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TSP Funds to avoid



TSP I Fund

(International fund - currently the developed markets minus the USA)


TSP I fund underwhelms


Forget the international fund (TSP I fund) this market cycle...


Take a look at the TSP I fund performance since 2012 compared to the TSP C fund (SP500 index).  The primary reasons the international fund has under-performed the US funds is 1) lack of exposure to the global tech sector and 2) US companies have burned over 16 trillion in cash buying their own stock on the open markets - this practice is largely illegal or looked at harshly in other countries. We will also discuss the inclusion of emerging markets.


The best performing sector in world has been technology and this is a primary weakness of the TSP I fund.  And guess where the world’s preeminent tech companies are listed?  They are listed in the US where their returns are captured by the SP500 index which is tracked by the TSP C fund.   


The SP500 companies as a whole obtain 31% of their revenue outside the US, meaning the SP500 is already diversified internationally.  Better yet the SP500 tech sector obtains 57% of its tech revenue outside the US.  When you add the I fund to your allocations, you are quickly under-weighting the world's large tech stocks.


The International index (TSP I fund) is weighted with only 8% tech compared to the TSP C fund's 20% weighting. Facebook and Google have been moved to the communication services sector and they too sit in the SP500 which is why I added the Nasdaq-100 index to the chart above.  These companies are predominately tracked in the SP500 index and pulled the TSP C fund well ahead of the TSP I fund.  These are the most profitable growth companies in the developed world and they sit in the TSP C fund.


Using their high profits, the tech sector led the way in stock buybacks.  This not only helped the tech sector stocks, but pulled the SP500 higher.  Many US companies have engaged in this form of financial engineering and unfortunately too often borrowing to buyback their own stocks. The effect on the US stock market has been significant and is one of the two primary reasons the US funds have outperformed this market cycle.


TSP I Fund adds emerging markets


Adding emerging markets: The I fund is transitioning to broader international exposure in 2020. There is an ongoing battle between some Senators and the TSP managers over the inclusion of China into the TSP I funds portfolio and currently the TSP managers signaled they are going ahead with the expansion.  This is not why I do not recommend the I fund, but it does add to the case a bit.


TSP I fund emerging market


The TSP International (I) Fund will now include more emerging markets the largest being China.  Adding emerging markets does compliment the TSP US equity funds from a geographic diversification point-of-view.  But diversification into under-performing sectors is not a benefit and remains the same with the new index it may track.


While I expect Chinese companies to suffer under the trade war, the biggest problem is the lack of rigorous accounting and oversight in China.  Many Chinese companies will not be standing after the next global financial crisis.  This has more to do with financial falsifications than a simple recession.  Chinese companies are stating cash and other assets they do not have.  One of their top auditing agencies has been caught knowingly signing off on fraudulent accounting records.  Not to over-state China, its contribution to the I fund should top out around 7% in the near term.


Europe: The TSP I fund is also holding over a 24% weighting in financial stocks and frankly Europe’s banks and finances are a bug looking for a windshield.  The European Central Banks manipulation of interest rates into negative territory merely covered up the European problems in the short run with little positive effect on their economy.  


If interest rates do not rise above inflation, European savers will be crushed and the demand-side of the economy will suffer. Simply put, I do not see the TSP I fund as a good long-term investment for 2020 and beyond.


While the US stock market is more over-valued today, the global stock markets were highly correlated to the downside during the last two bear markets - meaning you can not hide in international stocks when the US stock market rolls over into a bear market.


Adding emerging markets adds an additional risk to the I fund.  My concern on emerging markets are the lack of protections for investors in some countries during another financial crisis. I would eliminate the TSP I fund from your allocations this market cycle.


TSP F fund

Comparing the two low-risk funds


With one exception I consider the TSP F fund the less desirable low-risk fund for long-term investors at this point in history. The exception to this rule is during periods when US interest rates are declining.


The difference in performance of these two funds are the capital gains or losses the F fund sustains during the year due to interest rate movements. Unless interest rates are falling and the F fund price is rising, there is no reason to be in the F fund over the G fund since the G fund interest rate closely matches the TSP F fund's yield alone.  This may explain why the TSP Lifecycle Income Fund for retirees currently holds 74% G fund and only 6% F fund.


From the F fund’s inception until 2012, interest rates were declining and the F fund’s price went up due to the falling rates.  While this makes the F fund’s past performance look good when comparing it to the G fund, this has not always the case.  Since 2012 interest rates have put in three bottoms, one in 2012-13, then 2016 and recently in 2019.  The TSP F fund price has been on an interest rate roller coaster since 2012 with the only sustained gains coming from its yield. The latest dive in interest rates bounced off the two previous lows. 

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TSP G fund is safer



We saw downward pressure on interest rates in 2019 due to a slowing global economy and increased financial stress. Holding the TSP F fund at the end of 2019 is a bet that interest rates in the US will plunge to record lows which implies a negative forward outlook for the US economy and financial situation. It could happen.


The main point here is that over the long-term interest rates determine whether the F fund is a better place to park your funds over the TSP G fund.  Sitting near historic lows in interest rates I don't consider this a sound long-term bet.  Short-term can be a different story.


If US interest rates hit zero the TSP F fund would see a maximum of 11% in capital gains over the TSP G fund while interest rates decline.  There is risk of capital losses due to higher interest rates caused by the higher gov't borrowing and from rising inflation. 


So if you expect another financial crisis, does this mean the TSP F fund will become a better performing fund as interest rates dive again. Maybe, but be careful. Bond funds come with both interest rate risk and default risk, the default risk during financial crisis means you should return to the risk-free TSP G fund after interest rates bottom. 


The bottom-line is when looking for safety during financial crisis's or bear markets, there is no better safe haven fund than the TSP G fund.


A TSP Allocation Strategy

Life-Cycle Funds


The most basic TSP investment strategy - Buy and Hold - is employed by the TSP Lifecycle Funds. While it is true that it greatly simplifies investing, the TSP Lifecycle Fund is subject to real market risk - significant losses in bear markets - while limiting gains in bull markets as discussed below.  The other issue is the inclusion of the TSP I fund as discussed above.  You can do better.


The Lifecycle funds are predominately invested in equities until you close in on retirement where they start shifting to the TSP G fund -- 74% in the retirement income producing fund. 


The two ovals in the next chart highlight a key point about most Lifecycle funds.  They do lose less during bear (down) markets, but the gain less during bull (up) markets. This means they are less "volatile" and this is advertised as being less risky.  With the exception of the Retirement Income Lifecycle fund you run the risk of large losses during bear markets as seen in the chart.


TSP Lifecycle Funds


The Life cycle funds hold proportions of each equity fund (TSP C/S/I) based on their market valueWhile the equity funds are diversified geographically across the developed world based on a value weighted basis, this geographic diversification under-weights global technology relative to holding the US only equity funds.  With the addition of emerging markets to the TSP I fund, the increased market value of this fund means the Lifecycle funds will hold a higher allocation to the I fund than before and a lower allocation of the US equity funds. 


So to keep it simple we've now narrowed our decisions down to only basic 3 funds to consider - the TSP C and S equity funds and the no-risk G fund... (the one exception is to temporarily hold the F fund over the G fund during declining interest rates)



...let's take a look at 

 The 3 Best TSP Funds today and why.







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