jaMichael wrote: ↑Thu Mar 28, 2024 10:55 pm
What an interesting discussion! Would the TSP G Fund do as well as (or better than) IT, or should TSPers be moving from G to IT?

Great question. I was motivated to address it, but first let me explain the obstacles.

1. The G fund only dates to April 1987. It is not available for even the full bull market case, much less the bear market case back to 1946.

2. The G fund is available to Federal employees. The government pays the average yield on Treasuries maturing more than four years in the future. The precise mix/count of shorter, intermediate, long, and very long Treasuries at any time will vary, making it difficult to simulate the missing years 1982 – 1987.

So I will only be able to examine the outcomes for using the G fund in the bull case—precisely the circumstances where it is likely to be an imperfect or inferior diversifier. (I note Svensk Anga's reply to you.)

To simulate what the G fund yield would have been 1982 – 1987, I obtained the yields at the end of each prior year, e.g., 1981, for:

1. 5-year Treasury (SBBI)

2. 10-year constant maturity (FRED)

3. 20-year Treasury (SBBI)

4. 30-year constant maturity (FRED)

Equal-weighted, that gives an average maturity of about 16 years, where a portfolio consisting of the 4-year Treasury and the 30-year Treasury (the G fund range) would have a maturity of 17 years.

Close enough for government work.

Also eyeballing the G fund returns for 1988 – 1993, this simulated G fund was reasonably close to the return on the actual G fund when extended to those years.

So with all those limitations acknowledged, here goes.

The G fund emerges as decisively inferior to either BND or IT as a stock diversifier, for stock allocations greater than 40% (given the bull case, I'll ignore the LT blend).

Under conditions of falling interest rates.

Conversely, the G fund is clearly superior to T-bills, at every stock allocation. And the G fund, like T-bills, at very low stock allocations, reduces portfolio risk considerably below what can be obtained from any of the other bond types. SD is hundreds of basis points lower than anything you can get from intermediate Treasuries or BND at low stock allocations.

I speculate that had something like the G fund been available 1946-1981, a period of climbing interest rates, it probably would have been superior to T-bills then as well; and as we saw earlier, in the bear market case T-bills would have been just a bit better than intermediate Treasuries.

If you are a Federal employee who is very fearful—someone who can’t imagine putting even 40% into stocks, despite Civil Service protections, the generous pension accruals, the retiree health care benefits, yada yada;

And if you are also one of those obsessives who looks at the portfolio value each afternoon, and suffers agonies whenever today’s value has dropped below yesterday’s value;

Then I can endorse use of the G fund in place of the other fixed income options in a 30/70 or 20/80 portfolio.

If instead your risk tolerance allows a 60/40 or 75/25 portfolio, and you are not that sensitive to day-to-day fluctuations occurring decades before retirement, and you are not convinced that the next decades will see an extended bear market in bonds, then you can typically do better than the G fund with one of the other options.

OTOH, I would certainly replace any T-bills in your mix with the G fund.

Last, it may be useful to quantify the wealth loss from being overly conservative—too little in stocks, too much in G fund or T-bill like investments.

A 20/80 blend with the G fund returned 7.2% annualized over the 36 years of the bull case. A 60/40 blend with intermediate Treasuries returned 10.5%.

The fearful G fund investor turned $10,000 into $122,000. The confident IT blend investor turned $10,000 into $360,000—three times the wealth.

The G fund *IS* very low risk. But, which part of “return is a function of risk” do G fund investors not understand?

You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.