Is G-fund safer today than previously?

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USAFperio
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Is G-fund safer today than previously?

Post by USAFperio »

My apologies if I don't phrase this the right way, but . . .

From what I've been reading, new investment dollars in bonds today are not predicted to do well, based on low yields and a low projections for the next 10 years. I still have a lot of money in Total Bond Market and in munis (in taxable), but I'm not putting new dollars into bond funds now--even though my target asset allocation says I should--due to concerns I'm reading from Bogleheads who are smarter on these things than I am.

BUT . . . if I have access to the G-fund (I do), would you consider it to be a better investment now, by comparison, than other bond index funds? I realize it's a free lunch in that it can't lose money, but I'm wondering if the yields we'd anticipate with G-fund will be similarly ultra-low along the same lines as treasuries and other bonds, or would we expect G-fund to do better b/c of it's "uniqueness".

In short, are new dollars in G-fund today expected to do better than new dollars today in Total Bond Market and/or other commonly-chosen bond index funds?

Thanks for the help.
Last edited by USAFperio on Thu Apr 30, 2020 9:33 pm, edited 1 time in total.
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Re: Is G-fund safer today than previously?

Post by striker79 »

G fund is the best instrument you will find for return vs risk. It is 0 risk. Investing is all about return vs risk. The portion of your portfolio you want in bonds or fixed income, I say put it in G fund and have an aggressive allocation in stocks. So many investors wish they could have money in the G fund.
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Re: Is G-fund safer today than previously?

Post by Mel Lindauer »

striker79 wrote: Thu Apr 30, 2020 2:33 pm ...So many investors wish they could have money in the G fund.
Yes, and I'm one of them! I wish it was available to all investors. :)
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Re: Is G-fund safer today than previously?

Post by delamer »

I don’t know the answer to your question.

But the G fund invests in short-term Treasuries. Which means it avoids municipal bonds and corporate bonds, which is a good thing in the current economic environment.
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Re: Is G-fund safer today than previously?

Post by vineviz »

USAFperio wrote: Thu Apr 30, 2020 11:26 am
In short, are new dollars in G-fund today expected to do better than new dollars today in Total Bond Market and/or other commonly-chosen bond index funds?
The G-fund is a really excellent money market fund (or stable value fund), and if that's what you need then it's hard to beat.

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

Post by rkhusky »

G Fund returns will go down as Intermediate Treasury bonds go down. In fact it’s been going down for awhile.
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Re: Is G-fund safer today than previously?

Post by striker79 »

With that same logic, I'd have a hard time recommending bonds over stocks. You have to view your investment in terms of return vs risk. G fund typically is at least 2% return and will never go down in value.
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Re: Is G-fund safer today than previously?

Post by vineviz »

striker79 wrote: Thu Apr 30, 2020 3:29 pm With that same logic, I'd have a hard time recommending bonds over stocks. You have to view your investment in terms of return vs risk. G fund typically is at least 2% return and will never go down in value.
If you're going to look at the ratio of risk and return, the only valid place to do that is at the portfolio level (not at the individual asset level). This is, in part, why I mentioned "diversification" in my post.

A portfolio of stocks & F-fund has a higher expected return/risk (i.e Sharpe) ratio than a portfolio of stocks & G-fund.
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Re: Is G-fund safer today than previously?

Post by MichDad »

I think your current age and expected age of retirement are relevant to this question. If you're young and many years from retirement, the G Fund may not be all that useful. If you're in your 50s or older and are close to or in retirement, the G Fund is terrific. I didn't voluntarily invest into the G Fund until I was age 61 and a year from retirement. Until that time, I was invested only in the C, S, and I Funds (no G, F, or L Funds). Today, the G Fund makes up more than one-third of my wife's and my combined retirement portfolio. Everything we hold outside the G Fund in in widely-diversified, low expense US and international equities index funds. We're using the G Fund to bridge us to after I turn age 70 and will collect maximum Social Security benefits.

I haven't worried one bit about the current downturn in the US and international equities markets given our G Fund holding, my FERS pension, and some rental income.

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Re: Is G-fund safer today than previously?

Post by USAFperio »

All, thank you kindly for your courteous and helpful responses. Best wishes and be safe :)
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Re: Is G-fund safer today than previously?

Post by Mel Lindauer »

USAFperio wrote: Thu Apr 30, 2020 9:33 pm All, thank you kindly for your courteous and helpful responses. Best wishes and be safe :)
Based on your user name, it appears that you're either currently serving, or did serve, in the USAF. If so, thank you for your service.
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Re: Is G-fund safer today than previously?

Post by USAFperio »

Thank you, Mr. Lindauer, and I'd say the same to you . . . thank you for your service to our nation as a Marine.
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Re: Is G-fund safer today than previously?

Post by Kbg »

rkhusky wrote: Thu Apr 30, 2020 3:27 pm G Fund returns will go down as Intermediate Treasury bonds go down. In fact it’s been going down for awhile.
What are you talking about? It has never had negative day, week, month or year since inception (nominal).
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Re: Is G-fund safer today than previously?

Post by 02nz »

Kbg wrote: Thu Apr 30, 2020 11:54 pm
rkhusky wrote: Thu Apr 30, 2020 3:27 pm G Fund returns will go down as Intermediate Treasury bonds go down. In fact it’s been going down for awhile.
What are you talking about? It has never had negative day, week, month or year since inception (nominal).
“Returns going down” meaning decreasing returns as interest rates fall. Not going negative. Not share price going down.
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Re: Is G-fund safer today than previously?

Post by rkhusky »

Kbg wrote: Thu Apr 30, 2020 11:54 pm
rkhusky wrote: Thu Apr 30, 2020 3:27 pm G Fund returns will go down as Intermediate Treasury bonds go down. In fact it’s been going down for awhile.
What are you talking about? It has never had negative day, week, month or year since inception (nominal).
G Fund return for April 2019 was about 2.6% annualized. March 2020 return was about 1.3%.
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Re: Is G-fund safer today than previously?

Post by BruinBones »

MichDad wrote: Thu Apr 30, 2020 3:38 pm I think your current age and expected age of retirement are relevant to this question. If you're young and many years from retirement, the G Fund may not be all that useful. If you're in your 50s or older and are close to or in retirement, the G Fund is terrific. I didn't voluntarily invest into the G Fund until I was age 61 and a year from retirement. Until that time, I was invested only in the C, S, and I Funds (no G, F, or L Funds). Today, the G Fund makes up more than one-third of my wife's and my combined retirement portfolio. Everything we hold outside the G Fund in in widely-diversified, low expense US and international equities index funds. We're using the G Fund to bridge us to after I turn age 70 and will collect maximum Social Security benefits.

I haven't worried one bit about the current downturn in the US and international equities markets given our G Fund holding, my FERS pension, and some rental income.

MichDad
Then the answer to his original question is yes - if you are at, or nearing, retirement (ie, not in accumulation phase).
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Re: Is G-fund safer today than previously?

Post by beanie »

rkhusky wrote: Fri May 01, 2020 7:17 am ... March 2020 return was about 1.3%.
I calculate current yield for the G Fund (as of May 1) at around 0.70%.

The TSP website gives past monthly returns to only two decimal points. The stated April monthly return of 0.07% is 0.84% annualized. But I can calculate a more current yield based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity.

This is now well below many online bank savings accounts.

How much worse can it get? I'm not at all clear what will happen if 4+ Treasury yields go negative. Can the G Fund interest rate go below zero?
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Re: Is G-fund safer today than previously?

Post by rkhusky »

beanie wrote: Fri May 01, 2020 7:46 pm How much worse can it get? I'm not at all clear what will happen if 4+ Treasury yields go negative. Can the G Fund interest rate go below zero?
I think the G Fund is guaranteed to not lose principal, so 0% is the worst it can get.
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Re: Is G-fund safer today than previously?

Post by tadamsmar »

I don't think you are asking the right questions. The question is what is a good AA in the context of your overall plan (usually a retirement plan around here). Deciding on the "best" fund is not the game, unless it's about picking a target date fund.

The L funds are one answer to this question. You hold some G and some Total Bond. That is what I do. But there are some who think you should hold no G at all. Unfortunately, it's hard to get a specific recommendation about how much G to hold if you are are using funds different from the TSP options. The L Funds are the only guide developed by experts that I know of: https://www.tsp.gov/PDF/formspubs/FundsL.pdf

Is the G-fund safer today that previously? Basically, no. It has always been very safe.
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Re: Is G-fund safer today than previously?

Post by vasaver »

striker79 wrote: Thu Apr 30, 2020 2:33 pm G fund is the best instrument you will find for return vs risk. It is 0 risk. Investing is all about return vs risk. The portion of your portfolio you want in bonds or fixed income, I say put it in G fund and have an aggressive allocation in stocks. So many investors wish they could have money in the G fund.
I don't know if it really is 0 risk. Our president is on the record saying "Now we're in a different situation with a country, but I would borrow knowing that if the economy crashed you could make a deal." Suggesting that bond holders could take a 'haircut'. That doesn't sound like 0 risk to me.
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Re: Is G-fund safer today than previously?

Post by Ki_poorrichard »

tadamsmar wrote: Fri May 01, 2020 10:40 pm Is the G-fund safer today that previously? Basically, no. It has always been very safe.
+1
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Re: Is G-fund safer today than previously?

Post by Ki_poorrichard »

Kbg wrote: Thu Apr 30, 2020 11:54 pm
rkhusky wrote: Thu Apr 30, 2020 3:27 pm G Fund returns will go down as Intermediate Treasury bonds go down. In fact it’s been going down for awhile.
What are you talking about? It has never had negative day, week, month or year since inception (nominal).
+1
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Re: Is G-fund safer today than previously?

Post by cresive »

USAFperio wrote: Thu Apr 30, 2020 11:26 am My apologies if I don't phrase this the right way, but . . .

From what I've been reading, new investment dollars in bonds today are not predicted to do well, based on low yields and a low projections for the next 10 years. I still have a lot of money in Total Bond Market and in munis (in taxable), but I'm not putting new dollars into bond funds now--even though my target asset allocation says I should--due to concerns I'm reading from Bogleheads who are smarter on these things than I am.

BUT . . . if I have access to the G-fund (I do), would you consider it to be a better investment now, by comparison, than other bond index funds? I realize it's a free lunch in that it can't lose money, but I'm wondering if the yields we'd anticipate with G-fund will be similarly ultra-low along the same lines as treasuries and other bonds, or would we expect G-fund to do better b/c of it's "uniqueness".

In short, are new dollars in G-fund today expected to do better than new dollars today in Total Bond Market and/or other commonly-chosen bond index funds?

Thanks for the help.

I may be reading your question incorrectly, so forgive me if I am off base. But to answer your question, the G fund is a very good vehicle to give you decent interest with effectively zero risk. The G fund should out perform money markets, online savings, etc. because each days interest is base on an average of Gov. bonds. For this reason, the G fund can't be beat as a safe haven for money. However, you get what you pay for. In my limited (couple years) experience, the G fund does not out perform other bond funds for gains. In my experience, the F fund, or a Barclay's total bond fund will outperform the G fund for growth. However, these funds do have a down side, and can lose money in a bad bond market.

The way I look at it, you can use the G fund to protect your gains. It will provide interest to keep up with inflation but don't look at it as a growth vehicle. If you want more growth you have to take more risk. Minimal risk would be F fund or another bond index fund. This will provide some growth with associated minor risk. If you want more than minimal growth you have to expand into equities.

That being said, I plan to use the G fund during my retirement to house a couple years expenditures to guard against sequence of returns risk. If I were to retire in early February 2020, I would be really happy to have my next few years of expenses in a G fund. For later years expenses (e.g. years 3-5), I will be using the F fund, or an equivalent. I want a bit more growth, but not too much risk. I will increase equities exposure for anything after 5 years.

Ben
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Re: Is G-fund safer today than previously?

Post by Ketawa »

rkhusky wrote: Fri May 01, 2020 7:17 am G Fund return for April 2019 was about 2.6% annualized. March 2020 return was about 1.3%.
beanie wrote: Fri May 01, 2020 7:46 pm I calculate current yield for the G Fund (as of May 1) at around 0.70%.

The TSP website gives past monthly returns to only two decimal points. The stated April monthly return of 0.07% is 0.84% annualized. But I can calculate a more current yield based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity.
There's no need to guess or manually calculate the G Fund rate. It is always equal to the TSP loan rate. TSP: Current Limits and Rates

2020-01 2.000%
2020-02 1.625%
2020-03 1.250%
2020-04 0.875%
2020-05 0.750%

Regarding the OP, or G Fund vs F Fund, the G Fund isn't any safer that it was previously, but it's still a free lunch. 0.75% is better than 10 year Treasuries without any interest rate risk. Why hold all those Treasuries in the F Fund that yield less than 0.75%? I could do better without any additional risk by holding a barbell of G Fund and EDV, plus a separate corporate bond fund. Or stick with G Fund and take my risk on the equity side.

Personally, I reduced my G Fund holdings to a minimal amount and shifted to using a Special 17-Month Share Certificate at NFCU with APY 2.25% that allows adding funds throughout its term. However, it is no longer being offered publicly for an obvious reason; interest rates have plummeted. If I was limited to only tax-advantaged accounts, I would still be holding only the G Fund, perhaps with some EDV: Extend Duration from Zero (G Fund) to Intermediate Term (G Fund/LT Treasury ETF)?
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Re: Is G-fund safer today than previously?

Post by azanon »

vineviz wrote: Thu Apr 30, 2020 3:33 pm
striker79 wrote: Thu Apr 30, 2020 3:29 pm With that same logic, I'd have a hard time recommending bonds over stocks. You have to view your investment in terms of return vs risk. G fund typically is at least 2% return and will never go down in value.
If you're going to look at the ratio of risk and return, the only valid place to do that is at the portfolio level (not at the individual asset level). This is, in part, why I mentioned "diversification" in my post.

A portfolio of stocks & F-fund has a higher expected return/risk (i.e Sharpe) ratio than a portfolio of stocks & G-fund.
The TSP L funds were professionally designed to fall upon the Efficient Frontier, and with that design, the proportion of G to F in the L funds is in the ballpark of 9 to 1, respectively. It's also safe to say that some serious professional firepower was put into the L fund design given the sum total of money in the TSP. In short, they don't agree with your statement above. For reference, see: https://www.tsp.gov/PDF/formspubs/FundsL.pdf

The yield on G fund is usually very close to (but just under) the F fund. Given no risk to G fund, it'd be hard for me to imagine that the risk-adjusted return of the F fund is ever higher than the G fund.
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Re: Is G-fund safer today than previously?

Post by tadamsmar »

vasaver wrote: Fri May 01, 2020 10:50 pm
striker79 wrote: Thu Apr 30, 2020 2:33 pm G fund is the best instrument you will find for return vs risk. It is 0 risk. Investing is all about return vs risk. The portion of your portfolio you want in bonds or fixed income, I say put it in G fund and have an aggressive allocation in stocks. So many investors wish they could have money in the G fund.
I don't know if it really is 0 risk. Our president is on the record saying "Now we're in a different situation with a country, but I would borrow knowing that if the economy crashed you could make a deal." Suggesting that bond holders could take a 'haircut'. That doesn't sound like 0 risk to me.
Nothing is zero risk. But if the G Fund nominal return went below zero then that would probably be the least of your worries. I think the inflation-adjusted return could go below zero under less abnormal circumstances.
Last edited by tadamsmar on Tue May 05, 2020 12:01 pm, edited 1 time in total.
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Re: Is G-fund safer today than previously?

Post by vineviz »

azanon wrote: Tue May 05, 2020 9:48 am
vineviz wrote: Thu Apr 30, 2020 3:33 pm
striker79 wrote: Thu Apr 30, 2020 3:29 pm With that same logic, I'd have a hard time recommending bonds over stocks. You have to view your investment in terms of return vs risk. G fund typically is at least 2% return and will never go down in value.
If you're going to look at the ratio of risk and return, the only valid place to do that is at the portfolio level (not at the individual asset level). This is, in part, why I mentioned "diversification" in my post.

A portfolio of stocks & F-fund has a higher expected return/risk (i.e Sharpe) ratio than a portfolio of stocks & G-fund.
The TSP L funds were professionally designed to fall upon the Efficient Frontier, and with that design, the proportion of G to F in the L funds is in the ballpark of 9 to 1, respectively. It's also safe to say that some serious professional firepower was put into the L fund design given the sum total of money in the TSP. In short, they don't agree with your statement above. For reference, see: https://www.tsp.gov/PDF/formspubs/FundsL.pdf

The yield on G fund is usually very close to (but just under) the F fund. Given no risk to G fund, it'd be hard for me to imagine that the risk-adjusted return of the F fund is ever higher than the G fund.
The L Funds were professionally designed, yes, but not with a goal of being mean-variance efficient.

And even if they were, mean-variance efficiency is a terrible goal for most investors.
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Re: Is G-fund safer today than previously?

Post by azanon »

vineviz wrote: Tue May 05, 2020 11:44 am
azanon wrote: Tue May 05, 2020 9:48 am
vineviz wrote: Thu Apr 30, 2020 3:33 pm
striker79 wrote: Thu Apr 30, 2020 3:29 pm With that same logic, I'd have a hard time recommending bonds over stocks. You have to view your investment in terms of return vs risk. G fund typically is at least 2% return and will never go down in value.
If you're going to look at the ratio of risk and return, the only valid place to do that is at the portfolio level (not at the individual asset level). This is, in part, why I mentioned "diversification" in my post.

A portfolio of stocks & F-fund has a higher expected return/risk (i.e Sharpe) ratio than a portfolio of stocks & G-fund.
The TSP L funds were professionally designed to fall upon the Efficient Frontier, and with that design, the proportion of G to F in the L funds is in the ballpark of 9 to 1, respectively. It's also safe to say that some serious professional firepower was put into the L fund design given the sum total of money in the TSP. In short, they don't agree with your statement above. For reference, see: https://www.tsp.gov/PDF/formspubs/FundsL.pdf

The yield on G fund is usually very close to (but just under) the F fund. Given no risk to G fund, it'd be hard for me to imagine that the risk-adjusted return of the F fund is ever higher than the G fund.
The L Funds were professionally designed, yes, but not with a goal of being mean-variance efficient.

And even if they were, mean-variance efficiency is a terrible goal for most investors.
Mean-variance efficiency is the same thing as striving for the efficient frontier. The brochure I linked showed that's exactly what they did with the design as all of the portfolios are clearly resting on the efficient frontier line. The reference was there just in case you didn't want to take my word for it. For easier reference, I'll quote the brochure:

"For each risk level, there is an “optimal” asset allocation that has the highest expected return. The collection of optimal asset allocations make up the “Efficient Frontier,” which is shown by the curve. Asset allocations that are below the Efficient Frontier are less than optimal, because there is an asset allocation along the frontier that has a higher expected return for the same level of risk, or lower risk for the same expected return. The five TSP L Funds have asset allocations that correspond to points shown on the Efficient Frontier. Putting your entire TSP account into one of the L Funds will help you to achieve the best expected return for the amount of expected risk that is appropriate for your time horizon."

I trust you at least would agree that the board that devised the L funds would not agree that their L funds are a terrible choice for most investors.
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Re: Is G-fund safer today than previously?

Post by tadamsmar »

vineviz wrote: Tue May 05, 2020 11:44 am The L Funds were professionally designed, yes, but not with a goal of being mean-variance efficient.
The goal is indeed being mean-variance efficient.

"The five TSP L Funds have asset allocations that correspond to points shown on the Efficient Frontier"

https://www.tsp.gov/PDF/formspubs/FundsL.pdf
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Re: Is G-fund safer today than previously?

Post by azanon »

tadamsmar wrote: Tue May 05, 2020 12:06 pm
vineviz wrote: Tue May 05, 2020 11:44 am The L Funds were professionally designed, yes, but not with a goal of being mean-variance efficient.
The goal is indeed being mean-variance efficient.

"The five TSP L Funds have asset allocations that correspond to points shown on the Efficient Frontier"

https://www.tsp.gov/PDF/formspubs/FundsL.pdf
I will say though, what would be neat is to see the math where they came to the conclusion for that asset mix. It's certainly not a hard sell for me to believe that the G fund wins out in terms of risk adjusted return over a vanilla Total Bond fund (e.g. F fund), but still, I'd like to see the math. I'm assuming there is some. :shock: The ~ 35% to international stocks is pretty much dead on most Vanguard studies I've seen on International diversification, so I don't find that surprising either.
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Re: Is G-fund safer today than previously?

Post by tadamsmar »

azanon wrote: Tue May 05, 2020 12:18 pm
tadamsmar wrote: Tue May 05, 2020 12:06 pm
vineviz wrote: Tue May 05, 2020 11:44 am The L Funds were professionally designed, yes, but not with a goal of being mean-variance efficient.
The goal is indeed being mean-variance efficient.

"The five TSP L Funds have asset allocations that correspond to points shown on the Efficient Frontier"

https://www.tsp.gov/PDF/formspubs/FundsL.pdf
I will say though, what would be neat is to see the math where they came to the conclusion for that asset mix. It's certainly not a hard sell for me to believe that the G fund wins out in terms of risk adjusted return over a vanilla Total Bond fund (e.g. F fund), but still, I'd like to see the math. I'm assuming there is some. :shock: The ~ 35% to international stocks is pretty much dead on most Vanguard studies I've seen on International diversification, so I don't find that surprising either.
By "the math" guess you mean the assumptions: "The expected returns are derived from the investment consultant’s economic assumptions and are not guaranteed."

I think that most professionals don't just use trailing returns to come up with the input data. So they vary a bit depending on the assumptions.

The efficient frontier has always been very flat and straight for the L Funds relative to other's that I have seen. The use to be a FAQ that said that the curve shape was due to the G Fund having a relatively high risk-adjusted return.

The F fund would probably be freezed out even more in favor of G except for the fact that it maybe has a bit more of a favorable covariance with stocks.
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Re: Is G-fund safer today than previously?

Post by vineviz »

azanon wrote: Tue May 05, 2020 12:03 pm
Mean-variance efficiency is the same thing as striving for the efficient frontier. The brochure I linked showed that's exactly what they did with the design as all of the portfolios are clearly resting on the efficient frontier line.
The brochure shows us only what the plan consultant wants us to see.

The plan consultant (which was Aon Hewitt) expressly said that they did NOT design the L funds to be mean-variance efficient. They were doing something else, which is actually slightly more reasonable. Their goal was to optimize the income replacement ratio for plan participants.

Here's their presentation on the plan design.

Check out slide 18: they are defining "risk" as the 5th percentile outcome for income replacement ratio and "reward" as 50th percentile outcome. This is consistent with their goal as stated in slide 3:
The desired outcome is to create a series of L Funds such that an “average participant” in those L Funds, in combination with the FERS defined benefit plan and Social Security, will be projected to have sufficient assets to maintain a reasonable standard of living throughout retirement.
This is an entirely reasonable goal, even if it is a little opaque without full access to the data they have about plan participants, and it certainly is a quantitative goal. But it means they are NOT trying to allocate the L Funds to be on the Markowitz frontier.

Furthermore, they put their thumbs rather heavily on the scale in favor on the G Fund by using the same expected return for both the G Fund and the F fund, which is a completely unreasonable assumption to make.

For illustration, here's the actual mean-variance efficient frontier as of last fall when I created the image. Except for the most radically risk-averse investors, every portfolio using the F Fund produced higher returns per unit of risk than any portfolio using the G Fund.

Image
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Re: Is G-fund safer today than previously?

Post by tadamsmar »

azanon wrote: Tue May 05, 2020 12:18 pm
tadamsmar wrote: Tue May 05, 2020 12:06 pm
vineviz wrote: Tue May 05, 2020 11:44 am The L Funds were professionally designed, yes, but not with a goal of being mean-variance efficient.
The goal is indeed being mean-variance efficient.

"The five TSP L Funds have asset allocations that correspond to points shown on the Efficient Frontier"

https://www.tsp.gov/PDF/formspubs/FundsL.pdf
I will say though, what would be neat is to see the math where they came to the conclusion for that asset mix. It's certainly not a hard sell for me to believe that the G fund wins out in terms of risk adjusted return over a vanilla Total Bond fund (e.g. F fund), but still, I'd like to see the math. I'm assuming there is some. :shock: The ~ 35% to international stocks is pretty much dead on most Vanguard studies I've seen on International diversification, so I don't find that surprising either.
Here's some of the math:

https://federalnewsnetwork.com/wp-conte ... tation.pdf
azanon
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Re: Is G-fund safer today than previously?

Post by azanon »

vineviz wrote: Tue May 05, 2020 1:54 pmThis is an entirely reasonable goal, even if it is a little opaque without full access to the data they have about plan participants, and it certainly is a quantitative goal. But it means they are NOT trying to allocate the L Funds to be on the Markowitz frontier.

............
For illustration, here's the actual mean-variance efficient frontier as of last fall when I created the image. Except for the most radically risk-averse investors, every portfolio using the F Fund produced higher returns per unit of risk than any portfolio using the G Fund.
Just wanted to say thanks for sending that link to this presentation - I didn't know it existed, and I'll view it ASAP! I am a little annoyed though if they're claiming on the parent fact sheet for the L fund portfolios to be on the Efficient (Markowitz) Frontier if they're actually not.

.................

I'll have to look closer as to how you're coming up with F fund having higher return/unit risk vs G fund. I'm certainly no CFA like you, but I've read so many finance books (such as Swedroes) where the more common position taken is that the credit risk taken on by non-government bonds is never fully compensated for and why more experts that not, don't recommend them (Swedroe, Bernstein, Swensen, others...). So most authors I've seen will say that corporates and mortgage-backed securities aren't even as efficient as "regular", IT treasuries that have associated duration risk. So how much more so would the G fund be efficient to have the return of an approximately 9 year treasury (hypothetical), with no duration risk and by rule can't lose money. I would think it'd be no contest, given "inferior" IT Treasuries are more efficient than corporates and MBSs.

Of course for the life of the TSP, we all know that F fund has outperformed G fund largely because of the interest rate drop over the life of the funds. Duration "risk" is actually zero-sum, and when rates drop, it's actually a good thing for bonds having duration.
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Re: Is G-fund safer today than previously?

Post by azanon »

vineviz wrote: Tue May 05, 2020 1:54 pmFurthermore, they put their thumbs rather heavily on the scale in favor on the G Fund by using the same expected return for both the G Fund and the F fund, which is a completely unreasonable assumption to make.
fwiw, No they didn't. I'm looking at the presentation you linked now. On slide 14, they said their projected return for F fund was higher (3.3%) than G fund (3.0%), but with more volatility. They explained that by saying the (effective) duration for G was higher than F (9 vs. 6 years), so more return for G fund from that POV, but then since F fund is 55% corporate/securitized bonds, that's going to put the F fund slightly ahead on return.

So I think bottom line is an extra 0.3% return is not enough to make up for that extra volatility. Hence, G "wins" the risk-adjusted return battle.
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Re: Is G-fund safer today than previously?

Post by vineviz »

azanon wrote: Tue May 05, 2020 3:12 pm
vineviz wrote: Tue May 05, 2020 1:54 pmFurthermore, they put their thumbs rather heavily on the scale in favor on the G Fund by using the same expected return for both the G Fund and the F fund, which is a completely unreasonable assumption to make.
fwiw, No they didn't. I'm looking at the presentation you linked now. On slide 14, they said their projected return for F fund was higher (3.3%) than G fund (3.0%), but with more volatility. They explained that by saying the (effective) duration for G was higher than F (9 vs. 6 years), so more return for G fund from that POV, but then since F fund is 55% corporate/securitized bonds, that's going to put the F fund slightly ahead on return.

So I think bottom line is an extra 0.3% return is not enough to make up for that extra volatility. Hence, G "wins" the risk-adjusted return battle.
It's a bit confusing because the presentation is covering two different iterations of the L Funds.

The ratio of the G Fund to F Fund was set using the returns in the "Previous Study" column on slide 14. This ratio persists from the old version to the new "transitional" version, which means the L Funds are still persistently holding more G fund than is optimal. With the exception of a slight reduction in the ratio of G Fund to F Fund in the L-Income Fund, the ratio of G to F is unchanged in the current revamp. Which is unfortunate IMHO, but probably not catastrophically so.

Aon Hewitt did update their assumptions in slide 14, yes. But if you flip FORWARD to slide 16 you can see the impact of this update: all the L Funds are actually expected to fall BELOW the efficient frontier constructed using the updated assumptions.

Image

Which is fine, as I mentioned earlier, because on slide 18 they make plain that their goal is actually slightly more sophisticated than mean-variance optimization anyway. Slide 20 shows the real goal, which is to maximize the expected account depletion age, reduce the probably of depleting the account before the average participants life expectancy, and maximize real account balance withdrawals.

If the data were run today it'd be even worse for the G Fund, since the yield on the F Fund (and therefor the most neutral estimate of expected return) is now over 100bps greater than the yield on the G Fund. For instance, the efficient frontier allocations using current market conditions look more like this:

Image
"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: Is G-fund safer today than previously?

Post by tadamsmar »

vineviz wrote: Tue May 05, 2020 3:32 pm It's a bit confusing because the presentation is covering two different iterations of the L Funds.
I think that as of now they are on a glide path from an old set of assumptions to a new set of assumptions. So, it is mix of an up-to-date efficient frontier and an out-of-date efficient frontier. And the two efficient frontiers are based on the assumptions of two different sets of experts on two different calendar dates.

Come to think of it, this may be an issue with many target date funds. The experts change their maids but they don't want to abruptly change the asset allocations.
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Re: Is G-fund safer today than previously?

Post by vineviz »

tadamsmar wrote: Tue May 05, 2020 5:25 pm
vineviz wrote: Tue May 05, 2020 3:32 pm It's a bit confusing because the presentation is covering two different iterations of the L Funds.
I think that as of now they are on a glide path from an old set of assumptions to a new set of assumptions. So, it is mix of an up-to-date efficient frontier and an out-of-date efficient frontier. And the two efficient frontiers are based on the assumptions of two different sets of experts on two different calendar dates.

Come to think of it, this may be an issue with many target date funds. The experts change their maids but they don't want to abruptly change the asset allocations.
Unfortunately the new glide paths are basically only increasing the equity allocation, not fixing the relative allocation between G Fund and F Fund.

If Treasury yields don’t bounce back up, a lot of TSP investors are going to find it much less easy to meet their goals.
"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: Is G-fund safer today than previously?

Post by patrick »

cresive wrote: Sun May 03, 2020 3:41 pmI may be reading your question incorrectly, so forgive me if I am off base. But to answer your question, the G fund is a very good vehicle to give you decent interest with effectively zero risk. The G fund should out perform money markets, online savings, etc. because each days interest is base on an average of Gov. bonds.
It won't outperform online savings at current interest rates. You can get up to 1.75% from online savings which is 1% above the G fund yield quoted earlier in this thread.
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