TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

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fundseeker
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TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by fundseeker » Thu Jan 18, 2018 7:01 am

So, just looking at the annual returns of the G and F Funds, I am not sure I should continue to buy in to all of the favoritism shown here to the G Fund. I get that the F Fund is a little riskier, but it beat the G Fund in 9 of the last 11 years! With more than $500k now in the G Fund ($0 in F) , it feels like I am just sitting around with a huge emergency fund (since I can soon begin TSP withdrawals if I want), and I'm missing some good returns. Should we reconsider all the negativity about F Fund?

Individual Funds Annual Returns (10 Yr Summary)

Year/ G Fund/ F Fund/ Difference in Returns
2007/ 4.87%/ 7.09%/ 2.22%
2008/ 3.75%/ 5.45%/ 1.70%
2009/ 2.97%/ 5.99%/ 3.02%
2010/ 2.81%/ 6.71%/ 3.90%
2011/ 2.45%/ 7.89%/ 5.44%
2012/ 1.47%/ 4.29%/ 2.82%
2013/ 1.89%/ -1.68%/ -3.57%
2014/ 2.31%/ 6.73%/ 4.42%
2015/ 2.04%/ 0.91%/ -1.13%
2016/ 1.82%/ 2.91%/ 1.09%

10 Yr
Compound/ 2.63%/ 4.59%/ 1.96%

2017/ 2.33%/ 3.82%/ 1.49%
Last edited by fundseeker on Thu Jan 18, 2018 7:23 am, edited 1 time in total.

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Re: The F Fund outperforms the G Fund, so why is the G Fund favored?

Post by david1082b » Thu Jan 18, 2018 7:13 am

Didn't know what was being talked about at first, had to seach. Default risk might be a reason why some might prefer "G" over "F":
The F Fund assets are held in a separate account and managed to track the Bloomberg Barclays U.S. Aggregate Bond Index. This broad index includes U.S. Government, mortgage-backed, corporate, and foreign government (issued in the U.S.) sectors of the U.S. bond market. The earnings consist of interest income on the securities and gains (or losses) in the value of the securities. https://www.tsp.gov/InvestmentFunds/Fun ... nce_F.html
The payment of G Fund principal and interest is guaranteed by the U.S. Government. This means that the U.S. Government will always make the required payments. In other words, your G Fund investment is not subject to credit (default) risk.
https://www.tsp.gov/InvestmentFunds/Fun ... nce_G.html

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Re: The F Fund outperforms the G Fund, so why is the G Fund favored?

Post by david1082b » Thu Jan 18, 2018 7:17 am

A riskier fund is expected to beat a lower-risk on in the long run as a reward for risk, so it shouldn't be a surprise that the riskier one has outperformed. It depends on whether you want to take on the risk that the risk won't be rewarded in the future.

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Re: The F Fund outperforms the G Fund, so why is the G Fund favored?

Post by nisiprius » Thu Jan 18, 2018 8:01 am

I'm not a TSP participant, so I don't know what "all the negativity" is, maybe you could quote some actual examples. The F fund seems to be a Bloomberg Barclays Aggregate Bond Index fund, just like Vanguard Total Bond (but with an even lower expense ratio) which is one of the most commonly suggested bond funds in this forum, and happens to be the largest single holding I personally have in any fund.

I thnk the idea is that the F fund is just like you can get many other places, but the G fund is fairly unique. Why bother with the risk of a bond fund if you don't need to? You personally need to figure out how you balance risk and reward but you need to take risk into account somehow. Given equal return, nobody would prefer a risky fund if they could get a nearly riskless one instead, So risk should count against a fund in making your decision. You need to figure out how much,

Get your verb tenses right. Don't say the F fund "outperforms" the G fund, say it "has outperformed" the G fund.

Some negativity about the F could be part of what is, in my opinion, wildly exaggerated alarm about what might happen "to bonds" but I don't want to get into that.

Anyway, I think the idea is that the G fund is something like a sure thing that is better than any similar sure thing you can in ordinary mutual funds or most retirement plans, while the F fund is nothing special. Depending on your approach to risk and reward the F fund might be preferable to you.

But you absolutely need to look at something that tells you what "the risk of the F fund" is to you, and think you need to consider more than a table of numbers of ten years of past return data.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by rkhusky » Thu Jan 18, 2018 8:08 am

I think it is worthwhile to have more of the F Fund early in your career in order to allow the small return advantage that it has had over the G Fund to compound. As you get closer to retirement and you prepare to start to withdraw, you may want to increase the proportion to the G Fund because of it's safety - it is guaranteed not to lose money and the returns are supposed to be similar to an intermediate bond fund, which can lose money.
If you want more return with a bit more risk, you also have the option to slightly increase your allocation to stocks, rather than a larger allocation to the F Fund.
As mentioned above, you have to determine how much extra expected return you demand in order take more risk. The risk of the F Fund is that, with a duration of 6 years, it could drop 6% if bond prices increase by 1% or drop by 12% if bond prices increase by 2%. It would be expected to eventually make up for the drop, but it would take 6 years to do so. How much additional return do you require to take that risk - 1%/yr, 2%/yr, more?

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by stan1 » Thu Jan 18, 2018 8:27 am

In fixed income I look for risk compensated return not broadest market diversification as I would in equities. I use TSP G Fund, CDs, muni bond funds, and intermediate corporate bond funds for my fixed income allocation. I hold some of each almost all the time in at least one of my accounts but I do look at yield and adjust. I do this in my head, not using an optimized algorithm or model (I don't think such a thing exists in the public domain). I am at a point with age and net worth where over the long term preserving what I have accumulated is more important than growing it faster than inflation.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by jadd806 » Thu Jan 18, 2018 8:31 am

The G Fund is one of the only "free lunches" around. Unlike the F Fund, the G Fund has no credit risk, no duration risk, and is subject only to upward volatility. It's essentially cash with the yield of an intermediate term bond fund. Investors may hold "less" of the G Fund to achieve the same level of risk reduction as a portfolio which includes the F Fund. This would enable one to hold more equities, potentially allowing the portfolio including the G Fund to have a higher expected return for the same level of risk.

I hold 15% of my portfolio in bonds, entirely in the G Fund. If I were using the F Fund, I would need to hold ~25% to feel the same level of comfort with my asset allocation.

Additionally, some investors prefer the G Fund because it allows them to engage in a light form of market timing. The outperformance of the F Fund was exaggerated by the falling interest rates since the inception of the G Fund. The F Fund would be expected to outperform less in a flat rate environment, and underperform the G fund in a rising rate environment. Investors who believe that interest rates are likely to rise over the long term would thus prefer the G Fund.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Crisium » Thu Jan 18, 2018 8:33 am

The G fund is a stable value fund backed by the US Gov't instead of insurance companies. This is unique. The F fund equivalent can be found anywhere, albeit usually a tiny bit higher ER. The G fund provides a yield usually similar to or exceeding a 7 year treasury, but with no loss of principle. It is unique and different.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by dbr » Thu Jan 18, 2018 9:51 am

The very language commonly used "outperforms" and "beats" is pejorative and betrays ignorance of what is involved in investing. Investing is not a football game or auto racing. The fundamental is return and risk as the properties of investments. One cannot be considered without the other. This is completely aside from the problem of recency, depending on a few years data to make decisions. Others have mentioned why the G fund is often looked on favorably here, or anywhere.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by triceratop » Thu Jan 18, 2018 10:00 am

As others have mentioned, the F fund invests in corporate bonds (in addition to treasuries) so you are exposed to default risk and to term risk. First default risk: this is extra yield you demand for the possibility that a corporation will go bankrupt and be unable to honor the obligations of the contract, or even return principal. Over the time period the G and F funds have existed, few enough corporations have defaulted (or fallen below investment grade) that the F fund simply picked up extra return due to this risk.

Now for duration/term risk. The G fund has no exposure to term risk (it has a 0yr-duration), though its return is determined on the upside by term risk. This means if interest rates increase the G fund yield (and subsequent return) will increase without a decline in 'market value'. This is an advantage over investments with exposure to term/duration risk, which would necessarily decline (bond prices fall as interest rates rise). However, given that over the lifetime of the G fund interest rates have been on a downward trend, this feature has not been rewarded (other than on a risk-adjusted basis).
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by TSR » Thu Jan 18, 2018 10:56 am

Others have covered the reasons the G Fund is often favored (or not -- I just use the L funds and let them allocate the difference between the two), so I won't wade in too much. But if you have half a million dollars in the G Fund, it sounds like you've made a pretty deliberate choice about it. Is that your entire TSP balance as part of a larger portfolio including non-TSP funds, or do you have a certain allocation within the TSP that you've stuck with for various reasons?

Regardless, if I had 1/2 million in the G Fund I wouldn't feel too bad.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Thu Jan 18, 2018 11:08 am

Here's my way of thinking of it. The G fund current yield is 2.375% and has zero risk/zero duration (Source: https://www.tspfolio.com/tspgfundinterestrate). The F Fund yield is/should be ~ 2.62% (source: 30-day yield on VBTLX). So why would you take 6.x years of duration risk, and credit risk (~ 31% of bonds aren't AAA), just to try to earn an extra expected return of 0.25%?

As probably already mentioned, F has beaten G in the past because interest rates dropped. Duration risk is actually long-term zero sum, meaning if rates drop, you actually earn extra return.

One other thing to be aware of is that past performance doesn't prove previous advice as being either right or wrong. G fund was rightfully identified as the more sensible fund over F, regardless of what ended up actually happening. Just because someone took more risk than they logically should have to earn a bit of extra return, and that panned out paying benefits, doesn't mean the initial decision to do so was the best decision. To use an analogy, imagine a coin flip where for some strange reason, you knew beforehand that there's a 75% chance of it landing on heads. If you take this bet, pick heads, flip the coin, and it lands on tails anyway despite the 1/4 odds of it doing so, doesn't mean that the decision to go with heads at the beginning wasn't the better decision.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Nate79 » Thu Jan 18, 2018 3:05 pm

Do you want to take risk on the bond side or only on the stock side? If you are willing to take a little bit more risk on the bond side to get a little bit more return then I think the OP's idea is good, especially in accumulation phase. This is no different than why is TBM recommended in the 3 fund portfolio because there are certainly less risk bond funds out there than TBM, for example a short term bond fund. This is why I do not use a stable value fund in my 401k, the return has always been less than TBM fund in my 401k. I'm willing to take a little more risk for the little bit of extra return, especially since the risk for TBM is so low.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by triceratop » Thu Jan 18, 2018 3:09 pm

Nate79 wrote:
Thu Jan 18, 2018 3:05 pm
Do you want to take risk on the bond side or only on the stock side? If you are willing to take a little bit more risk on the bond side to get a little bit more return then I think the OP's idea is good, especially in accumulation phase. This is no different than why is TBM recommended in the 3 fund portfolio because there are certainly less risk bond funds out there than TBM, for example a short term bond fund. This is why I do not use a stable value fund in my 401k, the return has always been less than TBM fund in my 401k. I'm willing to take a little more risk for the little bit of extra return, especially since the risk for TBM is so low.
Increased risk does not imply increased expected return. The G fund may be the prototypical example of why this is not true. TBM or the F fund does expose you to default risk which carries additional return but the term exposure doesn't seem rewarded given the way the G fund works.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Earl Lemongrab » Thu Jan 18, 2018 3:24 pm

The G fund is unique. Being unique doesn't, by itself, say anything about its value. G has a rate that's pretty middle-of-the-road compared to corporate stable-value funds. For instance, its current rate is 2.375%, which is a smidge less than Megacorp's 2.55%.

So how does anyone value the increased insurance? It's a tricky question. There have been very few instances where stable-value funds did not perform as expected, and those cases usually other factors like terminating the plan.

I have used 50/50 stable-value and bond-index (equivalent to F) for ten years or so. I don't see any reason to change.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by triceratop » Thu Jan 18, 2018 3:28 pm

Earl Lemongrab wrote:
Thu Jan 18, 2018 3:24 pm
The G fund is unique. Being unique doesn't, by itself, say anything about its value. G has a rate that's pretty middle-of-the-road compared to corporate stable-value funds. For instance, its current rate is 2.375%, which is a smidge less than Megacorp's 2.55%.

So how does anyone value the increased insurance? It's a tricky question. There have been very few instances where stable-value funds did not perform as expected, and those cases usually other factors like terminating the plan.

I have used 50/50 stable-value and bond-index (equivalent to F) for ten years or so. I don't see any reason to change.
The OP is choosing between the G fund and F fund, not being a public and private sector employee. We should keep the comparisons straight; I don't think anyone would encourage OP to leave their position for Megacorp with a high-yielding stable value fund. :wink:

Does Megacorp state the methodology for how the yield is determined? You quote the current yield, but the G fund states what it will return in various interest rate environment (IT Govt bond yield).
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Earl Lemongrab » Thu Jan 18, 2018 3:47 pm

^^ I understand that, the comparison was to qualify the "uniqueness" of the G Fund. Many advocate using it because you get this great rate with no risk. I was pointing out that the rate isn't all that great. It's good, and the risk virtually non-existent, but it's not exactly the "free lunch" that many seem to think.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by rkhusky » Thu Jan 18, 2018 3:50 pm

azanon wrote:
Thu Jan 18, 2018 11:08 am
Here's my way of thinking of it. The G fund current yield is 2.375% and has zero risk/zero duration (Source: https://www.tspfolio.com/tspgfundinterestrate). The F Fund yield is/should be ~ 2.62% (source: 30-day yield on VBTLX). So why would you take 6.x years of duration risk, and credit risk (~ 31% of bonds aren't AAA), just to try to earn an extra expected return of 0.25%?

As probably already mentioned, F has beaten G in the past because interest rates dropped. Duration risk is actually long-term zero sum, meaning if rates drop, you actually earn extra return.

One other thing to be aware of is that past performance doesn't prove previous advice as being either right or wrong. G fund was rightfully identified as the more sensible fund over F, regardless of what ended up actually happening. Just because someone took more risk than they logically should have to earn a bit of extra return, and that panned out paying benefits, doesn't mean the initial decision to do so was the best decision. To use an analogy, imagine a coin flip where for some strange reason, you knew beforehand that there's a 75% chance of it landing on heads. If you take this bet, pick heads, flip the coin, and it lands on tails anyway despite the 1/4 odds of it doing so, doesn't mean that the decision to go with heads at the beginning wasn't the better decision.
The long term F Fund out-performance has been more than 0.25%.

In 2017, with increasing rates, the F Fund outperformed the G Fund by 1.5%, according to the OP.

If my investing horizon is 20 years, why do I care about 6 year duration risk?

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by fundseeker » Thu Jan 18, 2018 10:44 pm

Thank you everyone for the great detailed explanations. I will likely stay the course and not bother with the F Fund after reading the comments. Thanks again for taking the time to respond!
TSR wrote:
Thu Jan 18, 2018 10:56 am
But if you have half a million dollars in the G Fund, it sounds like you've made a pretty deliberate choice about it. Is that your entire TSP balance as part of a larger portfolio including non-TSP funds, or do you have a certain allocation within the TSP that you've stuck with for various reasons?
Thie $500k is right at 42% of our total TSP, and about 1/3 of our investments, which is where I am pretty comfortable. I am trying hard to resist lowering my exposure by going down to 55/45, but we will see. I will retire this year, but I expect to find other employment for five years or so, or not! :)

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Fri Jan 19, 2018 10:29 am

rkhusky wrote:
Thu Jan 18, 2018 3:50 pm
azanon wrote:
Thu Jan 18, 2018 11:08 am
Here's my way of thinking of it. The G fund current yield is 2.375% and has zero risk/zero duration (Source: https://www.tspfolio.com/tspgfundinterestrate). The F Fund yield is/should be ~ 2.62% (source: 30-day yield on VBTLX). So why would you take 6.x years of duration risk, and credit risk (~ 31% of bonds aren't AAA), just to try to earn an extra expected return of 0.25%?

As probably already mentioned, F has beaten G in the past because interest rates dropped. Duration risk is actually long-term zero sum, meaning if rates drop, you actually earn extra return.

One other thing to be aware of is that past performance doesn't prove previous advice as being either right or wrong. G fund was rightfully identified as the more sensible fund over F, regardless of what ended up actually happening. Just because someone took more risk than they logically should have to earn a bit of extra return, and that panned out paying benefits, doesn't mean the initial decision to do so was the best decision. To use an analogy, imagine a coin flip where for some strange reason, you knew beforehand that there's a 75% chance of it landing on heads. If you take this bet, pick heads, flip the coin, and it lands on tails anyway despite the 1/4 odds of it doing so, doesn't mean that the decision to go with heads at the beginning wasn't the better decision.
The long term F Fund out-performance has been more than 0.25%.

In 2017, with increasing rates, the F Fund outperformed the G Fund by 1.5%, according to the OP.

If my investing horizon is 20 years, why do I care about 6 year duration risk?
You're talking about actual performance, whereas I was discussing expected performance. The generally accepted method of estimating a bond's return is its current yield minus an estimate of default rate to the extent that defaults are expected or possible. Defaults should be 0 for G fund and very near 0 for F fund, so the yield continues to be the best estimate for forward returns. As far as I know, this method of estimating expected return hasn't changed. Has this been revised since I was educated on this?

The reason one might care about duration risk is because they might realize the primary reason they're purchasing bonds in the first place is for stability and as a cash proxy to rebalance their stocks with. Specifically, history has shown that any bonds besides government bonds (F fund has 30% non-government) often drop at exactly the same time as stocks, so you might end up having to sell your F fund bonds to rebalance the stocks at exactly the same time your risky bonds are also temporarily dropping.

You say your investing horizon is 20 years, but are you also saying you're not going to ever rebalance your portfolio? That would be an interesting approach.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Fri Jan 19, 2018 11:22 am

rkhusky wrote:
Thu Jan 18, 2018 8:08 am
As mentioned above, you have to determine how much extra expected return you demand in order take more risk. The risk of the F Fund is that, with a duration of 6 years, it could drop 6% if bond prices increase by 1% or drop by 12% if bond prices increase by 2%. It would be expected to eventually make up for the drop, but it would take 6 years to do so. How much additional return do you require to take that risk - 1%/yr, 2%/yr, more?
And, fortunately, the extra expected return can be estimated at any time; It's the difference in the current yields between the 2 funds, F fund yield currently being 0.25% higher than G. And the only extent that would be wrong, is that it might be every so slightly high since F fund holds some bonds that have a very small chance of default vs. no default for G.

Please anyone correct me if I am not estimating the forward return correctly. I want to make sure I'm doing this right.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by rkhusky » Fri Jan 19, 2018 12:39 pm

azanon wrote:
Fri Jan 19, 2018 10:29 am
You're talking about actual performance, whereas I was discussing expected performance. The generally accepted method of estimating a bond's return is its current yield minus an estimate of default rate to the extent that defaults are expected or possible. Defaults should be 0 for G fund and very near 0 for F fund, so the yield continues to be the best estimate for forward returns. As far as I know, this method of estimating expected return hasn't changed. Has this been revised since I was educated on this?

The reason one might care about duration risk is because they might realize the primary reason they're purchasing bonds in the first place is for stability and as a cash proxy to rebalance their stocks with. Specifically, history has shown that any bonds besides government bonds (F fund has 30% non-government) often drop at exactly the same time as stocks, so you might end up having to sell your F fund bonds to rebalance the stocks at exactly the same time your risky bonds are also temporarily dropping.

You say your investing horizon is 20 years, but are you also saying you're not going to ever rebalance your portfolio? That would be an interesting approach.
I'm not a bond expert. How accurate has the method you describe been in predicting long term bond returns? Since the G Fund return is so stable, I expect that the interest rate is a good indication of future returns, although I might do a linear interpolation over the last 1-2 years to get a better estimate of the trend. But It doesn't seem like SEC yield would be very accurate for predicting F Fund returns, since it is only based on the past 30 days, but I could be missing something.

In order to need to rebalance by selling bonds, stocks would need to drop further than the bonds. In that case, I wouldn't mind selling F Fund to buy stocks. I agree that I would have been better off owning G Fund in that case, but then I may have missed the years of F Fund out-performance. Since we can't predict when stocks will drop, I would not able to switch from F to G in time to miss the drop in F. On the other hand, it is not clear to me that F would necessarily perform worse than G in the case of a stock sell off. It is reasonable to conjecture that people looking to avoid the drop in stocks would bid up the high quality bonds in the F Fund, including the high quality bonds that are not government bonds.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Fri Jan 19, 2018 1:03 pm

rkhusky wrote:
Fri Jan 19, 2018 12:39 pm
I'm not a bond expert. How accurate has the method you describe been in predicting long term bond returns? Since the G Fund return is so stable, I expect that the interest rate is a good indication of future returns, although I might do a linear interpolation over the last 1-2 years to get a better estimate of the trend. But It doesn't seem like SEC yield would be very accurate for predicting F Fund returns, since it is only based on the past 30 days, but I could be missing something.
I just don't see the relevance in comparing widely accepted means of estimating bond return to what actually happened in the past. So if what actually happened doesn't match up with the expected return (e.g. F greatly outperformed G when the yields were always pretty close), then that only proves that expected return isn't the same thing as guaranteed return, which hopefully we both already know anyway. Without going into the details, the most cursory of glances at the prime rate over the lifetime of G and F fund shows rates that dropped quite substantially, largely explaining F fund out-performance, but of course having corporate bonds helps too.

Now while I don't at all advocating predicting future rates, I cannot completely divorce myself from admitting that, generally speaking, I believe in mean reversion, and I'm fairly sure rates are below mean right now. So forward-looking, if someone were going to make you guess, would you go with rates doing the same thing over the next 20 years (dropping several percentage points and a negative prime rate)? I wouldn't. I would say at worst they stay mostly flat, which means expected outperformance for F is ~ 0.25% as of today.

You say it doesn't seem like SEC yield would be very accurate for predicting F fund. Like you, I'm not a bond expert, I just recall "experts" saying that yield minus expected default is how you estimate future bond return. Do you trust Larry Swedroe? He said to use the yield for estimating expected bond return. I'm just the messenger.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Engineer250 » Fri Jan 19, 2018 1:17 pm

jadd806 wrote:
Thu Jan 18, 2018 8:31 am
The G Fund is one of the only "free lunches" around. Unlike the F Fund, the G Fund has no credit risk, no duration risk, and is subject only to upward volatility. It's essentially cash with the yield of an intermediate term bond fund. Investors may hold "less" of the G Fund to achieve the same level of risk reduction as a portfolio which includes the F Fund. This would enable one to hold more equities, potentially allowing the portfolio including the G Fund to have a higher expected return for the same level of risk.

I hold 15% of my portfolio in bonds, entirely in the G Fund. If I were using the F Fund, I would need to hold ~25% to feel the same level of comfort with my asset allocation.

Additionally, some investors prefer the G Fund because it allows them to engage in a light form of market timing. The outperformance of the F Fund was exaggerated by the falling interest rates since the inception of the G Fund. The F Fund would be expected to outperform less in a flat rate environment, and underperform the G fund in a rising rate environment. Investors who believe that interest rates are likely to rise over the long term would thus prefer the G Fund.
This is kind of what I do. I am young and had a 100% equity portfolio prior to getting access to the TSP. Since then as a result of getting a little older, G Fund makes up 10% of my portfolio and my only non-equity part of my portfolio. Most days 10% feels like “too much” but I’m trying to stick with it.

I also have to admit there is a bit of market timing as mentioned above. Long term I think I will own both F Fund and G Fund. F is as far as I can tell Total Bond but with an even cheaper cost. But short term like others have mentioned with bond yields so low and rates expected to rise (I know I know they’ve been saying the same thing for YEARS) it feels needless to take on more risk for a tiny amount of extra return. Especially since my non-equity, while it seems like a lot to me, is considered pretty low.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by BigMoneyNoWhammies » Fri Jan 19, 2018 1:25 pm

jadd806 wrote:
Thu Jan 18, 2018 8:31 am
The G Fund is one of the only "free lunches" around. Unlike the F Fund, the G Fund has no credit risk, no duration risk, and is subject only to upward volatility. It's essentially cash with the yield of an intermediate term bond fund. Investors may hold "less" of the G Fund to achieve the same level of risk reduction as a portfolio which includes the F Fund. This would enable one to hold more equities, potentially allowing the portfolio including the G Fund to have a higher expected return for the same level of risk.

I hold 15% of my portfolio in bonds, entirely in the G Fund. If I were using the F Fund, I would need to hold ~25% to feel the same level of comfort with my asset allocation.

Additionally, some investors prefer the G Fund because it allows them to engage in a light form of market timing. The outperformance of the F Fund was exaggerated by the falling interest rates since the inception of the G Fund. The F Fund would be expected to outperform less in a flat rate environment, and underperform the G fund in a rising rate environment. Investors who believe that interest rates are likely to rise over the long term would thus prefer the G Fund.
Ditto to all of this. I'm a TSP participant and plan on keeping my TSP account even if I leave federal service exclusively for access to the G fund when I get closer to retirement.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by triceratop » Fri Jan 19, 2018 1:32 pm

Engineer250 wrote:
Fri Jan 19, 2018 1:17 pm
jadd806 wrote:
Thu Jan 18, 2018 8:31 am
The G Fund is one of the only "free lunches" around. Unlike the F Fund, the G Fund has no credit risk, no duration risk, and is subject only to upward volatility. It's essentially cash with the yield of an intermediate term bond fund. Investors may hold "less" of the G Fund to achieve the same level of risk reduction as a portfolio which includes the F Fund. This would enable one to hold more equities, potentially allowing the portfolio including the G Fund to have a higher expected return for the same level of risk.

I hold 15% of my portfolio in bonds, entirely in the G Fund. If I were using the F Fund, I would need to hold ~25% to feel the same level of comfort with my asset allocation.

Additionally, some investors prefer the G Fund because it allows them to engage in a light form of market timing. The outperformance of the F Fund was exaggerated by the falling interest rates since the inception of the G Fund. The F Fund would be expected to outperform less in a flat rate environment, and underperform the G fund in a rising rate environment. Investors who believe that interest rates are likely to rise over the long term would thus prefer the G Fund.
This is kind of what I do. I am young and had a 100% equity portfolio prior to getting access to the TSP. Since then as a result of getting a little older, G Fund makes up 10% of my portfolio and my only non-equity part of my portfolio. Most days 10% feels like “too much” but I’m trying to stick with it.

I also have to admit there is a bit of market timing as mentioned above. Long term I think I will own both F Fund and G Fund. F is as far as I can tell Total Bond but with an even cheaper cost. But short term like others have mentioned with bond yields so low and rates expected to rise (I know I know they’ve been saying the same thing for YEARS) it feels needless to take on more risk for a tiny amount of extra return. Especially since my non-equity, while it seems like a lot to me, is considered pretty low.
If I were younger (and I am) and had access to the G fund (I do not) I would not put 10% into the G fund. What are you going to do with it? Rebalance in an equity crash, a flight to quality situation, most likely. The G fund will not appreciate when interest rates fall (which since 2000 has tended been a fairly consistent correlation with stocks falling). From a holistic porfolio perspective I do not see how the G fund helps you here.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Fri Jan 19, 2018 1:42 pm

triceratop wrote:
Fri Jan 19, 2018 1:32 pm
Engineer250 wrote:
Fri Jan 19, 2018 1:17 pm
jadd806 wrote:
Thu Jan 18, 2018 8:31 am
The G Fund is one of the only "free lunches" around. Unlike the F Fund, the G Fund has no credit risk, no duration risk, and is subject only to upward volatility. It's essentially cash with the yield of an intermediate term bond fund. Investors may hold "less" of the G Fund to achieve the same level of risk reduction as a portfolio which includes the F Fund. This would enable one to hold more equities, potentially allowing the portfolio including the G Fund to have a higher expected return for the same level of risk.

I hold 15% of my portfolio in bonds, entirely in the G Fund. If I were using the F Fund, I would need to hold ~25% to feel the same level of comfort with my asset allocation.

Additionally, some investors prefer the G Fund because it allows them to engage in a light form of market timing. The outperformance of the F Fund was exaggerated by the falling interest rates since the inception of the G Fund. The F Fund would be expected to outperform less in a flat rate environment, and underperform the G fund in a rising rate environment. Investors who believe that interest rates are likely to rise over the long term would thus prefer the G Fund.
This is kind of what I do. I am young and had a 100% equity portfolio prior to getting access to the TSP. Since then as a result of getting a little older, G Fund makes up 10% of my portfolio and my only non-equity part of my portfolio. Most days 10% feels like “too much” but I’m trying to stick with it.

I also have to admit there is a bit of market timing as mentioned above. Long term I think I will own both F Fund and G Fund. F is as far as I can tell Total Bond but with an even cheaper cost. But short term like others have mentioned with bond yields so low and rates expected to rise (I know I know they’ve been saying the same thing for YEARS) it feels needless to take on more risk for a tiny amount of extra return. Especially since my non-equity, while it seems like a lot to me, is considered pretty low.
If I were younger (and I am) and had access to the G fund (I do not) I would not put 10% into the G fund. What are you going to do with it? Rebalance in an equity crash, a flight to quality situation, most likely. The G fund will not appreciate when interest rates fall (which since 2000 has tended been a fairly consistent correlation with stocks falling). From a holistic porfolio perspective I do not see how the G fund helps you here.
I agree. Either approach will require the risk tolerance possessed by probably less than 10% of the population, and also need to be part of the 90% of the population that's convinced they're better than average.

Now if we were all emotionless computers, 100% equities is king!

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Engineer250 » Fri Jan 19, 2018 1:47 pm

triceratop wrote:
Fri Jan 19, 2018 1:32 pm
If I were younger (and I am) and had access to the G fund (I do not) I would not put 10% into the G fund. What are you going to do with it? Rebalance in an equity crash, a flight to quality situation, most likely. The G fund will not appreciate when interest rates fall (which since 2000 has tended been a fairly consistent correlation with stocks falling). From a holistic porfolio perspective I do not see how the G fund helps you here.
You suggesting I be in F Fund instead? Or feeding my impulses to be 100% equities? I’m early 30’s so young-ish. I only moved into G Fund after reading too many of the panic “you better hold bonds” threads on here.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by triceratop » Fri Jan 19, 2018 2:00 pm

I'm saying that 90/10 makes more sense with the F fund than the G fund. It actually makes more sense with a Treasury ETF like VGIT than either, but that's not available in the TSP. Actually I would need to go back and look at how the F fund performed in recent equity crises to be 100% sure about this.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by triceratop » Fri Jan 19, 2018 2:01 pm

azanon wrote:
Fri Jan 19, 2018 1:42 pm
triceratop wrote:
Fri Jan 19, 2018 1:32 pm
Engineer250 wrote:
Fri Jan 19, 2018 1:17 pm
jadd806 wrote:
Thu Jan 18, 2018 8:31 am
The G Fund is one of the only "free lunches" around. Unlike the F Fund, the G Fund has no credit risk, no duration risk, and is subject only to upward volatility. It's essentially cash with the yield of an intermediate term bond fund. Investors may hold "less" of the G Fund to achieve the same level of risk reduction as a portfolio which includes the F Fund. This would enable one to hold more equities, potentially allowing the portfolio including the G Fund to have a higher expected return for the same level of risk.

I hold 15% of my portfolio in bonds, entirely in the G Fund. If I were using the F Fund, I would need to hold ~25% to feel the same level of comfort with my asset allocation.

Additionally, some investors prefer the G Fund because it allows them to engage in a light form of market timing. The outperformance of the F Fund was exaggerated by the falling interest rates since the inception of the G Fund. The F Fund would be expected to outperform less in a flat rate environment, and underperform the G fund in a rising rate environment. Investors who believe that interest rates are likely to rise over the long term would thus prefer the G Fund.
This is kind of what I do. I am young and had a 100% equity portfolio prior to getting access to the TSP. Since then as a result of getting a little older, G Fund makes up 10% of my portfolio and my only non-equity part of my portfolio. Most days 10% feels like “too much” but I’m trying to stick with it.

I also have to admit there is a bit of market timing as mentioned above. Long term I think I will own both F Fund and G Fund. F is as far as I can tell Total Bond but with an even cheaper cost. But short term like others have mentioned with bond yields so low and rates expected to rise (I know I know they’ve been saying the same thing for YEARS) it feels needless to take on more risk for a tiny amount of extra return. Especially since my non-equity, while it seems like a lot to me, is considered pretty low.
If I were younger (and I am) and had access to the G fund (I do not) I would not put 10% into the G fund. What are you going to do with it? Rebalance in an equity crash, a flight to quality situation, most likely. The G fund will not appreciate when interest rates fall (which since 2000 has tended been a fairly consistent correlation with stocks falling). From a holistic porfolio perspective I do not see how the G fund helps you here.
I agree. Either approach will require the risk tolerance possessed by probably less than 10% of the population, and also need to be part of the 90% of the population that's convinced they're better than average.

Now if we were all emotionless computers, 100% equities is king!
No, I personally am 90/10. My point was about F fund vs. G fund with that allocation. I'm not sure if I made that clear, though.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Fri Jan 19, 2018 2:24 pm

Yeah, I misunderstood.

Well, i imagine it's been quite the pleasure to hold a 90/10, whether that 10% were G or F, for the past several years. I'm reminded of something else Larry Swedroe once said (paraphrase), that once you're passed 80% or so equities, there's really no harm in choosing higher risk bonds since the stocks will so largely dominate the volatility anyway.

I wish I could go back in time to 3/2009 or later and do the same thing. But being middle aged, and having had my start that predates the 00-03 and 07-09 investing periods, I have confirmed that 90/10 isn't my sort of thing. I'm willing to pay in the form of a smaller end portfolio, for far more restful nights of sleep along the way.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by blaugranamd » Fri Jan 19, 2018 2:32 pm

The reason I prefer the G fund is because I want to utilize the least amount of risk in my bond allocation. if I want to increase my returns rather than taking on more risk with my small percentage of funds invested in bonds I will simply increase my stock to bond ratio. trying to increase returns by increasing the risk of your least risky asset seems counterintuitive when you can simply take on more risk in other other manners.
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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by rkhusky » Fri Jan 19, 2018 2:39 pm

azanon wrote:
Fri Jan 19, 2018 1:03 pm
I just don't see the relevance in comparing widely accepted means of estimating bond return to what actually happened in the past. So if what actually happened doesn't match up with the expected return (e.g. F greatly outperformed G when the yields were always pretty close), then that only proves that expected return isn't the same thing as guaranteed return, which hopefully we both already know anyway.
I don't see the point of using expected return to differentiate between funds if it doesn't match to reality.
azanon wrote:
Fri Jan 19, 2018 1:03 pm
You say it doesn't seem like SEC yield would be very accurate for predicting F fund. Like you, I'm not a bond expert, I just recall "experts" saying that yield minus expected default is how you estimate future bond return. Do you trust Larry Swedroe? He said to use the yield for estimating expected bond return. I'm just the messenger.
The question is for how long is the estimate good? I trust that it is fairly accurate for the next month or so, maybe longer. But, in addition, I would use some longer term data to look at trends in past performance too.

It's all a bit of a crap shoot anyway, which is why 50/50 in G and F is appealing, especially 5+ years out from retirement.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by azanon » Fri Jan 19, 2018 3:11 pm

I've got nothing. Let me just say I read the entirety of The Bond Book by Annette Thau (an exceptional, very detailed book), and if you were to ask her which of these two funds would she recommend, I haven't a doubt in my mind Annette would say 100% G (vs. F) any day of the week. A ~ 7 year treasury with zero duration? Honestly, I get why non-feds aren't happy we have this fund.

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Re: TSP's F Fund outperforms the G Fund, so why is the G Fund favored?

Post by Engineer250 » Fri Jan 19, 2018 5:34 pm

azanon wrote:
Fri Jan 19, 2018 3:11 pm
I've got nothing. Let me just say I read the entirety of The Bond Book by Annette Thau (an exceptional, very detailed book), and if you were to ask her which of these two funds would she recommend, I haven't a doubt in my mind Annette would say 100% G (vs. F) any day of the week. A ~ 7 year treasury with zero duration? Honestly, I get why non-feds aren't happy we have this fund.
I think only non-fed Bogleheads and Congress maybe. I’m an engineer and bet most of my engineer coworkers don’t know what a treasury note even is, let alone the rest of what the US might know.
azanon wrote:
Fri Jan 19, 2018 1:42 pm
I agree. Either approach will require the risk tolerance possessed by probably less than 10% of the population, and also need to be part of the 90% of the population that's convinced they're better than average.
Perfect. I already think I’m better than everyone, I knew this allocation was for me :beer
Where the tides of fortune take us, no man can know.

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