Bond Allocation to TSP G Fund

[winelvr]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

[stan1]

TSP G Fund yield right now is 4.125% annualized

Inflation is 6% through Feb 2023.

So negative real return of 1.875% at least for the time being. Safety comes at a cost.

What are your ages and how long until you retire?

[retired@50]

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

Question 2 is interesting.

If you could find a way to determine the volatility (or lack thereof) of the G fund as compared to say the Vanguard total bond market fund VBTLX (which is what the rest of us, not in the TSP have to use) then you may be able to determine that holding an extra few percent of stock would replace the portfolio volatility that you're not experiencing because of your use of the G fund.

Maybe 65/35 would be a close approximation...??? Just a guess.

Regards,

[MrJedi]

I would treat G fund closer to cash or money market fund than a bond fund. Maybe you can find comparisons to people who hold little in bonds but keep higher amounts of cash to lower risk.

[White Coat Investor]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

The G Fund made up my entire nominal bond allocation for many years.

[Navillus1968]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

Try this thread-"AA and the G Fund" viewtopic.php?t=336617

Post by David Grabiner:
"For a given stock holding, you have lower portfolio risk with bonds in the G fund than a typical investor with bonds in a retail fund such as Total Bond Market.

There are two reasonable ways to take advantage of this. You could hold more stock than a typical investor, or hold the same amount of stock but hold riskier stock (and thus get a larger benefit by holding more in the G fund). For example, if your risk tolerance is consistent with 100% stock, you could hold 90% stock, overweighting riskier stock (S fund in your TSP, and possibly value funds or emerging markets in your IRA), and 10% G fund."

You could probably go 70 stock/30 G Fund without assuming any more risk than your current 60/40. Hopefully, Grabiner himself will chime in & give you a more authoritative answer.

[makeitcount]

I use the G fund for all of our fixed income. I consider our 65/35 (stocks/g fund) to be approximately the risk/volatility of a 60/40 (stocks/total bond) allocation. Based more on a gut feel than a rigorous analysis.

[makeitcount]

TSP G Fund yield right now is 4.125% annualized

Inflation is 6% through Feb 2023.

So negative real return of 1.875% at least for the time being. Safety comes at a cost.

What are your ages and how long until you retire?

Ok, sure. But what is the alternative for a TSP investor? F fund (=total bond) is the only other fixed income product available. No fixed income? No thanks.

[winelvr]

TSP G Fund yield right now is 4.125% annualized

Inflation is 6% through Feb 2023.

So negative real return of 1.875% at least for the time being. Safety comes at a cost.

What are your ages and how long until you retire?

We are in our mid 40s (45 and 44) and hope to retire in 15-20 years.

There may be presently a negative real return for the G Fund, but that hasn't historically been the case. Also, isn't there a negative real return for most bond funds right now?

[winelvr]

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

Question 2 is interesting.

If you could find a way to determine the volatility (or lack thereof) of the G fund as compared to say the Vanguard total bond market fund VBTLX (which is what the rest of us, not in the TSP have to use) then you may be able to determine that holding an extra few percent of stock would replace the portfolio volatility that you're not experiencing because of your use of the G fund.

Maybe 65/35 would be a close approximation...??? Just a guess.

Regards,

Thanks for responding! Depending on where I look the VBTLX volatility is around 8-10%. I assume the G Fund volatility is 0%. But I'm unclear on what to do with this information and how I would use it to modify my AA.

[winelvr]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

The G Fund made up my entire nominal bond allocation for many years.

Great! How did that work out for you? Would you have done better (risk adjusted) in the F Fund or another bond fund?

[winelvr]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

Try this thread-"AA and the G Fund" viewtopic.php?t=336617

Post by David Grabiner:
"For a given stock holding, you have lower portfolio risk with bonds in the G fund than a typical investor with bonds in a retail fund such as Total Bond Market.

There are two reasonable ways to take advantage of this. You could hold more stock than a typical investor, or hold the same amount of stock but hold riskier stock (and thus get a larger benefit by holding more in the G fund). For example, if your risk tolerance is consistent with 100% stock, you could hold 90% stock, overweighting riskier stock (S fund in your TSP, and possibly value funds or emerging markets in your IRA), and 10% G fund."

You could probably go 70 stock/30 G Fund without assuming any more risk than your current 60/40. Hopefully, Grabiner himself will chime in & give you a more authoritative answer.

Thanks you for this - I had missed that thread. Very helpful!

[White Coat Investor]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

The G Fund made up my entire nominal bond allocation for many years.

Great! How did that work out for you? Would you have done better (risk adjusted) in the F Fund or another bond fund?

Over that time period? Absolutely. Would have been better off in stocks, real estate, and Bitcoin too. The G fund is just now having its day in the sun.

[renegade06]

I’m a former Fed (late 40s) and I have almost all of my bonds in the G fund. My asset allocation is 75% equities, 20% Bonds (mostly G fund) and 5% cash. The G fund is a great place to be right now. I choose to take more risk on the equity side with VTI, VXUS, AVUV, and a few select stocks. I like knowing that I have the safety of the G fund and am excited not to be losing money right now if I was in the F fund. You could also decide to split it up between G and F fund, but in this ugly environment, G fund has been the winner.

[junior]

G fund is overhyped on this forum.

Poster Vineviz has made the case that you are better with the F fund:

The G-fund is a really excellent money market fund (or stable value fund), and if that's what you need then it's hard to beat.

However, the expected return of the G-fund is lower than the expected return of the F-fund. And the F-fund offers better diversification for the stock funds in the TSP. For money that won't be spent in the next five years, I'd have a hard time recommending the G-fund over the F-fund.

viewtopic.php?p=5223594#p5223594

If you're going to look at the ratio of risk and return, the only valid place to do that is at the portfolio level (not at the individual asset level). This is, in part, why I mentioned "diversification" in my post.

A portfolio of stocks & F-fund has a higher expected return/risk (i.e Sharpe) ratio than a portfolio of stocks & G-fund.

viewtopic.php?p=5223626#p5223626

[Outer Marker]

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I think your plan is a good one. It is in keeping with Warren Buffet's advice to take all of your risk on the equity side. Personally, I'd go 70/30.

[stan1]

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I think your plan is a good one. It is in keeping with Warren Buffet's advice to take all of your risk on the equity side. Personally, I'd go 70/30.

I'd agree if someone is using a G Fund, Stable Value Fund, or cash in their as a 5%+ slice in their asset allocation there would usually be more equity. So 70/30 or 80/20, definitely not "age in bonds" as a rule of thumb in that case (or mirroring a target fund that has Total Bond in it not cash or cash-like investments).

Some people may want to try to market time fixed income (bonds/cash). I think its even harder than stocks to market time fixed income for short term, but maybe there is a long term trend of higher interest rates we are in right now that can be played.

[Outer Marker]

Some people may want to try to market time fixed income (bonds/cash). I think its even harder than stocks to market time fixed income for short term, but maybe there is a long term trend of higher interest rates we are in right now that can be played.

BND 30 day SEC yield is about 4.2% and G fund is 4.1%. With nearly identical yields, I don't see why anyone would want to hold BND with more risk for the same return. If BND were paying 8% and G fund 4%, that might be a different story.

[UpperNwGuy]

TSP G Fund yield right now is 4.125% annualized

Inflation is 6% through Feb 2023.

So negative real return of 1.875% at least for the time being. Safety comes at a cost.

What are your ages and how long until you retire?

^^^ This is a comment about fixed income in general, not about the G Fund in particular.

[NiceUnparticularMan]

G fund is overhyped on this forum.

Poster Vineviz has made the case that you are better with the F fund

The F Fund and G Fund are sufficiently different that directly comparing them doesn't make much sense.

One of the most important concepts in modern portfolio theory incorporating the capital assets pricing model is the division between risky assets, where the goal is to find a mix which optimizes the risk-adjusted expected returns (aka efficiency) of the risky side of your portfolio, and very low risk assets (sometimes called risk free, but nothing is really risk free), where the goal is to use them in combination with the risky side of your portfolio to dial in your preferred location along the efficient risk-reward tradeoff line (aka the capital market line):



Whether they know this or not, the standard Bogleheads way of thinking of portfolios as a personalized mix of "equities" and "fixed income" (60/40, 30/70, and so on) is a sort of derivation of this capital market line concept, although a bit garbled in the sense that their "fixed income" often includes risky fixed income, not very low risk fixed income. Which causes a lot of unfortunate confusion.

Including in this case.

Specifically, the F Fund's higher expected returns come largely from the fact it includes non-Treasury bonds like corporates. There is a long standing debate around here about whether USD nominal corporate bonds (and other non-Treasuries) predictably help improve the efficiency of risky portfolios, or whether you can simply hold a bit more stocks and a bit less Treasuries. If you like, you could see this as a debate about whether what is sometimes called the tangency portfolio, or in the chart above the "ideal market portfolio", does or does not include USD nominal corporates.

vineviz is using backtesting to justify including non-Treasury USD bonds in a risky portfolio. I am personally in the camp that thinks on a forward-looking basis, non-Treasury USD nominal bonds are unnecessary.

But if you believe the backtesting is sufficiently predictive, and that particular risk premium is worth pursuing, a small allocation of a portion of the risky side of your portfolio to such bonds might make sense. Unfortunately, it is a little messy to do that with something like the F Fund (or a "total" bond fund like BND), because that is also including Treasuries. But if you are in the TSP, then the F Fund is your only choice for adding non-Treasury USD nominal bonds.

But properly understood, all that should be about the risky side of your portfolio, optimizing the "ideal market portfolio". We have not yet gotten to the very low risk assets you would use to choose your location along the capital markets line.

The G Fund isn't really designed to be a risky asset that will improve the efficiency of the risky side of your portfolio. Instead, it is really designed to be a very low risk asset for retirement savers. In that sense, I would agree there is not necessarily much case for adding the G Fund to the risky side of your portfolio--although again I am personally also skeptical about the F Fund for that purpose, and really anything besides stocks for that purpose, aside from maybe REITs. Still, I could see why if you did believe in adding risky bonds to the risky side of your portfolio, for that purpose you might choose F over G, because in fact F is much riskier.

But when using a very low risk asset in combination with an efficient risky portfolio to pick your location along the capital markets line? The G Fund is great! Indeed, I would say it is not overhyped at all for that purpose. And the F Fund is not going to be competitive for that purpose precisely because it is so much riskier.

Really the only other notable competitor to the G Fund for that purpose is liability-matched TIPS. But to summarize a longer discussion, liability-matched TIPS only gain better correlation with unexpected inflation at a significant cost to liquidity. So if you have significant uncertainty about the timing and amounts of of your future liabilities (and don't we all?), then the G Fund really stands out.

And that is all because the G Fund is not a marketed security and not subject to the normal yield curve. You could say it is like a Tbill, aka money market, fund which typically has unusually good rates. You could also say it is like a bond fund that has unusually low NAV volatility. But these are just different ways of expressing that the G Fund simply does not have the same sort of rate/price dynamic as marketed fixed income securities, because it isn't such a thing at all.

Anyway, the point is you can independently decided whether you want risky non-Treasury USD nominal bonds in the risky side of your portfolio (using the F Fund), and then use the G Fund as your very low risk asset when picking your location on the capital markets line. And that is really two different questions, not an F versus G question.

As a final thought, this is more or less what the TSP L Funds do. They include an allocation to F Fund, but never too much, and it sort of locks in at a somewhat modest percentage of the non-G portion of the L Funds. Given the discussion above, we can see that as more or less properly keeping the F Fund on the risky side of the portfolio.

In contrast, the G Fund allocation starts very low but then steadily ramps up to finish at 70% of the portfolio in L Income. That's not about improving portfolio efficiency, that is about de-risking, aka moving down to the lower-risk regions of the capital market line.

The forward asset and human capital modeling that leads to the L Fund glidepaths is a bit more complicated than I am suggesting, but at a high level what they are doing is consistent with the above--the G Fund is being used for its proper purpose as a very low risk asset in modern portfolio design, not as a risky asset like the F Fund. And for that purpose, it is not overhyped at all.

[trueblueky]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable? Yes.

2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

Part of the risk of the F fund or any fund that holds corporate bonds is that, while F may not be closely correlated with the C/S/I funds in normal times, when things go south in the corporate world, both stocks and corporate bonds suffer.

[grabiner]

TSP G Fund yield right now is 4.125% annualized

Inflation is 6% through Feb 2023.

So negative real return of 1.875% at least for the time being. Safety comes at a cost.

While it does come at a cost, this is not a fair comparison, because inflation is backward-looking and bond yields are forward-looking. Investors do not expect inflation for the next year to be 6%. The current yield on a one-year Treasury bond is 4.33%, and on a one-year TIPS is 1.70%, so investors are expecting about 2.63% inflation over the next year.

But the cost of getting safety (whether in the G fund or in some other bond fund) is a good reason for getting as much risk reduction per low-risk dollar as possible. You can do this in the G fund without sacrificing as much return as other investors would.

[junior]

vineviz is using backtesting to justify including non-Treasury USD bonds in a risky portfolio

This isn't true, I don't have the math skills to evaluate Vineviz's work, but it's clear he isn't just using backtesting since he discusses 10 year forward looking return assumptions by the TSP plan consultants here:

viewtopic.php?p=5232920#p5232920

But when using a very low risk asset in combination with an efficient risky portfolio to pick your location along the capital markets line? The G Fund is great! Indeed, I would say it is not overhyped at all for that purpose. And the F Fund is not going to be competitive for that purpose precisely because it is so much riskier.

It's not clear that a federal employee presumably more than 10 years from retirement, with a (presumed) pension needs a "very low risk" asset.

Here's how the TSP describes the F fund:

F Fund investors are rewarded with the opportunity to earn higher rates of return over the long term than they would from investments in short-term securities such as the G Fund. The overall risk is relatively low in comparison to certain other fixed income investments in the market because the F Fund includes only investment-grade securities.

The TSP also says

In periods of falling interest rates, the F Fund will experience gains from the resulting rise in bond prices. So in the long run, you may expect F Fund returns to exceed those of the G Fund; however, you should also expect greater price volatility (up and down movements). A retirement portfolio that contains stock funds, like the C, S, and I Funds, along with the F Fund, will tend to be less volatile than one that contains stock funds alone.

How we got from that to "F fund is not competitive with the G fund" is unclear to me, since we have at least one forum member with a technical background in finance who says on a technical level, the opposite is true.

That said with 40% in bonds, OP might be highly risk adverse, so it's possible G fund is the correct choice.

[ruralavalon]

Hello!

I'm a new federal government employee and am considering allocating the entirety of my bond allocation to the G Fund. My rationale is that the G fund is zero risk and so this would let me tweak the remainder of my portfolio towards riskier investments, while keeping my overall risk the same.

Both my spouse and I are in our mid 40s and we have one child in elementary school. The total portfolio amount is mid six figures.

Some questions:

1. Is this plan reasonable or do you think that there is a better way to proceed?
2. My existing allocation is 60/40. How far can I modify this while keeping the overall risk the same - 65/35, 70/30, 75/25? I'm not sure how I would go about calculating this.

I did search the forum - although there is a lot of information on the G fund, I didn't find answers to my specific questions.

Thanks for your help!

In my opinion putting all of the fixed income allocation in the G Fund is a reasonable strategy.

I would not use the relatively low overall risk of the G Fund as a reason for increasing the stock allocation.

In my opinion in your mid-40s (with a federal pension expected) each of the four asset allocations you list is within the range of what is reasonable.