TSP 3-Funds or TSP Target Date Fund?

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tomwood
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TSP 3-Funds or TSP Target Date Fund?

Post by tomwood » Thu Jul 18, 2019 1:31 am

Is it safe to say more people on this forum use a 3 Fund portfolio in their 401K or IRA accounts compared to a target date fund? Is the main reason for this target date fund fees? If everyone had access to the TSP, would the target date fund be more popular because of their low fees?

I’m in the group who currently uses a 3 Fund portfolio strategy in my retirement accounts but I’ve recebtly accepted a federal job which means my future retirement money will be in a TSP account. What is the recommendation from all on this forum with respect to a target date or 3-Fund portfolio in the TSP?

dru808
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by dru808 » Thu Jul 18, 2019 1:39 am

Can’t you hold a 3 or 4 fund index portfolio in the tsp?

Im not giving advice, I’m more or less interested in the answer to your question.

Topic Author
tomwood
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tomwood » Thu Jul 18, 2019 1:52 am

dru808 wrote:
Thu Jul 18, 2019 1:39 am
Can’t you hold a 3 or 4 fund index portfolio in the tsp?

Im not giving advice, I’m more or less interested in the answer to your question.
Yes I can.

Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?

dru808
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by dru808 » Thu Jul 18, 2019 2:28 am

tomwood wrote:
Thu Jul 18, 2019 1:52 am
dru808 wrote:
Thu Jul 18, 2019 1:39 am
Can’t you hold a 3 or 4 fund index portfolio in the tsp?

Im not giving advice, I’m more or less interested in the answer to your question.
Yes I can.

Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
1. So they can adjust to their desired allocation/weighting they may not want as much international, investment grade bonds etc. The tinkering type.

2. They don’t have a forced glide path.

3. Fees.

jbinpa59
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by jbinpa59 » Thu Jul 18, 2019 2:38 am

tomwood wrote:
Thu Jul 18, 2019 1:31 am
I’m in the group who currently uses a 3 Fund portfolio strategy in my retirement accounts but I’ve recebtly accepted a federal job which means my future retirement money will be in a TSP account. What is the recommendation from all on this forum with respect to a target date or 3-Fund portfolio in the TSP?
What three asset indexes are you in now?
Are they the same indexes as tsp uses?

imho tsp target date funds are conservative in allocation compared to a same date external fund

But that's easy to work around pick a different date fund that suits your desired splits better or roll your own
From the tsp list
Can't beat g fund as a short term treasuries pick


Btw I've been 75/25 c/s funds for 20yrs+ but I've got a larger cap / domestic stocks only tilt on things
I do need to start shifting some to g to set up for retirement tho

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tadamsmar
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tadamsmar » Thu Jul 18, 2019 4:28 am

tomwood wrote:
Thu Jul 18, 2019 1:31 am
Is it safe to say more people on this forum use a 3 Fund portfolio in their 401K or IRA accounts compared to a target date fund? Is the main reason for this target date fund fees? If everyone had access to the TSP, would the target date fund be more popular because of their low fees?

I’m in the group who currently uses a 3 Fund portfolio strategy in my retirement accounts but I’ve recebtly accepted a federal job which means my future retirement money will be in a TSP account. What is the recommendation from all on this forum with respect to a target date or 3-Fund portfolio in the TSP?
According to this, the fee (expense ratio) of the TSP L Fund, which is the target date fund, is the same or lower than the individual funds:

https://www.tsp.gov/InvestmentFunds/Fun ... atrix.html

What would the TSP 3-fund portfolio be? C,F,I? I would not do that. C,G,I would probably be better. But I think the L Fund is better because it includes some S and F and it is based on an efficient frontier analysis. (Of course, the guy who invented the efficient frontier says he just uses a 2-fund portfolio!)

TSP does not have a TSM (US total stock market) fund, and that is considered best for a 3 fund portfolio.

Your future money will be in the TSP, but I guess you or your spouse will have funds outside of the TSP?

We have some money in the TSP. We have an overall AA for all of our savings. All the TSP money ends up as part of our bond allocation, all of the TSP money is in the G Fund. This is consistent with our overall AA and seems to be best for us. The G Fund is a unique fund with the safety of a short duration bond and the higher return of a longer duration bond.

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tadamsmar
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tadamsmar » Thu Jul 18, 2019 4:43 am

tomwood wrote:
Thu Jul 18, 2019 1:52 am
dru808 wrote:
Thu Jul 18, 2019 1:39 am
Can’t you hold a 3 or 4 fund index portfolio in the tsp?

Im not giving advice, I’m more or less interested in the answer to your question.
Yes I can.

Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
I have a taxable account. Using target-date funds for all accounts would be less tax efficient.

Also, I have Roth and non-Roth. I want the non-Roth to grow slower to keep my future RMDs lower. RMDs that exceed your consumption rate are tax-inefficient because you have to pay the income tax and then reinvest. So I keep stocks in Roth and bonds in non-Roth as much as possible, since bonds are projected to grow slower. Also, it is typically better to consume taxable during retirement and not have other money being forced out and taxed due to RMDs. (Edit: I should perhaps say it is "better to avoid consuming tax-deferred", I think that rule has a broader application. The details of tax avoidance can be complicated.)
Last edited by tadamsmar on Thu Jul 18, 2019 6:06 am, edited 2 times in total.

FederalFIRE
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by FederalFIRE » Thu Jul 18, 2019 5:12 am

I hold only L funds in my TSP right now and use a 3-fund in our taxable and IRAs. I do this because, as tadamsmar correctly pointed out, the expense ratios for lifecycle funds are the same as or lower than (by 0.001%) the individual funds. Since I'm in an accumulation and growth phase, the blend used in the L2050 basically fits what I would be targeting anyway. I find it way easier to just buy everything in L2050 and forget about it.

In my long term plan and IPS, this does change over time. Eventually I expect that I will want a higher bond allocation in our portfolio. As this happens we will use the G-fund to make up our bond allocation. Other than that, we plan to stick with the L funds for the foreseeable future.

Unless one is into tinkering or having a particular tilt to their portfolio I don't see much reason to fiddle with balancing to a replicate a three-fund inside the TSP when the lifecycle funds are well balanced and extremely cheap.

Good luck!

FederalFIRE
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by FederalFIRE » Thu Jul 18, 2019 5:15 am

tadamsmar wrote:
Thu Jul 18, 2019 4:43 am
tomwood wrote:
Thu Jul 18, 2019 1:52 am
dru808 wrote:
Thu Jul 18, 2019 1:39 am
Can’t you hold a 3 or 4 fund index portfolio in the tsp?

Im not giving advice, I’m more or less interested in the answer to your question.
Yes I can.

Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
I have a taxable account. Using target-date funds for all accounts would be less tax efficient.
The taxable account point is exactly why I use the lifecycle fund in my TSP and a combo of VTI and VXUS in our taxable and IRA accounts. The individual funds outside the TSP give us the space to tax-optimize, prioritizing high growth (VTI) in Roth accounts, and international (VXUS) into taxable. I have no bond funds in any of these, as the L2050 bond allocation currently hits the mark for our target bond allocation.

Keeping a target date in the taxable account can result in negative tax consequences due to the re-balancing and also places assets in accounts that are not their optimal location from a long-term gains perspective. So, lifecycle funds in TSP and 3-fund portfolio outside of TSP gets us to our overall balance and optimized asset locations.

retiredjg
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by retiredjg » Thu Jul 18, 2019 7:23 am

tomwood wrote:
Thu Jul 18, 2019 1:52 am
Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
In plans other than the TSP, target date funds can cost a little or a lot more. Some people don't even want to pay a little more. In the TSP, everything costs the same.

Some people are not satisfied with how much of the target fund is put in international stocks. And some don't want some things that a target fund might contain. Those people may rather control what they have by using individual funds.

The TSP is pretty moderate about everything. It will not matter at all if you use 3 individual funds or one of the LifeCycle funds. Just do what you want.

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tadamsmar
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tadamsmar » Thu Jul 18, 2019 7:30 am

FederalFIRE wrote:
Thu Jul 18, 2019 5:15 am
tadamsmar wrote:
Thu Jul 18, 2019 4:43 am
tomwood wrote:
Thu Jul 18, 2019 1:52 am
dru808 wrote:
Thu Jul 18, 2019 1:39 am
Can’t you hold a 3 or 4 fund index portfolio in the tsp?

Im not giving advice, I’m more or less interested in the answer to your question.
Yes I can.

Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
I have a taxable account. Using target-date funds for all accounts would be less tax efficient.
The taxable account point is exactly why I use the lifecycle fund in my TSP and a combo of VTI and VXUS in our taxable and IRA accounts. The individual funds outside the TSP give us the space to tax-optimize, prioritizing high growth (VTI) in Roth accounts, and international (VXUS) into taxable. I have no bond funds in any of these, as the L2050 bond allocation currently hits the mark for our target bond allocation.

Keeping a target date in the taxable account can result in negative tax consequences due to the re-balancing and also places assets in accounts that are not their optimal location from a long-term gains perspective. So, lifecycle funds in TSP and 3-fund portfolio outside of TSP gets us to our overall balance and optimized asset locations.
In our case, only about 25% of our nest egg is in the TSP and we have an overall 45% bond allocation. We in early retirement. In our case, I think having all of the TSP in the G Fund makes sense.

azanon
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by azanon » Thu Jul 18, 2019 7:38 am

tomwood wrote:
Thu Jul 18, 2019 1:31 am
Is it safe to say more people on this forum use a 3 Fund portfolio in their 401K or IRA accounts compared to a target date fund? Is the main reason for this target date fund fees? If everyone had access to the TSP, would the target date fund be more popular because of their low fees?

I’m in the group who currently uses a 3 Fund portfolio strategy in my retirement accounts but I’ve recebtly accepted a federal job which means my future retirement money will be in a TSP account. What is the recommendation from all on this forum with respect to a target date or 3-Fund portfolio in the TSP?
This is my best guess, but it's definitely a generalization with exceptions:

A good many bogleheads prefer a 3 Fund portfolio, and then use some sort of "constant percentage" (or "SWR" style) method of retirement income, where the inflation adjusted principle is being maintained in perpetuity. If that's someone's goal, they usually need a "growth" style portfolio for life, which means equities will need to dominate (equal to or greater than 50%). However, If someone is using a (static) 3-fund portfolio, but does intend to change the mix at certain points in their career such as retirement, then they'll need to decide when to do that since they won't have that feature built-in like a target date fund or L funds. That could be a tricky proposition to do on your own, where target date funds put a lot of thought and analysis into that decision.

The L funds definitely glide to an eventual "income" level portfolio, so it's only going to be designed to keep up with inflation, but will likely earn as much as 3% real return. So in my opinion, if you go with the L funds, and keep the L income fund in retirement, then that's only optimal for retirement income strategies that will gradually spend down the principle as well.

If you'd like an idea to consider (since it is my current favorite idea), you might want to consider combining using the L funds, that will eventually become L income, and then someday take the "full withdrawal based on life expectancy" option (the most popular option I understand) and then combine that with deferment of Social Security to 70. The reason that might work out well, is that full withdrawal strategy uses the IRS Single Life Expectancy table until 70, and then switches to the Uniform Life Table at 70, which will drop the withdrawals substantially. What I discovered, based upon both my projected TSP balance and social security, is that the drop will approximately match up with the introduction of social security at 70. YMMV.

02nz
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by 02nz » Thu Jul 18, 2019 7:55 am

To be clear, using the L funds is not any cheaper (nor any more expensive) compared to using the same mix of individual funds. The expense ratios differ slightly (we're talking about 0.040 vs 0.041% for 2018) but that's just the weighted average of the underlying mix of C, G, etc. funds. This makes using L funds more attractive compared to say Vanguard's target retirement date funds, since you're not paying anything extra. (Vanguard's target retirement date funds have ERs around 0.13%, which is quite a bit higher, in proportional terms, than the Admiral shares of the underlying index funds; that's because the underlying funds are the higher-ER Investor shares. Those are closed to new investors as Admiral shares are now the default, with the same minimums that Investor shares used to carry.)

The L Funds are more conservative (higher bond allocation) for any given retirement date. So for example the L2040 fund is 28% in bonds (G+F) right now, while Vanguard's equivalent fund is just 16% in bonds. TSP has announced changes they'll be making to the L funds, to make them more aggressive: https://www.tsp.gov/whatsnew/Content/in ... clechanges

My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.

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tadamsmar
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tadamsmar » Thu Jul 18, 2019 10:06 am

02nz wrote:
Thu Jul 18, 2019 7:55 am
My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.
Just want to point out the people who design the L Fund see a reason to use the F Fund for a part to the bond allocation. Probably has something to do with their calculation of the efficient frontier. This allocation to F is never more than 8% of a TSP account, so it does not make a heck of a lot of difference, I guess.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tea_pirate » Thu Jul 18, 2019 10:14 am

I skip the L funds since I don't really want bonds at all at this point, and even if I did I'd put it all in G and nothing in F.

I'm 37% C, 13% S, and 50% I Fund which roughly mirrors world market capitalizations. I hold a corresponding amount of emerging markets in my Roth IRA to "complete" the I Fund until they finally get around to changing that to all world ex-US. That's close enough to set it and forget it to me since I shouldn't have to check that my contributions are in line with world market cap more than once every couple years.

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vineviz
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Thu Jul 18, 2019 10:17 am

tomwood wrote:
Thu Jul 18, 2019 1:52 am
Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
Most people don't hold a 3 or 4 Fund portfolio in their retirement account, if by "people" we're talking about normal, real-life people as opposed to Bogleheads.

The TSP target date funds are excellent and are only getting better.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

BigMoneyNoWhammies
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by BigMoneyNoWhammies » Thu Jul 18, 2019 10:35 am

tadamsmar wrote:
Thu Jul 18, 2019 4:28 am
tomwood wrote:
Thu Jul 18, 2019 1:31 am
Is it safe to say more people on this forum use a 3 Fund portfolio in their 401K or IRA accounts compared to a target date fund? Is the main reason for this target date fund fees? If everyone had access to the TSP, would the target date fund be more popular because of their low fees?

I’m in the group who currently uses a 3 Fund portfolio strategy in my retirement accounts but I’ve recebtly accepted a federal job which means my future retirement money will be in a TSP account. What is the recommendation from all on this forum with respect to a target date or 3-Fund portfolio in the TSP?
According to this, the fee (expense ratio) of the TSP L Fund, which is the target date fund, is the same or lower than the individual funds:

https://www.tsp.gov/InvestmentFunds/Fun ... atrix.html

What would the TSP 3-fund portfolio be? C,F,I? I would not do that. C,G,I would probably be better. But I think the L Fund is better because it includes some S and F and it is based on an efficient frontier analysis. (Of course, the guy who invented the efficient frontier says he just uses a 2-fund portfolio!)

TSP does not have a TSM (US total stock market) fund, and that is considered best for a 3 fund portfolio.

Your future money will be in the TSP, but I guess you or your spouse will have funds outside of the TSP?

We have some money in the TSP. We have an overall AA for all of our savings. All the TSP money ends up as part of our bond allocation, all of the TSP money is in the G Fund. This is consistent with our overall AA and seems to be best for us. The G Fund is a unique fund with the safety of a short duration bond and the higher return of a longer duration bond.
For most target date funds a higher expense ratio can certainly be a concern (as well as a tax drag if it's owned in a taxable account), but as mentioned above the TSP is an exception. Across the board TSP funds have some of the lowest ERs I've ever come across. I don't use the target date funds in my TSP because even the target date fund for the youngest set of federal employees is too conservative for my liking, so I adjust manually. Nothing to do with the expense. TSP target date funds are very worthwhile for people who want a solid set it and forget it fund.

02nz
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by 02nz » Thu Jul 18, 2019 10:42 am

tadamsmar wrote:
Thu Jul 18, 2019 10:06 am
02nz wrote:
Thu Jul 18, 2019 7:55 am
My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.
Just want to point out the people who design the L Fund see a reason to use the F Fund for a part to the bond allocation. Probably has something to do with their calculation of the efficient frontier. This allocation to F is never more than 8% of a TSP account, so it does not make a heck of a lot of difference, I guess.
I agree that whether one uses G or F for 6-8% of the portfolio makes very little difference. But it's worth noting the same people (consultants, not FRTIB) who designed the L funds also saw reason to allocate (currently) 73% to G and under 6% to F for the L Income fund. It almost seems they felt they had to allocate a token amount to F. Maybe there was a mandate that the L funds had to incorporate all of the available funds.

It's true that the F Fund has the potential to return slightly more, but it's at the expense of more risk and volatility. It's more efficient IMO to take the risk on the equities side. I think you can even make a reasonable argument that having all G for bonds allows one to hold a slightly lower bond allocation than one might otherwise - e.g., 20% all G instead of 25% in Vanguard Total Bond Market (which is a lot like TSP F).

azanon
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by azanon » Thu Jul 18, 2019 10:49 am

02nz wrote:
Thu Jul 18, 2019 10:42 am
tadamsmar wrote:
Thu Jul 18, 2019 10:06 am
02nz wrote:
Thu Jul 18, 2019 7:55 am
My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.
Just want to point out the people who design the L Fund see a reason to use the F Fund for a part to the bond allocation. Probably has something to do with their calculation of the efficient frontier. This allocation to F is never more than 8% of a TSP account, so it does not make a heck of a lot of difference, I guess.
I agree that whether one uses G or F for 6-8% of the portfolio makes very little difference. But it's worth noting the same people (consultants, not FRTIB) who designed the L funds also saw reason to allocate (currently) 73% to G and under 6% to F for the L Income fund. It almost seems they felt they had to allocate a token amount to F.

It's true that the F Fund has the potential to return slightly more, but it's comes at the expense of more risk and volatility. It's more efficient IMO to take the risk on the equities side. ..........
I would have to agree with tad on this one. It's not unusual at all for a small dose of a mediocre (or worse) investment to actually improve the risk-adjusted returns of a portfolio. A classic example (for non-TSP portfolios) is commodities which sometime show up at 5-7.5% in a portfolio because despite it's poor isolated returns, it actually improves the risk-adjusted return of a portfolio.

Taking risk solely on the equity side is a theory that always loses out when I've personally examined various portfolio combinations.

02nz
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by 02nz » Thu Jul 18, 2019 11:03 am

azanon wrote:
Thu Jul 18, 2019 10:49 am
02nz wrote:
Thu Jul 18, 2019 10:42 am
tadamsmar wrote:
Thu Jul 18, 2019 10:06 am
02nz wrote:
Thu Jul 18, 2019 7:55 am
My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.
Just want to point out the people who design the L Fund see a reason to use the F Fund for a part to the bond allocation. Probably has something to do with their calculation of the efficient frontier. This allocation to F is never more than 8% of a TSP account, so it does not make a heck of a lot of difference, I guess.
I agree that whether one uses G or F for 6-8% of the portfolio makes very little difference. But it's worth noting the same people (consultants, not FRTIB) who designed the L funds also saw reason to allocate (currently) 73% to G and under 6% to F for the L Income fund. It almost seems they felt they had to allocate a token amount to F.

It's true that the F Fund has the potential to return slightly more, but it's comes at the expense of more risk and volatility. It's more efficient IMO to take the risk on the equities side. ..........
I would have to agree with tad on this one. It's not unusual at all for a small dose of a mediocre (or worse) investment to actually improve the risk-adjusted returns of a portfolio. A classic example (for non-TSP portfolios) is commodities which sometime show up at 5-7.5% in a portfolio because despite it's poor isolated returns, it actually improves the risk-adjusted return of a portfolio.

Taking risk solely on the equity side is a theory that always looses out when I've personally examined various portfolio combinations.
Adding an asset class (like commodities in your example) that is poorly correlated with the rest of the portfolio can reduce volatility and/or improve performance. I think TSP G and F are too similar and too strongly correlated for this to really apply.

azanon
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by azanon » Thu Jul 18, 2019 11:15 am

02nz wrote:
Thu Jul 18, 2019 11:03 am
azanon wrote:
Thu Jul 18, 2019 10:49 am
02nz wrote:
Thu Jul 18, 2019 10:42 am
tadamsmar wrote:
Thu Jul 18, 2019 10:06 am
02nz wrote:
Thu Jul 18, 2019 7:55 am
My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.
Just want to point out the people who design the L Fund see a reason to use the F Fund for a part to the bond allocation. Probably has something to do with their calculation of the efficient frontier. This allocation to F is never more than 8% of a TSP account, so it does not make a heck of a lot of difference, I guess.
I agree that whether one uses G or F for 6-8% of the portfolio makes very little difference. But it's worth noting the same people (consultants, not FRTIB) who designed the L funds also saw reason to allocate (currently) 73% to G and under 6% to F for the L Income fund. It almost seems they felt they had to allocate a token amount to F.

It's true that the F Fund has the potential to return slightly more, but it's comes at the expense of more risk and volatility. It's more efficient IMO to take the risk on the equities side. ..........
I would have to agree with tad on this one. It's not unusual at all for a small dose of a mediocre (or worse) investment to actually improve the risk-adjusted returns of a portfolio. A classic example (for non-TSP portfolios) is commodities which sometime show up at 5-7.5% in a portfolio because despite it's poor isolated returns, it actually improves the risk-adjusted return of a portfolio.

Taking risk solely on the equity side is a theory that always looses out when I've personally examined various portfolio combinations.
Adding an asset class (like commodities in your example) that is poorly correlated with the rest of the portfolio can reduce volatility and/or improve performance. I think TSP G and F are too similar and too strongly correlated for this to really apply.
To explicitly state what I was agreeing with, I think the board chose the small percentage of F because including it was needed for the efficient frontier, rather than just giving a nod to the F fund. Of course, I can't know for certain, but given that F fund has beaten G by ~ 1% since inception, and is not perfectly correlated with the other assets, it's not a stretch by any imagination.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by 02nz » Thu Jul 18, 2019 11:33 am

azanon wrote:
Thu Jul 18, 2019 11:15 am
but given that F fund has beaten G by ~ 1% since inception,
During a time when interest rates had a huge decline overall, boosting F but not G fund returns.

Since those interest rates bottomed out around 2014, the G Fund has actually outpaced the F Fund.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by azanon » Thu Jul 18, 2019 11:37 am

02nz wrote:
Thu Jul 18, 2019 11:33 am
azanon wrote:
Thu Jul 18, 2019 11:15 am
but given that F fund has beaten G by ~ 1% since inception,
During a time when interest rates had a huge decline overall, boosting F but not G fund returns.

Since those interest rates bottomed out around 2014, the G Fund has actually outpaced the F Fund.
F fund outperformed G fund in 2014, 2016, 2017, and 2019-to-date. :sharebeer (source: www.tsptalk.com)

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Thu Jul 18, 2019 12:23 pm

azanon wrote:
Thu Jul 18, 2019 11:37 am
02nz wrote:
Thu Jul 18, 2019 11:33 am
azanon wrote:
Thu Jul 18, 2019 11:15 am
but given that F fund has beaten G by ~ 1% since inception,
During a time when interest rates had a huge decline overall, boosting F but not G fund returns.

Since those interest rates bottomed out around 2014, the G Fund has actually outpaced the F Fund.
F fund outperformed G fund in 2014, 2016, 2017, and 2019-to-date. :sharebeer (source: www.tsptalk.com)

F fund also outperformed G fund in 1989, 1991, 1993, 1995, 1997, 1998, 2000, 2001, 2002, 2007, 2008, 2009, 2010, 2011, and 2012.

Since 1988, a 60/40 TSP portfolio using the F fund gained over 11% more than the same portfolio using the G fund without any significant difference in volatility and maximum drawdown.

The G fund is obviously a good deal for the federal government, who gets to issue debt at a lower cost to G fund investors than to the general public, but it's not clear to me that most G fund investors understand the tradeoff they are making by accepting those lower returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by EngCapt1 » Thu Jul 18, 2019 12:25 pm

tomwood wrote:
Thu Jul 18, 2019 1:52 am
Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
tomwood:

I can't (and won't) speak for "most people", but I can tell you the multiple reasons why we DW and I don't use lifecycle/target date funds.

1. DW and I will receive pensions, so we plan to maintain a constant AA without any future "glide path"

2. We invest across multiple accounts and operate as 1 large portfolio: TSP, 457(b), Roth IRA x2 and taxable brokerage. See:Wiki: Asset Allocation In Multiple Accounts

3. Fund availability: We want bonds/fixed income in our AA and DW's TSP F & G are the best bond funds available to us. My 457(b) has an excellent low cost S&P Fund, but all other available funds there range from mediocre to poor.

4. Taxes: We invest in taxable brokerage, 22% tax bracket. Taxable bonds aren't favorable in our situation, and the lower yield on muni's don't make sense for us, either. So we're all equities here. See: Wiki: Tax-efficient Fund Placement

5. We use the TSP G Fund as our emergency fund. See: Wiki: Placing Cash Needs in a Tax-Advantaged Account

I believe the TSP Lifecycle Funds are excellent funds. We would use one of them if it wasn't for all of reasons the above.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by 02nz » Thu Jul 18, 2019 2:05 pm

vineviz wrote:
Thu Jul 18, 2019 12:23 pm
azanon wrote:
Thu Jul 18, 2019 11:37 am
02nz wrote:
Thu Jul 18, 2019 11:33 am
azanon wrote:
Thu Jul 18, 2019 11:15 am
but given that F fund has beaten G by ~ 1% since inception,
During a time when interest rates had a huge decline overall, boosting F but not G fund returns.

Since those interest rates bottomed out around 2014, the G Fund has actually outpaced the F Fund.
F fund outperformed G fund in 2014, 2016, 2017, and 2019-to-date. :sharebeer (source: www.tsptalk.com)

F fund also outperformed G fund in 1989, 1991, 1993, 1995, 1997, 1998, 2000, 2001, 2002, 2007, 2008, 2009, 2010, 2011, and 2012.

Since 1988, a 60/40 TSP portfolio using the F fund gained over 11% more than the same portfolio using the G fund without any significant difference in volatility and maximum drawdown.

The G fund is obviously a good deal for the federal government, who gets to issue debt at a lower cost to G fund investors than to the general public, but it's not clear to me that most G fund investors understand the tradeoff they are making by accepting those lower returns.
The federal funds rate was close to 10% in 1989. It came down to nearly 0 by the mid-2010's. That's a massive tailwind for a conventional bond fund. Conversely, when interest rates go up, the F fund doesn't look as good. And the F fund should return less over time - it has risks (interest rate and payment) that the G fund doesn't have. I think we'll just have to agree to disagree about whether those risks are worth the potential extra return.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by trueblueky » Thu Jul 18, 2019 2:30 pm

OP,
The G Fund is unique. https://www.bogleheads.org/wiki/G_Fund It has never had a bad day. You receive long-term treasury rates with no duration. Some people keep a TSP account solely for access to G Fund.

To create a "three-fund" portfolio in TSP requires 4 funds:
* C Fund = large US stocks
* S Fund = rest of US stocks
Combined these = Total US Stock Market
* I Fund = rest of the world stocks (soon. This is evolving to add emerging markets.
Those three are the equity portion of your AA.

* G Fund
* F Fund
These are choices in bonds. Either could be the bond portion of a 3-fund portfolio. I prefer G. Why take risk in bonds? Others have noted that the G Fund allows one to take additional risk in equities.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tadamsmar » Thu Jul 18, 2019 3:05 pm

02nz wrote:
Thu Jul 18, 2019 10:42 am
tadamsmar wrote:
Thu Jul 18, 2019 10:06 am
02nz wrote:
Thu Jul 18, 2019 7:55 am
My recommendation would be to skip the L funds, especially until the changes are fully implemented, as in the meantime they're not so "set it and forget it" at least for me. Instead use the G Fund for the entire bond allocation of your portfolio (not just of TSP). The G Fund is a uniquely good deal in giving you the returns of intermediate-term Treasuries, but without any interest rate risk. It never goes down in value, unlike normal bond funds, which drop in value when interest rates go up. The F Fund is more like a conventional total bond fund - it's a mix of Treasuries and corporate bonds and can go down in value. Nothing wrong with it, but I see no real reason to use it when the G Fund exists.
Just want to point out the people who design the L Fund see a reason to use the F Fund for a part to the bond allocation. Probably has something to do with their calculation of the efficient frontier. This allocation to F is never more than 8% of a TSP account, so it does not make a heck of a lot of difference, I guess.
I agree that whether one uses G or F for 6-8% of the portfolio makes very little difference. But it's worth noting the same people (consultants, not FRTIB) who designed the L funds also saw reason to allocate (currently) 73% to G and under 6% to F for the L Income fund. It almost seems they felt they had to allocate a token amount to F. Maybe there was a mandate that the L funds had to incorporate all of the available funds.
I doubt that there is a secret mandate to allocate 6% to F.
It's true that the F Fund has the potential to return slightly more, but it's at the expense of more risk and volatility.
They are probably just finding that a bit of F in the mix lowers risk-adjusted return. You seem to be looking at assets in isolation, they look at combinations and the impact of covariance.
It's more efficient IMO to take the risk on the equities side. I think you can even make a reasonable argument that having all G for bonds allows one to hold a slightly lower bond allocation than one might otherwise - e.g., 20% all G instead of 25% in Vanguard Total Bond Market (which is a lot like TSP F).
Not sure what you are adjusting. If you substitute stock+G for the F allocation of an L Fund then you are just increasing your risk-adjusted return according to the analysis that gave rise L Fund. They do substitute G for stocks+F (among other things) as they move toward lower risk

But the analysis is fuzzy math and I think it is partly based on assumptions about the future (not just the historical behavior of the assets). Shunning F is mostly harmless it the worst case, I think.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by bgyt » Thu Jul 18, 2019 3:15 pm

By the way, TSP can directly simulate TSM with a 80%/20% C/S allocation.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by travelogue » Thu Jul 18, 2019 3:25 pm

I like using the L funds for the bulk of my holdings and then adding a little extra allocation to individual funds to suit my AA. That way most of my portfolio is automatically rebalanced and on a glide path but I can tweak around the margins.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by jsprag » Thu Jul 18, 2019 3:34 pm

FederalFIRE wrote:
Thu Jul 18, 2019 5:12 am
I hold only L funds in my TSP right now and use a 3-fund in our taxable and IRAs. I do this because, as tadamsmar correctly pointed out, the expense ratios for lifecycle funds are the same as or lower than (by 0.001%) the individual funds. Since I'm in an accumulation and growth phase, the blend used in the L2050 basically fits what I would be targeting anyway. I find it way easier to just buy everything in L2050 and forget about it.
I'm doing the exact same thing with TSP (100% L2050) for the same reasons.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Thu Jul 18, 2019 3:45 pm

02nz wrote:
Thu Jul 18, 2019 2:05 pm
The federal funds rate was close to 10% in 1989. It came down to nearly 0 by the mid-2010's. That's a massive tailwind for a conventional bond fund. Conversely, when interest rates go up, the F fund doesn't look as good.

From July, 2011 to June, 2019 the effective Federal Funds Rate rose from 0.07% to 2.42%. Over that period of time, the F fund has substantially outperformed the G fund (about 70% cumulative outperformance, in fact).

Image

The nature of the G fund makes it hard, I think, to intuit its role in a portfolio. It behaves more like a stable value fund with a better-than-average yield, and less like a a bond fund, than I think many TSP participants assume.

02nz wrote:
Thu Jul 18, 2019 2:05 pm
And the F fund should return less over time - it has risks (interest rate and payment) that the G fund doesn't have. I think we'll just have to agree to disagree about whether those risks are worth the potential extra return.
I think you meant to say it should return MORE, and that's definitely true. However, investors shouldn't evaluate the risk-adjusted return of the G fund versus the F fund individually unless they own 0% in stocks. Risk-adjusted return should be measured at the portfolio level, and except for extremely risk-averse investors there will be some combination of stocks and the F fund that offers better expected return for the same expected volatility that a combination of stocks and the G fund can offer.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by 02nz » Thu Jul 18, 2019 5:07 pm

vineviz wrote:
Thu Jul 18, 2019 3:45 pm
I think you meant to say it should return MORE, and that's definitely true. However, investors shouldn't evaluate the risk-adjusted return of the G fund versus the F fund individually unless they own 0% in stocks. Risk-adjusted return should be measured at the portfolio level, and except for extremely risk-averse investors there will be some combination of stocks and the F fund that offers better expected return for the same expected volatility that a combination of stocks and the G fund can offer.
Point taken on looking at whole-portfolio volatility and risk. And yes I meant to say F should return more. But this reminds me of the suggestion some have made: If you want to get greater potential returns from the F fund, which still has a big chunk in treasuries, then it’s better to combine the G fund with a corporate bond fund outside the TSP, e.g., Vanguard Intermediate-Term Corporate Bond Index (VICSX), rather than with the F fund. In other words, stick to G for your treasuries.

PV shows VICSX returning quite a bit more over the past decade (5.75% CAGR) than Total Bond Market Index (VBTLX, 3.61% CAGR). The former has a weak positive correlation with the U.S. stock market while the latter has a (slightly stronger) negative correlation. Thoughts on this approach, beyond the added complexity?

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by nps » Thu Jul 18, 2019 5:49 pm

02nz wrote:
Thu Jul 18, 2019 5:07 pm
vineviz wrote:
Thu Jul 18, 2019 3:45 pm
I think you meant to say it should return MORE, and that's definitely true. However, investors shouldn't evaluate the risk-adjusted return of the G fund versus the F fund individually unless they own 0% in stocks. Risk-adjusted return should be measured at the portfolio level, and except for extremely risk-averse investors there will be some combination of stocks and the F fund that offers better expected return for the same expected volatility that a combination of stocks and the G fund can offer.
Point taken on looking at whole-portfolio volatility and risk. And yes I meant to say F should return more. But this reminds me of the suggestion some have made: If you want to get greater potential returns from the F fund, which still has a big chunk in treasuries, then it’s better to combine the G fund with a corporate bond fund outside the TSP, e.g., Vanguard Intermediate-Term Corporate Bond Index (VICSX), rather than with the F fund. In other words, stick to G for your treasuries.
I agree with this. The F Fund is more than 40 percent treasuries. Why invest in those intermediate term bonds when you can get similar duration and associated yield but without term risk? If you want to make a bet on falling rates you could do that with long term bonds.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Thu Jul 18, 2019 5:59 pm

02nz wrote:
Thu Jul 18, 2019 5:07 pm
But this reminds me of the suggestion some have made: If you want to get greater potential returns from the F fund, which still has a big chunk in treasuries, then it’s better to combine the G fund with a corporate bond fund outside the TSP, e.g., Vanguard Intermediate-Term Corporate Bond Index (VICSX), rather than with the F fund. In other words, stick to G for your treasuries.

PV shows VICSX returning quite a bit more over the past decade (5.75% CAGR) than Total Bond Market Index (VBTLX, 3.61% CAGR). The former has a weak positive correlation with the U.S. stock market while the latter has a (slightly stronger) negative correlation. Thoughts on this approach, beyond the added complexity?
In general I'd say the evidence is pretty clear that corporate bonds add nothing of significance to a portfolio (apart from complexity, as you observe). Corporate bonds can almost entirely be replicated by some combination of equities and Treasury bonds and therefore virtually never offer portfolio diversification benefits to the investor.

A pure Treasury fund (preferably long-term Treasury bonds, if your investment horizon is long enough) plus a diversified equity portfolio will almost always be the most efficient combination of assets for a portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by azanon » Thu Jul 18, 2019 6:13 pm

02nz wrote:
Thu Jul 18, 2019 2:05 pm
vineviz wrote:
Thu Jul 18, 2019 12:23 pm
azanon wrote:
Thu Jul 18, 2019 11:37 am
02nz wrote:
Thu Jul 18, 2019 11:33 am
azanon wrote:
Thu Jul 18, 2019 11:15 am
but given that F fund has beaten G by ~ 1% since inception,
During a time when interest rates had a huge decline overall, boosting F but not G fund returns.

Since those interest rates bottomed out around 2014, the G Fund has actually outpaced the F Fund.
F fund outperformed G fund in 2014, 2016, 2017, and 2019-to-date. :sharebeer (source: www.tsptalk.com)

F fund also outperformed G fund in 1989, 1991, 1993, 1995, 1997, 1998, 2000, 2001, 2002, 2007, 2008, 2009, 2010, 2011, and 2012.

Since 1988, a 60/40 TSP portfolio using the F fund gained over 11% more than the same portfolio using the G fund without any significant difference in volatility and maximum drawdown.

The G fund is obviously a good deal for the federal government, who gets to issue debt at a lower cost to G fund investors than to the general public, but it's not clear to me that most G fund investors understand the tradeoff they are making by accepting those lower returns.
The federal funds rate was close to 10% in 1989. It came down to nearly 0 by the mid-2010's. That's a massive tailwind for a conventional bond fund. Conversely, when interest rates go up, the F fund doesn't look as good. And the F fund should return less over time - it has risks (interest rate and payment) that the G fund doesn't have. I think we'll just have to agree to disagree about whether those risks are worth the potential extra return.
02nz - I want to make sure my original opinion didn't get lost in the discussion. In practice, I agree mostly with anyone preferring G fund over F fund (you for example) because as I originally stated, I support the L fund allocation which has ~ a 9 to 1 weighting of G vs. F. So our discussion was in a very small margin (9 to 1 G and F, vs 100% G). It'll make very little difference, as you said.

I'm trusting the team of experts constructed this portfolio correctly. Hopefully its fair to say, that they did just that.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by LinusP » Thu Jul 18, 2019 6:36 pm

bgyt wrote:
Thu Jul 18, 2019 3:15 pm
By the way, TSP can directly simulate TSM with a 80%/20% C/S allocation.
Actually, it's closer to 87%/13% these days. See Thrift Savings Plan in the wiki for a reference.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by dharrythomas » Thu Jul 18, 2019 7:17 pm

All of my TSP account is in L funds but then I use Target Retirement in my Traditional IRA.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by gclancer » Fri Jul 19, 2019 7:58 am

The domestic funds are more expensive than over the counter total market funds and more complicated to manage so (assuming you have assets invested elsewhere in addition to TSP) I wouldn’t mess with them. Once the I Fund changes indexes (supposedly later this year?) that will be the cheapest total international fund available to you. The G Fund has lots of merits which you can research here. Thus, assuming outside assets to balance your portfolio a two fund solution (I and G) may be most optimal.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tomwood » Fri Jul 19, 2019 5:28 pm

vineviz wrote:
Thu Jul 18, 2019 12:23 pm


The G fund is obviously a good deal for the federal government, who gets to issue debt at a lower cost to G fund investors than to the general public, but it's not clear to me that most G fund investors understand the tradeoff they are making by accepting those lower returns.
I don’t understand the tradeoff. Is the G Fund not as great as some earlier posts are suggesting? Would you please explain this to a novice like me? Thanks

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by retiredjg » Fri Jul 19, 2019 5:46 pm

Bogleheads like the G Fund because it pays a lot for the risk taken. But it does not pay a lot and generally does not pay as much as the F Fund. Boglehead adoration of the G fund is about the bang for the buck, not just the bang.

You can't go wrong using either fund. They are both good choices. I use both (but I'm way older than you and retired). I used only F Fund while working. That was before I understood the why the G fund was also a good choice.

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by grabiner » Fri Jul 19, 2019 8:11 pm

vineviz wrote:
Thu Jul 18, 2019 12:23 pm
Since 1988, a 60/40 TSP portfolio using the F fund gained over 11% more than the same portfolio using the G fund without any significant difference in volatility and maximum drawdown.

The G fund is obviously a good deal for the federal government, who gets to issue debt at a lower cost to G fund investors than to the general public, but it's not clear to me that most G fund investors understand the tradeoff they are making by accepting those lower returns.
The second paragraph does not follow from the first. The G fund yield is the same as the yield on outstanding Treasuries of four years or more; it doesn't save the government money, other than by attracting more investors. The G fund yield is lower than the F fund yield because the F fund includes corporate bonds with more risk.

The risk surprised me at first; it is the result of what happened in 2008, when the drawdown happened. When the market crashed in 2008, Treasury prices rose and corporate bond prices fell. The F fund, which holds both, was relatively steady. The G fund missed the benefit from rising Treasuries, as it doesn't change price when rates change. I believe the G fund would have been a much better diversifier than the F fund in 1974, when the stock-market decline was accompanied by rising inflation and interest rates.
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Fri Jul 19, 2019 8:15 pm

tomwood wrote:
Fri Jul 19, 2019 5:28 pm
I don’t understand the tradeoff. Is the G Fund not as great as some earlier posts are suggesting? Would you please explain this to a novice like me?
One of the many behavioral biases that plagues investors is a tendency to pay too much attention to the attributes of their individual assets and not enough attention to the attributes of the portfolio. It's a classic problem, one that modern portfolio theory itself was developed to combat.

The basic gist of it is that investors should not care whether the G fund or F fund is individually better. Instead, what matters is whether a portfolio containing one fund or the other is better (however you want to define "better").

I think people to tend to think of the G Fund as "great" because individually it has some appeal: decent returns and not much volatility. But my view is that when you combine the G Fund with stocks (e.g. in a 60/40 portfolio), those appealing attributes become negatives instead of positives.

The G Fund is a stable value fund: it's guaranteed to never lose money. Over time, however, because of the lower risk it has lower returns. Here's a comparison of two hypothetical 60/40 portfolios with the same stocks as each other: one fund is 40% in G Fund and the other is 40% in F Fund. You can see that the slightly higher return of the F Fund compounds over time to provide a distinctly higher rate of growth: over 1% more per year, on average.

Image

I think you should also be able to see that the two portfolios mostly rise and fall by similar amounts: the portfolio containing the F Fund is roughly as volatile as the portfolio containing the G fund, but it has provided higher overall growth. The G Fund can never lose money, it's true, but the worst 12-month return for the F Fund from 2003 to now is -2.26%: no one would consider it aggressive even by bond fund standards.

The main appeal of the G Fund seems to be its safety, but unless your portfolio holds no stocks it is not necessarily true the overall portfolio is safer with the G Fund than the F Fund. When combining two uncorrelated assets in a portfolio, the "free lunch effect" of diversification is actually greater when the diversifying asset is MORE volatile. This mathematical reality seems counterintuitive to many investors, leading them to pursue riskier portfolios when their intent is to do the opposite.

One way to illustrate how this works in a straight-forward way is to look a sample of the worst months for stocks. In some ways, this is when you want your bond fund to really help you out the most. I took the 20 worst months for the C Fund and computed the average return during those months for the C Fund, G Fund, and F Fund. The average one-month return of the C Fund was -7.18%, for the G Fund it was +0.24%, and for the F Fund it was +0.60%.

Image

Numerically that's not a big difference, but it is still instructive: during the worst months for stocks, the F Fund buffered the portfolio MORE than the G Fund. And the F Fund had higher returns than the G Fund during the BEST months for stocks as well.

To sum up, a 60/40 portfolio using the F Fund offers significantly more return with no significant difference in risk. So while I agree the G Fund is a good fund, it's probably not the best bond fund in the TSP for most investors.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tomwood » Fri Jul 19, 2019 9:45 pm

grabiner wrote:
Fri Jul 19, 2019 8:11 pm

The F fund, which holds both, was relatively steady. The G fund missed the benefit from rising Treasuries, as it doesn't change price when rates change. I believe the G fund would have been a much better diversifier than the F fund in 1974, when the stock-market decline was accompanied by rising inflation and interest rates.
You sound quite knowledgeable of both these funds.
If were staring a new federal job, currently hold a boglehead suggested 3-Fund portfolio in your 401k before this new job and have 25-30 more years of working and investing in this TSP retirement plan, would you be using the F or G fund? Thank you

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by tomwood » Sat Jul 20, 2019 5:01 am

vineviz wrote:
Fri Jul 19, 2019 8:15 pm

To sum up, a 60/40 portfolio using the F Fund offers significantly more return with no significant difference in risk. So while I agree the G Fund is a good fund, it's probably not the best bond fund in the TSP for most investors.

Thank you for breaking this down in such detail.
It has been suggested in earlier posts above that the security of the G fund allows for a higher equity percentage in a portfolio without assuming much more risk. Is this true? And does that change the example you wrote above about which portfolio offers a higher return?

For example, how would a 65/35 or 70/30 portfolio with the G fund compare to your 60/40 example using the F fund?

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by fortyofforty » Sat Jul 20, 2019 6:54 am

Thanks to vineviz for providing a contrarian view of the benefit of F over G for many investors. I say "contrarian" because, when I've suggested anything close to this here, the view was roundly criticized. Don't forget, there's nothing saying you can't break up your "bond" or "cash" or "safe" portion of your TSP portfolio into two parts, one part F and one part G.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Sat Jul 20, 2019 9:55 am

tomwood wrote:
Sat Jul 20, 2019 5:01 am
It has been suggested in earlier posts above that the security of the G fund allows for a higher equity percentage in a portfolio without assuming much more risk. Is this true?
No, it's not true.

For any given equity allocation, the G Fund and the F Fund portfolios have the same amount of risk.

If you increase your equity allocation because you use the G Fund, you're taking on more portfolio risk (as measured by volatility, maximum drawdown, downside deviation, probability of portfolio depletion, etc.) relative to using a smaller equity allocation with the F Fund.

From 2003 to present, you'd have needed to be 68% stocks and 32% G Fund to equal the same return as 60/40 using the F Fund all while taking on 14% more volatility.

This is primarily because in a 60/40 portfolio using either the G Fund or the F Fund, the equity portion of the portfolio is contributing essentially 100% of the risk to the portfolio. It's a little better with the F Fund (where equities contribute only 99.99% of the risk) than with the F Fund (where equities contribute 100.13% of the risk1).

To be fair the differences between using the two funds are not incredibly dramatic in dollar terms. Starting with $10,000 in 2003 and contributing $600/month to a 60/40 portfolio you'd have $304k using the F Fund and $288k using the G Fund. But the F Fund portfolio had slightly less risk with slightly higher returns, so I'm left baffled by the near-universal preference for the G Fund - at least during the investor's working years.

The G Fund is a great stable value fund, so for older retirees who have a need to keep a chunk of their portfolio in "cash" I can see the utility of the G Fund. For most other investors, though, I think it's overrated.

1I know that's a weird-sounding statement, but the explanation is technical probably not incredibly relevant to the current topic.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredjg
Posts: 38491
Joined: Thu Jan 10, 2008 12:56 pm

Re: TSP 3-Funds or TSP Target Date Fund?

Post by retiredjg » Sat Jul 20, 2019 10:03 am

vineviz wrote:
Sat Jul 20, 2019 9:55 am
tomwood wrote:
Sat Jul 20, 2019 5:01 am
It has been suggested in earlier posts above that the security of the G fund allows for a higher equity percentage in a portfolio without assuming much more risk. Is this true?
No, it's not true.
I think this is a matter of opinion.

I'm not saying that I have an opinion (I don't) but reasonable and intelligent minds will give you different answers on this question.

I do think everyone would agree that if the G Fund does allow for a higher equity percentage, it is a small difference. Maybe 5% higher and that small amount of change is not going to affect anything much.

Tdubs
Posts: 859
Joined: Tue Apr 24, 2018 7:50 pm

Re: TSP 3-Funds or TSP Target Date Fund?

Post by Tdubs » Sat Jul 20, 2019 10:23 am

vineviz wrote:
Sat Jul 20, 2019 9:55 am
tomwood wrote:
Sat Jul 20, 2019 5:01 am
It has been suggested in earlier posts above that the security of the G fund allows for a higher equity percentage in a portfolio without assuming much more risk. Is this true?
No, it's not true.

For any given equity allocation, the G Fund and the F Fund portfolios have the same amount of risk.

If you increase your equity allocation because you use the G Fund, you're taking on more portfolio risk (as measured by volatility, maximum drawdown, downside deviation, probability of portfolio depletion, etc.) relative to using a smaller equity allocation with the F Fund.

From 2003 to present, you'd have needed to be 68% stocks and 32% G Fund to equal the same return as 60/40 using the F Fund all while taking on 14% more volatility.

This is primarily because in a 60/40 portfolio using either the G Fund or the F Fund, the equity portion of the portfolio is contributing essentially 100% of the risk to the portfolio. It's a little better with the F Fund (where equities contribute only 99.99% of the risk) than with the F Fund (where equities contribute 100.13% of the risk1).

To be fair the differences between using the two funds are not incredibly dramatic in dollar terms. Starting with $10,000 in 2003 and contributing $600/month to a 60/40 portfolio you'd have $304k using the F Fund and $288k using the G Fund. But the F Fund portfolio had slightly less risk with slightly higher returns, so I'm left baffled by the near-universal preference for the G Fund - at least during the investor's working years.

The G Fund is a great stable value fund, so for older retirees who have a need to keep a chunk of their portfolio in "cash" I can see the utility of the G Fund. For most other investors, though, I think it's overrated.

1I know that's a weird-sounding statement, but the explanation is technical probably not incredibly relevant to the current topic.
Given its comparable interest rate (in fact inferior in some cases) to a bunch of other savings and MM accounts, isn't it's real value convenience for holding cash in tax-deferred and advantaged plans? I've not understood it's heavy allocation in L funds either.

ChrisC
Posts: 848
Joined: Tue Jun 19, 2012 9:10 am
Location: North Carolina

Re: TSP 3-Funds or TSP Target Date Fund?

Post by ChrisC » Sat Jul 20, 2019 10:29 am

EngCapt1 wrote:
Thu Jul 18, 2019 12:25 pm
tomwood wrote:
Thu Jul 18, 2019 1:52 am
Why do most people hold a 3 or 4 Fund portfolio in their retirement account and not a target date fund? Is it the higher fees for target date funds? Or other factors?
tomwood:

I can't (and won't) speak for "most people", but I can tell you the multiple reasons why we DW and I don't use lifecycle/target date funds.

1. DW and I will receive pensions, so we plan to maintain a constant AA without any future "glide path"

2. We invest across multiple accounts and operate as 1 large portfolio: TSP, 457(b), Roth IRA x2 and taxable brokerage. See:Wiki: Asset Allocation In Multiple Accounts

3. Fund availability: We want bonds/fixed income in our AA and DW's TSP F & G are the best bond funds available to us. My 457(b) has an excellent low cost S&P Fund, but all other available funds there range from mediocre to poor.

4. Taxes: We invest in taxable brokerage, 22% tax bracket. Taxable bonds aren't favorable in our situation, and the lower yield on muni's don't make sense for us, either. So we're all equities here. See: Wiki: Tax-efficient Fund Placement

5. We use the TSP G Fund as our emergency fund. See: Wiki: Placing Cash Needs in a Tax-Advantaged Account

I believe the TSP Lifecycle Funds are excellent funds. We would use one of them if it wasn't for all of reasons the above.
I'm taking a different approach than you and will likely have my entire TSP account (including future rollovers from a 401k) enrolled in a Lifecycle Fund. Right now, I have my entire, low 2 comma 401K account in a 2030 TRowe Price Target Fund, and my TSP account in 65% (CS)- 35 (G). We have other retirement accounts (Roth IRAs and 457(b) accounts) in balanced index funds and individual equities. Our taxable accounts are primarily in stupid cash levels. We're retired and our pensions (CSRS and a modest county annuity for my DW) meet our all living needs and also modestly fund 529 accounts for grandchildren, and I occasionally do some part-time work.

We don't think we'll ever use/spend our retirement accounts for any future expense. In the worse case scenario, if we faced agonizing and costly LTC we have LTCi and we will likely transition into a CCRC in a few years from now -- this is belt and suspender's protection for us. So, we've come to the conclusion that we're really saving these retirement accounts for our children. Two of my children are in higher tax brackets than we are currently (24%) and the remaining one will likely wind up higher than our bracket once we finished all our Roth conversions. In light of this, we're inclined to just set the retirement accounts in target funds that are driven by the ages of our children -- this might be 2050 target funds in TSP and elsewhere. Set it and leave it makes a lot of sense to us at this stage of lives -- I'm really tired of managing stuff.
Last edited by ChrisC on Sat Jul 20, 2019 11:31 am, edited 1 time in total.

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