofforty wrote:Well, here we are, four years on. How are things working out with my fellow TSP investors? I have now put my "bond" holdings in the G Fund, exclusively. Is that a mistake? Should I split it between F and G? Is G a good place to be, with the "bond" allocation in my TSP, or would F be better for diversification (if not safety)?
After four years, 2011-2014, VBTIX (same as the F Fund) has realized an average annual return of 3.92% with a 2.9% standard deviation. The G Fund has returned 2.03% with a standard deviation of 1.45%.

If you want low risk, low return, then the G Fund, is your fund. If you're willing to take on slightly higher risk, the the F Fund has provided a greater return.

In other words, higher risk, higher return (potentially).
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

rokidtoo wrote:
fortyofforty wrote:Well, here we are, four years on. How are things working out with my fellow TSP investors? I have now put my "bond" holdings in the G Fund, exclusively. Is that a mistake? Should I split it between F and G? Is G a good place to be, with the "bond" allocation in my TSP, or would F be better for diversification (if not safety)?
After four years, 2011-2014, VBTIX (same as the F Fund) has realized an average annual return of 3.92% with a 2.9% standard deviation. The G Fund has returned 2.03% with a standard deviation of 1.45%.

If you want low risk, low return, then the G Fund, is your fund. If you're willing to take on slightly higher risk, the the F Fund has provided a greater return.

In other words, higher risk, higher return (potentially).
IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
There is no inflation risk with the G Fund. If nominal interest rates rise, it will simply start yielding more, while regular bond funds will take a hit with higher rates.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

Ketawa wrote:
rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
There is no inflation risk with the G Fund. If nominal interest rates rise, it will simply start yielding more, while regular bond funds will take a hit with higher rates.
From the TSP website: "The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation."

The G Fund grew less than the CPI-U in 2008, 2011, and 2012. Granted the difference was small, but it was not zero.
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Re: Question about Govt. TSP: G vs. F Funds

Post by Professor Emeritus »

rokidtoo wrote:
Ketawa wrote:
rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
There is no inflation risk with the G Fund. If nominal interest rates rise, it will simply start yielding more, while regular bond funds will take a hit with higher rates.
From the TSP website: "The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation."

The G Fund grew less than the CPI-U in 2008, 2011, and 2012. Granted the difference was small, but it was not zero.
That is a disclaimer written by lawyers not an analytical statement. Please show a time period where the G fund had returns below inflation cf " While the TSP G Fund is not guaranteed to outpace inflation, since it's inception so far it has managed to do so, by a significant margin:"http://www.tspfolio.com/tspgfund

Alternatively show a mechanism for Inflation without an increase in the rate of return on the bonds in the G fund.

Caveat I will agree that over an extremely short period of time anything can happen. So lets take a minimum of 3 years.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

Professor Emeritus wrote:
rokidtoo wrote:
Ketawa wrote:
rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
There is no inflation risk with the G Fund. If nominal interest rates rise, it will simply start yielding more, while regular bond funds will take a hit with higher rates.
From the TSP website: "The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation."

The G Fund grew less than the CPI-U in 2008, 2011, and 2012. Granted the difference was small, but it was not zero.
That is a disclaimer written by lawyers not an analytical statement. Please show a time period where the G fund had returns below inflation cf " While the TSP G Fund is not guaranteed to outpace inflation, since it's inception so far it has managed to do so, by a significant margin:"http://www.tspfolio.com/tspgfund

Alternatively show a mechanism for Inflation without an increase in the rate of return on the bonds in the G fund.

Caveat I will agree that over an extremely short period of time anything can happen. So lets take a minimum of 3 years.
Thanks for allowing me to "cherry pick".

During the period 2011-2013, the G Fund's average real return was -.2%. That's not much of a problem unless you were expecting, and needed, the 2004-2014 average G Fund real return of .92%.

The G Fund is very low risk, if risk is defined by a variation in returns. However, it is not riskless and its real return can, on occasion, be negative.

Finally, I've found that the investing "rule of thumb" is true, i.e. higher returns require the acceptance of higher risk. I've also found that you need to examine the desirability of a particular investment in the context of a portfolio, not in isolation. In my portfolio, and at the level of return/risk I'm trying to achieve, I believe the F Fund is a better long-term option than the G Fund.
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

If your definition of "no inflation risk" is that an asset has to match the CPI, then sure, the G Fund isn't guaranteed to beat it over any given time period. This seems myopic to me. The only way you guarantee beating it is to take on interest rate risk with TIPS, and they're clearly more risky. The G Fund has a huge advantage in unexpected inflation and would trounce nominal bond alternatives.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

Ketawa wrote:If your definition of "no inflation risk" is that an asset has to match the CPI, then sure, the G Fund isn't guaranteed to beat it over any given time period. This seems myopic to me. The only way you guarantee beating it is to take on interest rate risk with TIPS, and they're clearly more risky. The G Fund has a huge advantage in unexpected inflation and would trounce nominal bond alternatives.
All I've claimed is:
1. The G Fund isn't riskless.
2. It doesn't defy gravity, i.e. it is very low risk and, as a result, has a low expected return.

If that return meets your needs, go for it. If you need a higher return, then you need to take on additional risk.
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Re: Question about Govt. TSP: G vs. F Funds

Post by fortyofforty »

Well, as a rebalancing asset class, how is the G Fund (with no direct equivalent in the open market)? I am using it, but wonder if I should split my allocation between G and F, or only use F since I'm not risk averse but merely trying to mitigate stock risk.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rkhusky »

When would you need to start withdrawing your G/F funds? If not for many years, having more F than G is fine. If soon, having more G than F is prudent. Having some of both seems like a good solution.
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Re: Question about Govt. TSP: G vs. F Funds

Post by William Million »

Both F and G are outstanding (and extremely low risk). Many non-govt employees wish they had access to them. Can't go wrong with either one.

F will do better in a falling rates environment, and G will do better when rates climb.

However, it is meaningless to debate the comparative merits of these two ultra-safe, modest return fixed income funds. Better to expend the effort on one's overall allocation, and where to invest that equity portion.
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Re: Question about Govt. TSP: G vs. F Funds

Post by VictoriaF »

The G fund is riskless to the extent of the guarantees provided by the U.S. government. For me, the existence of the G fund is the principal reason for keeping my TSP assets in the TSP and not rolling them over into Vanguard. The G fund is comparable to a guaranteed income fund in a 401(k); it cannot lose money. In contrast, the F fund is a bond fund that can lose principal in a rising interest rates environment.

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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

William Million wrote:Both F and G are outstanding (and extremely low risk). Many non-govt employees wish they had access to them.
We all have access to the F-fund-like mutual funds. It's the same as a total bond market index fund except it has a somewhat lower ER than the equivalent Vanguard Fund.
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tarnation
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
In nominal return terms, the G fund is the certainly the riskless asset.
In real return terms, what do you use for the real return riskless asset? I am not aware of a riskless asset which is freely investable. I think I bonds are riskless in real terms, but they are not freely investable. (individual TIPS would be if held to maturity, but you can't get them with arbitrary maturities. ) In the absence of such asset, I think G fund is the next closest thing to the riskless real return asset.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

rokidtoo wrote:
Ketawa wrote:
rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
There is no inflation risk with the G Fund. If nominal interest rates rise, it will simply start yielding more, while regular bond funds will take a hit with higher rates.
From the TSP website: "The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation."

The G Fund grew less than the CPI-U in 2008, 2011, and 2012. Granted the difference was small, but it was not zero.
Not the numbers I have. It looks to me like G fund securities under performed CPI-U in {2011,2012} and would have in {1979, 1980}.
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tarnation
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

Professor Emeritus wrote:
rokidtoo wrote:
Ketawa wrote:
rokidtoo wrote:
tarnation wrote:[IMO std dev of G fund is not a sensible measure to compare to. The variance is all upside, so look at semivariance. So moving from G to F is not taking on "sightly higher" risk; it is taking on risk over the riskless asset.
Not if you consider inflation risk.
There is no inflation risk with the G Fund. If nominal interest rates rise, it will simply start yielding more, while regular bond funds will take a hit with higher rates.
From the TSP website: "The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation."

The G Fund grew less than the CPI-U in 2008, 2011, and 2012. Granted the difference was small, but it was not zero.
That is a disclaimer written by lawyers not an analytical statement. Please show a time period where the G fund had returns below inflation cf " While the TSP G Fund is not guaranteed to outpace inflation, since it's inception so far it has managed to do so, by a significant margin:"http://www.tspfolio.com/tspgfund

Alternatively show a mechanism for Inflation without an increase in the rate of return on the bonds in the G fund.

Caveat I will agree that over an extremely short period of time anything can happen. So lets take a minimum of 3 years.
My calcs using the TSP data set show, in the 34 rolling three year periods, G fund securities would have underperformed CPI-U one period; the return for (2011,2012,2013) was -0.13% below CPI-U.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

rokidtoo wrote: During the period 2011-2013, the G Fund's average real return was -.2%.
Our numbers don't agree, not sure why.
That's not much of a problem unless you were expecting, and needed, the 2004-2014 average G Fund real return of .92%.
This seems curious. So this portfolio is so fragile that a .9% below average real return is a problem, but the swings in return of the F fund are not? It seems G-fund has the lowest downside variance (nominal and real) so if it is too much what to do??
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

rokidtoo wrote:
Ketawa wrote:If your definition of "no inflation risk" is that an asset has to match the CPI, then sure, the G Fund isn't guaranteed to beat it over any given time period. This seems myopic to me. The only way you guarantee beating it is to take on interest rate risk with TIPS, and they're clearly more risky. The G Fund has a huge advantage in unexpected inflation and would trounce nominal bond alternatives.
All I've claimed is:
1. The G Fund isn't riskless.
The lowest risk asset I'm aware of ( and certainly the lowest risk in TSP universe). If you have a better one, please share.
2. It doesn't defy gravity, i.e. it is very low risk and, as a result, has a low expected return.
TSP data set shows G fund securities would have had a 3.51% real return from 1979-2014. I would not characterize that as low. What are your breakpoints for high/med/low?

If that return meets your needs, go for it. If you need a higher return, then you need to take on additional risk.
I infered that you are choosing to increase risk in order to hit savings goals. You might be interested in reading some of Bodie's thoughts on that.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rokidtoo »

tarnation wrote:My calcs using the TSP data set show, in the 34 rolling three year periods, G fund securities would have underperformed CPI-U one period; the return for (2011,2012,2013) was -0.13% below CPI-U.
These are the numbers I have. Which ones differ from yours?

2008: Inflation: 3.8%; Return: 3.75%; Real Return: -.05%
2011: Inflation: 3.2%; Return: 2.45%; Real Return: -.75%
2012: Inflation: 2.1%; Return: 1.47%; Real Return: -.63%
2013: Inflation: 1.5%; Return: 1.89%; Real Return: .39%
Average real G Fund return 2011-2013: -.33%

I did discover that I had the wrong 2012 inflation number. It was actually higher than my original number.

My original point was that it was possible for the G Fund to provide a negative real return. It has and is, therefore, subject to inflation risk.

However, the bigger issue is its impact on the growth of a portfolio.

The F Fund returned an average of 2.19%, real, over the period 2004-2014. The G Fund returned .77%, real, over the same period. In order to make up the difference in return, you'd need to increase your stock allocation and portfolio risk. The G Fund only lies on the efficient frontier for low expected returns. For higher expected returns, the F Fund dominates.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

rokidtoo wrote: The F Fund returned an average of 2.19%, real, over the period 2004-2014. The G Fund returned .77%, real, over the same period. In order to make up the difference in return, you'd need to increase your stock allocation and portfolio risk. The G Fund only lies on the efficient frontier for low expected returns. For higher expected returns, the F Fund dominates.
F never dominates G on the efficient frontier estimated by Mercer, TSP's consulting firm:

https://www.tsp.gov/PDF/formspubs/LFunds.pdf

Mercer probably includes historical returns from periods when bonds were relative losers, or at least a model that takes into the account the possibility of those periods in the future.
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Re: Question about Govt. TSP: G vs. F Funds

Post by fortyofforty »

That data from Mercer is startling to me. I would not have thought the G fund would so completely dominate the "bond and cash" portion of the Efficient Frontier. Thanks for providing the link. I had seen it before but hadn't absorbed the information on the G fund at the time, as it wasn't a big concern at the time.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rkhusky »

fortyofforty wrote:That data from Mercer is startling to me. I would not have thought the G fund would so completely dominate the "bond and cash" portion of the Efficient Frontier. Thanks for providing the link. I had seen it before but hadn't absorbed the information on the G fund at the time, as it wasn't a big concern at the time.
Perhaps because they chose to use standard deviation for their measure of risk. Another measure of risk might have produced a different efficient frontier.

I wonder what percentage of five year periods since inception has the F Fund outperformed the G Fund? What are the largest 1-, 3-, 5- and 10-year losses and gains for the F Fund?
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

rkhusky wrote:
fortyofforty wrote:That data from Mercer is startling to me. I would not have thought the G fund would so completely dominate the "bond and cash" portion of the Efficient Frontier. Thanks for providing the link. I had seen it before but hadn't absorbed the information on the G fund at the time, as it wasn't a big concern at the time.
Perhaps because they chose to use standard deviation for their measure of risk. Another measure of risk might have produced a different efficient frontier.

I wonder what percentage of five year periods since inception has the F Fund outperformed the G Fund? What are the largest 1-, 3-, 5- and 10-year losses and gains for the F Fund?
I wonder if you understand what the G Fund is.
The interest rate resets monthly and is based on the weighted average
yield of all outstanding Treasury notes and bonds with 4 or more years
to maturity.
https://www.tsp.gov/PDF/formspubs/GFund.pdf

The investors get this interest rate directly. The government gives the investor the interest rate that is it having to pay on notes and bonds, but the investor does not have to take the risks associated with owning an index of those outstanding notes and bonds either directly or in a fund like the F Fund. You get the interest rate on +4 year duration bonds without the risk. It's a good deal, having access to the G Fund has a profound effect on the efficient frontier, it functions similar to a risk-free rate on steroids and tends to limit the usefulness of the F Fund.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tarnation »

rokidtoo wrote:
tarnation wrote:My calcs using the TSP data set show, in the 34 rolling three year periods, G fund securities would have underperformed CPI-U one period; the return for (2011,2012,2013) was -0.13% below CPI-U.
These are the numbers I have. Which ones differ from yours?

2008: Inflation: 3.8%; Return: 3.75%; Real Return: -.05%
2011: Inflation: 3.2%; Return: 2.45%; Real Return: -.75%
2012: Inflation: 2.1%; Return: 1.47%; Real Return: -.63%
2013: Inflation: 1.5%; Return: 1.89%; Real Return: .39%
Average real G Fund return 2011-2013: -.33%
The difference is in the inflation; you are using the Annual Avg. not the Dec-Dec percentage.
I did discover that I had the wrong 2012 inflation number. It was actually higher than my original number.


The F Fund returned an average of 2.19%, real, over the period 2004-2014. The G Fund returned .77%, real, over the same period. In order to make up the difference in return, you'd need to increase your stock allocation and portfolio risk.
This is not always the case, G securities would have outperformed F the ten years from 1979-1988.
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Re: Question about Govt. TSP: G vs. F Funds

Post by Ketawa »

rokidtoo wrote:The F Fund returned an average of 2.19%, real, over the period 2004-2014. The G Fund returned .77%, real, over the same period. In order to make up the difference in return, you'd need to increase your stock allocation and portfolio risk. The G Fund only lies on the efficient frontier for low expected returns. For higher expected returns, the F Fund dominates.
Looking backwards and assuming that you would have needed to hold the F Fund for higher expected returns is incorrect. This was a period of falling interest rates where intermediate duration bonds had higher realized returns, but you wouldn't know this ex ante.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rkhusky »

tadamsmar wrote:It's a good deal, having access to the G Fund has a profound effect on the efficient frontier, it functions similar to a risk-free rate on steroids and tends to limit the usefulness of the F Fund.
If I look at the data at https://www.tspdatacenter.com/annual_rates,
I see that F beat G 16 years out of 27, and tied 3 years. F had 3 years with a loss and the worst loss was -2.96%. The best gain was 18.31%.

According to https://www.tsp.gov/investmentfunds/ret ... mary.shtml
Since inception the G Fund has returned 5.43% and F Fund has returned 6.66%.
Last 10 years F Fund has returned 4.89% and the G Fund 3.19%.

The F Fund does not look that risky, especially if you have a 5+ year time span. The G Fund definitely has less risk, but so do CD's, savings and money market accounts. You just have to decide how much you are willing to pay for the delta in safety.

Frankly, the TSP is ultra-conservative. Their target date funds end with 20/80 stock/bond at retirement.

Going 50/50 in G and F for fixed income seems perfectly reasonable to me.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

rkhusky wrote:
tadamsmar wrote:It's a good deal, having access to the G Fund has a profound effect on the efficient frontier, it functions similar to a risk-free rate on steroids and tends to limit the usefulness of the F Fund.
If I look at the data at https://www.tspdatacenter.com/annual_rates,
I see that F beat G 16 years out of 27, and tied 3 years. F had 3 years with a loss and the worst loss was -2.96%. The best gain was 18.31%.

According to https://www.tsp.gov/investmentfunds/ret ... mary.shtml
Since inception the G Fund has returned 5.43% and F Fund has returned 6.66%.
Last 10 years F Fund has returned 4.89% and the G Fund 3.19%.

The F Fund does not look that risky, especially if you have a 5+ year time span. The G Fund definitely has less risk, but so do CD's, savings and money market accounts. You just have to decide how much you are willing to pay for the delta in safety.

Frankly, the TSP is ultra-conservative. Their target date funds end with 20/80 stock/bond at retirement.

Going 50/50 in G and F for fixed income seems perfectly reasonable to me.
The efficient frontier does what it does, if you want to reject it based on your recency bias, go for it.

That 27 years had almost relentless declining interest rates, it would be irresponsible for the L Funds to be based solely on that data, that's not an unbiased estimate of the future.

The TSP target date income fund looks to be as good as the Vanguard target date income fund at sustaining retirement, so it's not too conservative by this measure. The use of the G Fund provides a higher safe rate and more stability during the retirement draw-down phase, whereas Vanguard has no access to a fund like the G Fund
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Re: Question about Govt. TSP: G vs. F Funds

Post by rkhusky »

tadamsmar wrote: The efficient frontier does what it does, if you want to reject it based on your recency bias, go for it.

That 27 years had almost relentless declining interest rates, it would be irresponsible for the L Funds to be based solely on that data, that's not an unbiased estimate of the future.

The TSP target date income fund looks to be as good as the Vanguard target date income fund at sustaining retirement, so it's not too conservative by this measure. The use of the G Fund provides a higher safe rate and more stability during the retirement draw-down phase, whereas Vanguard has no access to a fund like the G Fund
There is always some measure of recency bias when dealing with historical data. And there is no unbiased estimate of the future when using historical data. Especially when one does not know if all the historical data is relevant to today's market. It's not like physics where one expects the laws of nature to remain constant over time and space.

There is no "the efficient frontier", because there is no agreed upon measure of risk. Standard deviation is commonly used because it is easy to compute and there is some correlation with what people think of as risk, not because there is any fundamental merit to using it solely as risk.

There is also the risk that one will not generate enough return to have a comfortable retirement.

That being said, I wonder how much the TSP's points on their efficient frontier plot would move if one changes their fixed income ratio to be 50/50 F/G?
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

rkhusky wrote:
tadamsmar wrote:
That being said, I wonder how much the TSP's points on their efficient frontier plot would move if one changes their fixed income ratio to be 50/50 F/G?
It would move the points to the right and a bit below the original curve. This would indicate that trading G for F is not the best way to increase return. Increasing mostly equities along with a small increase in the F/G ratio would typically be a better way to increase return according to the Mercer analysis.

PS: There is a slider version of the L Funds here:

https://www.tsp.gov/investmentfunds/lfu ... 2050.shtml

There is a discontinuity at January 2014. That's when Mercer revised the L Funds to reflect new projection with a higher probability of future interest rate increases.

For the 2050 fund F did dominate before 2014. 9%/4% F/G in 10/2013 shifted to 2%/11% in 1/2014.

So, F did dominate on part of the efficient frontier before the 2014 revision of the L Funds.
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Re: Question about Govt. TSP: G vs. F Funds

Post by rkhusky »

tadamsmar wrote: There is a discontinuity at January 2014. That's when Mercer revised the L Funds to reflect new projection with a higher probability of future interest rate increases.

For the 2050 fund F did dominate before 2014. 9%/4% F/G in 10/2013 shifted to 2%/11% in 1/2014.
How much can we believe their efficient frontier calculation if it is based on future projections of interest rates? What are the uncertainty bars on the plot? Frankly, with the size of the national debt, I doubt the government will allow interest rates to get very high.

The slider chart for the 2050 fund shows the F allocation getting larger until about 2019 when it becomes slightly higher than the G Fund.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

rkhusky wrote:
tadamsmar wrote: There is a discontinuity at January 2014. That's when Mercer revised the L Funds to reflect new projection with a higher probability of future interest rate increases.

For the 2050 fund F did dominate before 2014. 9%/4% F/G in 10/2013 shifted to 2%/11% in 1/2014.
How much can we believe their efficient frontier calculation if it is based on future projections of interest rates? What are the uncertainty bars on the plot? Frankly, with the size of the national debt, I doubt the government will allow interest rates to get very high.

The slider chart for the 2050 fund shows the F allocation getting larger until about 2019 when it becomes slightly higher than the G Fund.
True, when I said it never dominates I has just looked at the current allocations of the various F Funds, 10-year increments. But the 3-month increments in the slider show the F fund higher for a while around 2019 in the 2050 Fund.
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Re: Question about Govt. TSP: G vs. F Funds

Post by tadamsmar »

F 2040 1/2015 is not the same allocation as F 2050 1/2025, 25 years from retirement in both cases. That means they are projecting AA's that vary depending on the future calendar year. Interesting.
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