3 Best TSP Funds

Best TSP Fund

In Part II, we eliminated two of the less desirable funds from the mix, now let's look at the three best funds for you to invest in. Let's look at the two US equity (stocks) funds.

Compare TSP C fund and TSP S fund

Note: Index prices used prior to TSP publishing daily prices

TSP C fund versus TSP S fund

The TSP C fund and S fund are not special securities that only TSP account holders are allowed to invest in.  These funds are invested in much larger funds that track either the SP500 index and what I call the "non-sp500 index".  The SP500 index invests in the largest 500 companies listed on the US exchanges.  The TSP S fund invests in the other 3300 US listed companies not in the SP500 hence we named it the “non-sp500” index.

Weightings matter to allocation levels

While the S fund has more companies, these smaller companies account for about 20% of the total US stock market value.  The SP500 companies account for the other 80% of value listed in the US stock exchanges. 

Which brings up a mistake some investors make. If you want to diversify into the total US stock market you have to hold 4 parts C fund and 1 part S fund.  If you go 50/50 you are leaning heavily to small cap stocks because of market value weightings. Which may be okay, but it is good to understand you are doing this.

Remember the SP500 companies obtain 31% of their revenue outside the US, meaning the SP500 is already diversified internationally.  The SP500 tech sector obtains 59% of its tech revenue outside the US!  When you mix in the I fund, you are quickly over-weighting international revenue and under-weighting tech.

If you go 33/33/33 with a C/S/I mix, you are under-weighting the tech sector, over-weighting international finance and over-weighting small cap stock in the US.  In this case your large cap tech sector weighting is only 11% compared to 26% in the TSP C fund.  A return killer in the past and at some point in the future.

Stick with the US equity funds.

what is the best TSP fund to allocate to?

To keep it simple, the performance of the two funds depend where we are in a market cycle.  I'm not talking about the economy's business cycle, but actual stock market cycle - bull and bear markets. 

The small cap fund is more volatile which really means it gains more during market rallies and it loses more during market corrections.  So if we are nearing a market top it is better to be in the large cap funds (TSP C fund) and if we are coming off a market bottom we would tilt toward the S fund. Okay, I know the hard part is determining where we are in the cycles.  We will get to that.

Contrary to popular belief the TSP S fund has under-performed the TSP C fund since 2011.  Many believe the small companies in the S fund outperform the larger cap TSP C fund.  What is misleading is all the funds were given a starting value of 10.0 in 2003 and since that particular date the S fund has out-performed all the other funds. 

Update May 2021:  The small caps have surged to catch up with the SP500 in late 2020 and early 2021.  Then they pressed a bit higher.  This jockeying of position is normal and I expect the small caps to under-perform the large cap (TSP C fund) for awhile and most definitely during the next bear market or correction.

In 2003 the stock market was in the process of bottoming due to the 2000 stock market bubble bust. If they set the price to 10.0 a year later in 2004, the C and S fund would basically be in a tie for best performer by 2018. Note in this chart that both funds move together, but at slightly different rates at different times.  This means they are highly correlated and diversifying into both of them only changes your returns slightly over time.

TSP C fund 2020

If we compare more recent performance since late 2017, we see the large cap TSP C fund pulled away after the 2018 market plunge.  Often we see investors move to the safety of larger companies near market tops.  This cycle the SP500 has the added benefit of mega-monopoly stocks pulling in an ever-increasing share of the markets profits thanks to weak anti-trust enforcement for the last few decades. The late 2019 breakout of US equities was directly related to the Federal Reserve once again flooding the financial markets (repo) with "liquidity" (ie. money printed out of thin air to buy financial assets).

TSP S fund 2020

Bull/Bear Market Volatility

So the critical factor in determining allocations is to know approximately where we are in the larger bull/bear market cycle.  As we close in on a top, you should shift from the S fund to the C fund for safety.  In many cases other smart investors are doing the same as a defensive measure and the large cap C fund outperforms the small caps as the market slowly rolls over.  We've seen this since 2018, but understand market tops can take years.

You should always begin shifting out of the equity funds into the TSP G fund to avoid the larger market draw downs and preserve our nest egg to invest another day when future returns are more assured. The problem of course is some of the largest gains occur near the end of the bull market.  And of course, the news is the most positive at the top and retail investors are all-in.  

You will not see this perspective in charts from many investment advisers especially if their pay depends on fees from your staying invested.  The point of the next chart is to show the TSP G fund dominates during bear markets.  Since this is only 20% of the time, we want to point out that this means the relative gains for those in the G fund over those in the C or S fund in bear markets is greater than equity funds during bull markets. 

The market gave up 110% of the 5-year bull market gains in about 18 months from late 2007 until Spring of 2008.  From the 2000 market top, the equity funds took an average of 14 years to catch up with the lowly G fund.  This is not a call to sit in the G fund.  This is a call to avoid devastating bear markets by tilting to the G fund as the risk of large market losses increases.

TSP G fund 2020

The Hard Part

The most important decision you have to make is when to shift your allocations between either of the US equity funds and the TSP G fund. Equity funds (stocks) come with significant downside risks (ie. losses) during bear markets or large market corrections. Even young investors should sit in the TSP G fund while waiting out market resets.  

Yes, young investors have time to make up for losses, but why would you want to?  I completely reject this mainstream justification for buy and hold.  It serves the financial system, not you. Buy and hope and wait for it to come back up is not a strategy.  Nor is dollar-cost investing.

The most important action you can take to ensure the largest nest egg is simply to not ride a bear market to the bottom, period.

Unfortunately most financial advisers feel safer by running with the crowd.  That way when the bear market hits, they can tell you no one saw it coming and everyone else lost money too. And again, the reason this works is because the market spends 80% of its time in a bull (rising) market.  The problem is it tends to lose most of those gains in the other 20% of the time.

BTW, here is when I alerted my members to exit equities in late January 2020 based on signs of increasing distress in the credit markets.

One more page

Part 4: Best TSP Allocation for 2021

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