Independent allocation advice grounded in history not hype

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TSP Recommendations for 2020


Part 3: TSP Advice for 2020




Successful long-term investing requires knowing when you are close to a market top, understanding what actions to expect from policy makers, what the news narratives look like, and investor sentiment (euphoria).  There is a reason it is a "top" and it is not because everyone knows it is a top. We've seen the market drop over 50% twice since 2000. This is not something new to this millennium.  Bull and bear markets are part of the game.


It is better to give up some gains near the top than to ride the bear market down to a 50% loss.  After a 50% loss, it takes a 100% gain to get back to break even. Market cycles the last 40 years are running 8 - 12 years.  Prior to the 1990s they ran 3 - 6 years and often based on fiscal policy gunning the economy for re-election bids.  In 2020 we are hitting the longest bull market in history that started in 2008.  The reason is because the driver of this market is different from all others - emergency monetary policy that never got turned off.  We are on a monetary cycle now with some fiscal overlays.  But the laws of financial physics have not been eliminated. 


Corporate profits and cash flow do not match the prices being paid today for stocks and bonds and some sort of reset will happen again. To be clear, wealth is a stream of future income not a balance on your TSP account.  The same is true for valuations. If you are okay with extremely low future returns then the stock market is fairly valued.  If you expect 8% returns from the stock market then it is extremely overvalued starting 2020. The cash flow is not there.


The difference in losses between the TSP C and S fund is negligible compared the TSP G fund during bear markets or steep declines. I am not talking about market timing, I am talking about market cycle timing.  There is also seasonal timing, but I'll save that for another article because knowing what is driving each market cycle is the most important determinant to your major allocation decision - equity funds verse the safer G fund (and sometimes the F fund). 





The Reminder -The Market Cycle Matters



Best TSP Funds


The last bear market in stocks lost more than all the gains of the preceding bull market.  Kind of silly to give all of your gains back and start over again, but this is what buy and hold is all about. Meanwhile the TSP G fund will continue plodding higher during periods of financial stress and rising interest rates. In other words, the TSP G fund will significantly outperform equity funds during bear markets.


I do not advocate speculation in retirement accounts or “timing” the market in the traditional sense of jumping in or out.  I also do not advocate buy and hold when the evidence builds up that the bull market is coming to an end and a bear market is commencing.   It is more important for your nest egg to miss some of the gains near the top than to ride the bear market down, period.


Today, over 30% of the Russell 2000 index (smallest half of the US stock market) have negative earnings.  When the index and funds provide the Price-to-Earnings they conveniently calculate the PEs ratios leaving out the negative earnings. In other words, valuation measures commonly viewed by retail investors significantly understate the valuation levels of the market.


As for the SP500 today, over half of the companies' debt is ranked one notch above junk bond status.  Forty percent of these companies are getting a pass from the ratings agencies since their level of debt already exceeds the threshold for junk status.  Also consider that all 4 quarters of 2019 saw year-over-year declines in the SP500 earnings.  That late 2018 stock market plunge was justified.  The amazing recovery in early 2019 was due to a record-breaking quarter of these same over-leveraged companies buying back their own shares on the open markets with over half the buybacks financed with more debt not cash flow.  2019 was also the first year corporations burned more cash on buybacks than they took in from operational cash flow. All of this is unsustainable and only extended by global central banks breaking records in money printing to buy financial assets at the end of 2019.



Today's Market Cycle Considerations



A) Since we are in one of the top three most over-valued stock markets by the measures that actually predict future returns, I can pretty much guarantee we are not anywhere near the bottom of the cycle.  We are very close to the top of the market's cycle.  Market tops are a process.  This market top is an extended process because the bull market was central bank driven and they are now in a tug-o-war against free market price discovery.  


The chart below looks like a price chart for the stock market. It is NOT.  It is a valuation chart meaning it is telling us how much we are paying today when we allocate to equity funds.  This metric closely matches other valuations based on price to the following: Corporate revenue, corporate earnings, cash flow, dividends, as well as Warren Buffet's favorite total stock market capitalization to US GDP.  The one presented below was found by Dr. Hussman to be the highly correlated of them all to 12 year future returns.


Valuation is a very poor timing method for the stock market.  The point of the next two charts is simple.  Current price determines long-term future returns.  From these levels, don't expect marketing advertised returns of 8%.


In the chart below, I want you to note that the 2003 bear market bottom in terms of valuations was the highest bottom for any bear market in the last 60 years. A return to that level of valuation from the 2018 and 2019 market triple peaks would require greater than a 50% drop. I say "valuation" because either price has to drop over 50% or profits have to climb over 100% to return to the 2003 level in terms of market valuations.  In other words, you are buying high here.  This is not a timing call, just a historical perspective.




B) The primary driver of this bull market has been central banks buying financial assets and the funds flowing to all financial assets in one form or another.  The US market has far exceeded international markets simply because of out-sized corporate stock buybacks in the US that are not allowed in international markets.  It used to be illegal in the US to, considered a form of stock manipulation.  With CEOs timing selling their own stock shortly after they announce stock buybacks with corporate cash the overturned law was probably justified.  


Transaction volume of insiders’ shares sold before and after a buyback announcement


C) My view from 2019 remains the same, fade the corporate buyback binge when it ends. Corporations buying back their own company shares on the open markets reached a frenzy level in early 2019 and was the main cause of the surge in the market after the late 2018 swoon.  Corporations in the SP500 have leveraged up their balance sheets (debt) to levels higher than any time in history.  Much of the debt was used on stock buybacks with two effects: 1) Short-term support of higher stock prices and 2) an artificial bump to earnings-per-share reported to you the investor.  Both of these effects will reverse when buybacks are forced to be reduced due to credit ratings dropping and lack of cash to burn.  In other words, what amplified the bull will also amplify the bear market.



D) As 2019 came to a close, the Federal Reserve was forced to flood the financial system with liquidity.  Liquidity is a simple creating money out-of-thin-air and buying financial assets to keep the system from imploding. As long as the Fed continues to flood the financial markets with money created out-of-thin-air the markets can continue to trend higher. But understand these same actions make the markets for unstable and will lead to greater losses when stock prices reflect their cash flow.




To be clear, the level of support the central banks are giving to the financial markets since they panicked in September 2019 is more than the depths of the Global Financial Crisis.  I call this pre-bailouts.  This flood of money typically flows to the stock market until the operation nears and end.  Our members can expect a market warning from us when investors begin to react, not after.





The best funds today


The best funds for 2020 will continue to be a shifting mix of the TSP C fund and the TSP G fund. What that mix should be will change over the course of the year, but the C fund should capture similar gains of the S fund in market rallies and not lose as much during the next bear market. Although the small company non-sp500 companies (TSP S fund) does out-perform the SP500 index from December to early March historically. 


If you think the stock market went up the last few years because of a strong economy, read the second and third links in the text above. The stock market is a leading indicator of recessions and not the other way around.



We have found the difference between a market correction and the start of a bear market can be seen by the actions (not words) of the most risk-sensitive investors and whether they are holding onto risk assets or selling when the stock market rallies after a pullback.  Their continued selling usually leads major stock markets sell-offs... unlike signals from reported corporate profits, the economy, wall street analyst ratings, etc. We track these risk sensitive investors and have provided warnings of the larger sell-offs.



The Reluctant Investor and Staying Invested


In my conversations I have found many investors who were burned badly during the last two bear markets and remained reluctant to re-invest until very late in the bull market. This is very understandable but also leads to frustration in extended bull markets like the one we've been in.


Investment decisions require knowing both when to get in and when to get out.  I am not talking about cherry-picking the top or bottom, but simply being close.


Market tops always happen when the news is most positive and bottoms happen when the end of the world is around the corner. So do not let headlines determine your allocations. 


Remember not everyone can get out at the top.  Tops form when the smart investors start heading to the exits before the masses do. And this happens when the headlines are most positive.


We reduced exposure near the top in the early 2018 parabolic move, but the market was not indicating a bear market at that time.  We are watching our long term signals that lead the stock market and provide insight if a move is a correction or something more.  We are also watching the long term trend of the market as seen on the chart below in blue lines? 


I hope you bookmark our free blog or sign up for our blog posts via e-mail at our blog's website. I hope you become a TSP Smart Investor.  If you want to receive our e-mail warnings like the one represented by the red arrow we sent to members to reduce allocations to equities, please join us.


We don't spam, the last warning prior to the early 2018 warning was just prior to the 2015 market correction.  (Note: we sent a warning in December prior to the deeper plunge in the market).  We are not a market chasing timing service.  We are a bear-market-avoiding service along with providing a simple-to-execute seasonal strategy that has beaten buy & hold annualized by several percentage for the last 60 years.  I haven't talked about this strategy, but I provide links at the bottom of the page.


Members have access to current charts





Buy & Hope



I get the same messages you do from "investment advisers" about "don't panic" and "buy and hold is the best strategy"...


                                 ...after the market plunges. 



I have a different point-of-view on this subject.  I started my service in 2011 because I felt no one was looking out for the average TSP investor. 


What the buy and hold types fail to mention is that it took 13 years for the market to break even after the 2000 market top.  They also fail to mention that Japan's market topped in 1989 and they are still waiting for a new high 30 years later!  



Don't Go It Alone



I monitor the market for serious and reluctant investors so they can spend their time doing what they really enjoy in life and that is usually not watching the financial markets. And remember, long before there was fake news, there was financial news.   


I provide two primary services with our low-cost basic service that keeps we watching the markets full-time for you:


1) Bear market and large correction warnings

2) An easy-to-execute strategy from my best practices research to avoid losses while capturing most of the market gains.


And serious investors should take a look at our TSP trading day almanacs to add to their investor tool kit. 




 

A Note About Investing in Retirement


When most investors retire, allocations need to shift to low-risk funds for income production.


For this reason above all others, please do not leave TSP when you retire!  I am probably one of the few advisers who recommends considering moving your other retirement account funds to TSP to take advantage of the G fund in retirement (along with the low fees).  Yes you can do this.


Can you imagine your broker or bank telling you to pull money out of their account and send it to your TSP account where they lose fees.  Commission-based financial planners are likely to talk you into moving your funds to their accounts and products so they can manage them for you to make your life easier.  It is not just the advisers fee that will cost you, it is the loss of interest income in retirement by not having access to the TSP G fund when you need to be in low-risk investments.  


Please don't move your funds.  You can do fine managing your own account.  If you do move transfer your funds out of TSP, consider keeping $100 in your account to keep your account open to allow you to change your mind later. 





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Our basic rate is only $75 annually which is less than 1% of $10,000 account.  



Compare this to the last two bear market which cost the stock market over 50%.





Okay enough advertising...


 here are some of those links I mentioned.

our

TSP & Vanguard Smart Investor Dashboard

easiest way to navigate our site


info on the favorable season strategy

the basics on seasonal investing


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A quick note about me


After earning my degree in Investment Finance, I joined the US Air Force and thus became a TSP account holder.  I never gave up interest in finance and continued to study the markets while serving. I discovered I had to do some unlearning from what I "learned" in my financial planning courses.  Through my website and blog I share what I've learned.


I spent years researching the best strategy for the TSP funds.  I wanted a strategy that was easy to execute and did not ride the bear markets down. I almost gave up then found Sy Harding's strategy which only required two trades a year and was rare in that it beat buy and hold over the long haul.  


Mark Hulbert of the Financial Digest fame tracked Sy's record and often wrote about him on Market Watch.  Sy invested in the Dow Jones Industrial Averages. I simply optimized Sy's seasonal strategy to fit our TSP funds.  


I also developed my own TSP almanacs which break down the annual patterns of the markets to the trading day of the year. On my website you will find a more in-depth breakdown than the Thrift Savings Plan's own website for each fund (to include the Lifecycle funds) to better understand what is driving their returns.  It all helps in determining the best TSP allocation.


I started my company in 2011 and my service in 2012.  I hope you have some time to look around the site - it is designed for you.  And did I mention you can also sign up for my free blog.  


TSPSmart-

I can’t read enough!  You are saying all of the things I have been saying!  I have been successful for quite some time at stocks, but starting last December, I lost my read of the market.  Your writing is spot on and largely correct at guessing the future direction.  Love the service.  Naval aviator with an interest in finance…sounds familiar.  


Sean XXXXX



Mr. Bond,
I was signed up with Sy Harding from March 2009 until his death. I told him once that I didn't know who was the smartest market adviser in the business but I was certain he was #2. I found TSP smart online last February and signed up. You have saved my six about five times in the past year. I'll be renewing and will keep trying to spread the word about your service. It is unreal how buy and hold has been sold to investors.
I believe I have finally found #1.
Best wishes for the new year and many more to come.
Don XXXXX


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