best TSP allocation strategy

TSP Allocation Advice

Keeping it Simple

Updated January 2021

TSP investment advice

The opinions presented here highlight some of the basic realities that are left out of marketing material and academic theory used by investment advisers to simplify their jobs and increase their fees. This is not rocket science.  It just takes time to research the TSP options which is not something most investors have time for in their busy lives. This 15-20 minute guide will save you some time and hopefully increase your future returns starting today.

I am not affiliated with the Thrift Savings Plan or any other financial services company, nor do I require your email address to read this TSP Allocation Guide nor will you see any jumping ads on my website. The advice is based on my personal opinions informed by my degree in investment finance & everything I've unlearned since then. 

We will walk through the following:

1) eliminate the weak funds, then

2) develop a rough idea where we are in the market cycle (bull/bear/bubble/bust) so you can

3) lean on the equity funds during bull markets or the safe funds during high risk markets...

...without making many allocation changes. 


Best TSP Fund

Which Fund is best for TSP?

You have six real choices today - the five basic funds and the Life Cycle fund.  They are all diversified, low-fee choices but some are better than others.  The Life Cycle Funds simply allocate to the five basic funds for you, but as you will see this has not been beneficial to returns. My view is you should start by eliminating the weaker equity fund and focus on your most important decision - how much do you risk in equities versus playing it safe. Frankly, when it comes to investing in stock funds the difference between the TSP C fund and TSP S fund has been small compared to the TSP I fund (international equities).

Best TSP fund since 2007

Note how poorly the International fund (I) performed relatively. We will discuss why the TSP I fund significantly under performed the two US funds this market cycle.  As for the safe funds - the TSP G fund and TSP F fund - there is only one condition when allocating to the TSP F fund over the TSP G fund makes sense and that is when interest rates are falling. This seems confusing to those who look at the F funds higher past returns because interest rates in the US fell from the F fund's inception until 2016 leading to its higher returns from capital gains. As we approach zero rates this advantage becomes a risk.

Best TSP Allocation

Reality versus theory. When you google search the question... "What is the best TSP fund to invest in?"  you will see academic theory and basic facts about the funds which frankly tells you little. The mainstream media makes it sound much more complicated than it is. My goal here is to try to simplify this the best I can so you can make more informed allocation decisions.

In section II we also look at some basic TSP strategies that include variants of Buy & Hold. These include the TSP Lifecycle funds which is a variant of buy & hold, but diversifies for you based on your years-to-retirement.  After learning about the individual funds and understanding the risk of bear markets, you will see why Lifecycle funds may not be the best strategy for you...even the Lifecycle Income Fund in retirement.

finding the

Best TSP Strategy

What is the Best TSP Strategy?

If you had a crystal ball, the best TSP investment strategy would be easy.  Invest in the best performing fund during bull markets and sit in safest funds during the bear market.  But many investors have followed the opposite strategy - buy, hold, then panic, then delay re-entry. You can not time the top of a bull market (rising) or the bottom in a bear market (falling), but you can save yourself a lot of heartache and stress by being close.

Mainstream investment strategies will tell you to take on "more risk" to get better returns.  For short term speculation - maybe.  But I have found that you increase your nest egg substantially more by reducing or avoiding market risk at the right times. Unlike mainstream advice, I do not think risk is static throughout time. 

Buy & hold strategies are based on the belief risk is static or unobservable so they merely reduce volatility in returns over time by diversifying. I've warned about risk of large moves down that were foreseeable and led to us telling our members to exit equities completely in late January 2020.

TSP Allocation

I am 80% on board with Warren Buffet and John Boggle advice of sticking with low-fee broad indexes.  Only eighty percent because that is how much of the time the market has spent in bull (rising) markets.  It is that other 20% where the market loses most of the gains of the proceeding bull market that I am not on board with holding. I also do not believe in Bogle's advice of holding international bond funds as part of your diversification since you would be the sucker holding Europe's negative interest bonds today.  Note: TSP does not invest in international bonds.

It can not be repeated enough - the last bear market in stocks gave up 110% of the previous bull markets gains.  Why would you want to give up 10+ years of returns and have to wait to break-even.

We will look at strategies that reduce real risk - large market losses - while capturing most of the market's gains.  No, not a crystal ball, but the best strategies we found that can be employed in TSP for long-term investors (not traders).  Which will lead us back to the question "What is the best TSP fund to allocate to?" 

Best TSP Allocation

What is the Best TSP Allocation?

The best TSP allocation strategy comes down to avoiding large market losses while capturing most of the market gains.  Avoiding bear markets is a long-term strategy that requires an understanding of where we are in the market cycle (bull/bear/bubble).  We also see more investors employing a TSP Seasonal Strategy by avoiding the the weakness in the markets that usually occurs during the summer and fall months.  This strategy has become feasible due to low fees and no tax considerations in tax deferred accounts.  We will touch on, but not cover seasonal investing in this guide.

So we will walk through 1) eliminate the weak funds, then 2) develop a rough idea where we are in the market cycle (bull/bear/bubble/bust) so you can 3) lean on the equity funds during bull markets or the safe funds during high risk markets.  

Let's move to Part I B.  Eliminate the two weak funds

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