TSP 3-Funds or TSP Target Date Fund?

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

Post by GCD » Sat Jul 20, 2019 10:51 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?
I don't agree with the AAs in the target date funds. My personal situation is not unusual, but sufficiently so that I prefer to set my own AA.

Congrats on your new federal job. I highly recommend FERS Guide by Dan Jamison for all federal employees (I have no association with him). Fortunately for you, he gives it away free to new employees in their first 12 months of federal employment. I have found his calculations and information to be very accurate.https://fersguide.com/

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

Post by grabiner » Sat Jul 20, 2019 12:05 pm

tomwood wrote:
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
I would recommend the G fund (for the relatively small bond allocation which would be appropriate for a new Government employee). Since I expect the G fund to have less risk, and less correlation with stock-market risk, you need less of the G fund than of the F fund to get the same risk reduction. If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.

The model which the TSP uses to develops its target-date portfolios agrees with this. The TSP estimates the efficient frontier (maximum return for each level of risk), and then sets a glidepath along that frontier. The L funds in the TSP hold mostly the G fund rather than the F fund for their fixed-income allocation.
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vineviz
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by vineviz » Sat Jul 20, 2019 1:54 pm

grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
That would be great if it were the case, but unfortunately it isn't.

At least it hasn't been for investors for the past 16 years: since 2003, 75% stock and 25% F fund has had the same returns and lower risk (measured by volatility and/or maximum drawdown) than 80% stock and 20% G fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by grabiner » Sat Jul 20, 2019 2:15 pm

vineviz wrote:
Sat Jul 20, 2019 1:54 pm
grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
That would be great if it were the case, but unfortunately it isn't.

At least it hasn't been for investors for the past 16 years: since 2003, 75% stock and 25% F fund has had the same returns and lower risk (measured by volatility and/or maximum drawdown) than 80% stock and 20% G fund.
And that was the basis of my comment above. My expectation is that the G fund is a better risk reducer, although it happened that the F fund didn't decline in 2008 and thus did just as well as a diversifier. (In 2008, the best diversifier was a conventional Treasury fund, which rose when the market fell, doing better than both the F and G funds when diversification was needed.)
Wiki David Grabiner

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

Post by tomwood » Sat Jul 20, 2019 3:46 pm

grabiner wrote:
Sat Jul 20, 2019 12:05 pm

I would recommend the G fund (for the relatively small bond allocation which would be appropriate for a new Government employee). Since I expect the G fund to have less risk, and less correlation with stock-market risk, you need less of the G fund than of the F fund to get the same risk reduction. If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.

The model which the TSP uses to develops its target-date portfolios agrees with this. The TSP estimates the efficient frontier (maximum return for each level of risk), and then sets a glidepath along that frontier. The L funds in the TSP hold mostly the G fund rather than the F fund for their fixed-income allocation.
Your first paragraph recommendation says G over F. And the second paragraph uses the L fund as data to support your view of G better than F. Those might be linked points and they might not be, but would you recommend stocks and bonds using G fund, or would you recommend the L Fund? Thanks

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EngCapt1
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by EngCapt1 » Sat Jul 20, 2019 4:10 pm

ChrisC wrote:
Sat Jul 20, 2019 10:29 am
I'm really tired of managing stuff.
There is something to be said for simplicity, for sure. Congratulations on what appears to be an excellent retirement for you and your family. We will also receive pensions that cover more than our expenses in retirement.
ChrisC wrote:
Sat Jul 20, 2019 10:29 am
So, we've come to the conclusion that we're really saving these retirement accounts for our children
This is actually another reason we no longer use the Target-Date/Lifecycle Funds and keep mostly bonds/fixed income in our traditional TSP account. Hopefully, our DS (sole beneficiary) will appreciate the lower RMD's from an inherited IRA filled with bonds and a stepped-up basis from the equities in our taxable account along with equities in the tax-free Roth IRA's.

Many roads to Dublin, take the one that's best for you.

:beer

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

Post by grabiner » Sat Jul 20, 2019 4:15 pm

tomwood wrote:
Sat Jul 20, 2019 3:46 pm
grabiner wrote:
Sat Jul 20, 2019 12:05 pm

I would recommend the G fund (for the relatively small bond allocation which would be appropriate for a new Government employee). Since I expect the G fund to have less risk, and less correlation with stock-market risk, you need less of the G fund than of the F fund to get the same risk reduction. If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.

The model which the TSP uses to develops its target-date portfolios agrees with this. The TSP estimates the efficient frontier (maximum return for each level of risk), and then sets a glidepath along that frontier. The L funds in the TSP hold mostly the G fund rather than the F fund for their fixed-income allocation.
Your first paragraph recommendation says G over F. And the second paragraph uses the L fund as data to support your view of G better than F. Those might be linked points and they might not be, but would you recommend stocks and bonds using G fund, or would you recommend the L Fund? Thanks
Either one is fine. Unlike other target-date funds such as Vanguard's, the L funds cost no more than the underlying funds, and they have a similar allocation.

As usual, the L funds only make sense if their allocation is right for you (although you can always use a fund that doesn't match your retirement date to change your risk level). And there is no simplicity advantage unless your whole portfolio is in target-date funds; if you use the L fund, you should also use Vanguard Target Retirement or Fidelity Freedom Index in your IRA.
Wiki David Grabiner

Tucker50
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by Tucker50 » Tue Jul 23, 2019 3:04 pm

If you could place all of your contributions in Roth TSP, you might want to reconsider your strategy

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

Post by tomwood » Sun Nov 10, 2019 9:12 pm

LinusP wrote:
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.
Do you simulate this fund or use the L fund in your portfolio?

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

Post by tomwood » Sun Nov 10, 2019 9:13 pm

grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
Are these just random numbers or is 80/20 roughly the same risk as 75/25, more or less, as you write here?

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

Post by grabiner » Sun Nov 10, 2019 9:41 pm

tomwood wrote:
Sun Nov 10, 2019 9:13 pm
grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
Are these just random numbers or is 80/20 roughly the same risk as 75/25, more or less, as you write here?
The TSP's models must imply a significant correlation between F fund and stock fund risk, as the L funds are supposedly on the efficient frontier and have much more G than F. I don't have an actual model, so I don't know whether the specific numbers I quoted are a good estimate for the risk, but they are a logical argument why the G fund may be better. Normally, you are fairly compensated for taking extra risk; this is why corporate bonds yield more than Treasury bonds, and intermediate-term bonds yield more than money-market funds. With the G fund, you get some of that compensation (the higher yields on intermediate-term and long-term bonds) without the risk.
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LinusP
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Re: TSP 3-Funds or TSP Target Date Fund?

Post by LinusP » Sun Nov 10, 2019 10:08 pm

tomwood wrote:
Sun Nov 10, 2019 9:12 pm
LinusP wrote:
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.
Do you simulate this fund or use the L fund in your portfolio?
I started out with an age-appropriate L fund and a target date fund with Vanguard, but I've since switched to separate funds that I rebalance myself. Incrementally lower costs, and a little more hands-on - but either are perfectly good choices. Do what works for you.

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

Post by travelogue » Sun Nov 10, 2019 10:32 pm

grabiner wrote:
Sun Nov 10, 2019 9:41 pm
tomwood wrote:
Sun Nov 10, 2019 9:13 pm
grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
Are these just random numbers or is 80/20 roughly the same risk as 75/25, more or less, as you write here?
The TSP's models must imply a significant correlation between F fund and stock fund risk, as the L funds are supposedly on the efficient frontier and have much more G than F. I don't have an actual model, so I don't know whether the specific numbers I quoted are a good estimate for the risk, but they are a logical argument why the G fund may be better. Normally, you are fairly compensated for taking extra risk; this is why corporate bonds yield more than Treasury bonds, and intermediate-term bonds yield more than money-market funds. With the G fund, you get some of that compensation (the higher yields on intermediate-term and long-term bonds) without the risk.
Page 16 of this report has a snippet of info on TSP funds in relation to the efficient frontier: https://www.frtib.gov/pdf/minutes/MM-2018Sep-Att5c.pdf

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

Post by tomwood » Mon Nov 11, 2019 12:55 pm

grabiner wrote:
Sun Nov 10, 2019 9:41 pm
tomwood wrote:
Sun Nov 10, 2019 9:13 pm
grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
Are these just random numbers or is 80/20 roughly the same risk as 75/25, more or less, as you write here?
The TSP's models must imply a significant correlation between F fund and stock fund risk, as the L funds are supposedly on the efficient frontier and have much more G than F. I don't have an actual model, so I don't know whether the specific numbers I quoted are a good estimate for the risk, but they are a logical argument why the G fund may be better. Normally, you are fairly compensated for taking extra risk; this is why corporate bonds yield more than Treasury bonds, and intermediate-term bonds yield more than money-market funds. With the G fund, you get some of that compensation (the higher yields on intermediate-term and long-term bonds) without the risk.
This was a valuable read. Thank you

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

Post by tomwood » Mon Nov 11, 2019 1:05 pm

LinusP wrote:
Sun Nov 10, 2019 10:08 pm
tomwood wrote:
Sun Nov 10, 2019 9:12 pm
LinusP wrote:
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.
Do you simulate this fund or use the L fund in your portfolio?
I started out with an age-appropriate L fund and a target date fund with Vanguard, but I've since switched to separate funds that I rebalance myself. Incrementally lower costs, and a little more hands-on - but either are perfectly good choices. Do what works for you.
Linus, that’s well said.
why did you choose not to roll your other retirement accounts into the TSP, if you had such an option.

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

Post by fortyofforty » Mon Nov 11, 2019 3:53 pm

travelogue wrote:
Sun Nov 10, 2019 10:32 pm
grabiner wrote:
Sun Nov 10, 2019 9:41 pm
tomwood wrote:
Sun Nov 10, 2019 9:13 pm
grabiner wrote:
Sat Jul 20, 2019 12:05 pm
If 80% stock and 20% G fund has the same risk as 75% stock and 25% F fund, then the G fund gives a better portfolio return at the same risk level.
Are these just random numbers or is 80/20 roughly the same risk as 75/25, more or less, as you write here?
The TSP's models must imply a significant correlation between F fund and stock fund risk, as the L funds are supposedly on the efficient frontier and have much more G than F. I don't have an actual model, so I don't know whether the specific numbers I quoted are a good estimate for the risk, but they are a logical argument why the G fund may be better. Normally, you are fairly compensated for taking extra risk; this is why corporate bonds yield more than Treasury bonds, and intermediate-term bonds yield more than money-market funds. With the G fund, you get some of that compensation (the higher yields on intermediate-term and long-term bonds) without the risk.
Page 16 of this report has a snippet of info on TSP funds in relation to the efficient frontier: https://www.frtib.gov/pdf/minutes/MM-2018Sep-Att5c.pdf
Interesting. My problem with the Efficient Frontier is that we don't know where it is until we know where it was. We're all just making assumptions and hoping for the best.

From the AON efficient frontier chart: "Efficient Frontier -- Based on 10-Year Forward-Looking Assumptions as of 2/28/2018"
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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

Post by LinusP » Mon Nov 11, 2019 4:25 pm

tomwood wrote:
Mon Nov 11, 2019 1:05 pm
why did you choose not to roll your other retirement accounts into the TSP, if you had such an option.
I don't think you can rollover a Roth IRA into TSP. I also have a taxable account; if I ever had trouble finding cash to max out TSP contributions, I'd raid those funds...but haven't needed to yet.

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

Post by tomwood » Mon Nov 11, 2019 4:26 pm

travelogue wrote:
Sun Nov 10, 2019 10:32 pm

Page 16 of this report has a snippet of info on TSP funds in relation to the efficient frontier: https://www.frtib.gov/pdf/minutes/MM-2018Sep-Att5c.pdf
Thank you for sharing.

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