abidingpatri0t
New member
Before starting a new thread about TSP asset allocation, please read this thread and ask questions in this thread if clarification is necessary.
Suggested reading if you are going to deviate from a TSP Lifecycle Fund:
Short answer: Lifecycle 2065 https://www.tsp.gov/funds-lifecycle/l-2065/ until you know how you want to set up your asset allocation.
Long answer: Do your own research and read classic books like A Random Walk Down Wall Street, The Little Book of Common Sense Investing, and the Bogleheads Lazy Portfolios: https://www.bogleheads.org/wiki/Lazy_portfolios.
Understand Modern Portfolio Theory and how diversification increases your returns while decreasing your volatility. Once you do that, then you can go about creating your own asset allocations.
Before building a portfolio inside TSP, you first need to understand what tools you have at your disposal.
You can run some back-tests of asset allocations on Portfolio Visualizer.
If a million people flip a coin 10 times, how many do you think will get heads 10 times in a row? Almost 1,000 (0.0977% * 1,000,000 = 977). Even something that has a low probability of success, repeated enough times, will have a successful outcome many more times than what you would intuit. This is just to illustrate that there are a lot of gurus out there promoting one strategy over another, but the chances that any one of them will be correct just comes down to statistics.
The second path you can take, is to utilize the G/F/C/S/I funds yourself and build a custom portfolio. Notice the L fund is not listed among the tools you should use in building a custom portfolio, as it’s unnecessary and will only blur how your assets are actually allocated. If you want to use the L Fund, just use the L fund. If you want to build a custom portfolio, exclude any L funds as they will only complicate things; the opposite of their intended purpose.
Custom portfolios can vary greatly, with 31 potential combinations of funds, and each fund can have a custom allocation between 0-100%. To help you get started, here are the generally accepted principles to consider:
As of 2022, L 2065 has the following composition:
You’ll need to keep an eye on it over the years to make sure it stays balanced, and you will need to adjust accordingly as your risk capacity changes, but overall you should hold your allocation once it’s set and minimize changes that go against buy-and-hold philosophy.
You could also select a starting point from Vanguard’s, Schwab’s, or Fidelity’s target date funds. These funds may require an extra step or two in order to arrive at your decision for a TSP portfolio, but they offer more funds which may be more correctly tailored to your age, and you’ll get a better variety of opinions on what an ideal portfolio should look like.
Sure, that's a fine asset allocation, is that's what you want and you understand the volatility inherent in a 100% stock portfolio.
With the C Fund you buy the 500 largest companies in America. If you did that over any 20 year period from 1900-2021, worst case you would have a 3.1% annualized return and best case 17.1% annualized return. On average about a 10% return before inflation. Check the compound annual growth rate of the C Fund (SP500) on MoneyChimp.
You have no exposure to small cap funds, bond funds, or international stocks with a 100% C Fund portfolio.
There are an infinite number of TSP portfolios. Back-testing on historical returns or looking at the 5 or 10 year returns of individual funds only tells you what happened in the recent past. It might suggest what may happen in the future, but past performance is no guarantee of future results.
Here are some examples of other funds you could construct. Which is the right one? No one knows. If you did, you'd be a trillionaire. No one knows what's going to happen in the next day, year, decade, so no one knows the perfect asset allocation. Far better to just pick one you can justify to yourself and stick with through good and bad performance.
Find a reasonable asset allocation you can stick with through good times (2009-2021) and bad times (2022). If a 30% drop in 30 days in the C Fund will spook you and make you move to the G Fund and miss out on 2 years of double digit returns, don't put 100% of your money into the C Fund.
However, if you can handle the volatility, which is the fee you pay for long-term good returns, then by all means, go with a stock heavy portfolio.
Here are some examples of other TSP allocations:
VTSAX (ETF: VTI) Vanguard Total Stock Market Index portfolio simulation in the TSP - own most of the publicly traded companies in America
Bogleheads 3 Fund Portfolio
Suggested reading if you are going to deviate from a TSP Lifecycle Fund:
- Bogleheads Guide to Investing
- The Little Book of Common Sense Investing
- A Random Walk Down Wall Street
- The Simple Path To Wealth
How should I invest my TSP account?
Short answer: Lifecycle 2065 https://www.tsp.gov/funds-lifecycle/l-2065/ until you know how you want to set up your asset allocation.
Long answer: Do your own research and read classic books like A Random Walk Down Wall Street, The Little Book of Common Sense Investing, and the Bogleheads Lazy Portfolios: https://www.bogleheads.org/wiki/Lazy_portfolios.
Understand Modern Portfolio Theory and how diversification increases your returns while decreasing your volatility. Once you do that, then you can go about creating your own asset allocations.
Before building a portfolio inside TSP, you first need to understand what tools you have at your disposal.
You can run some back-tests of asset allocations on Portfolio Visualizer.
If a million people flip a coin 10 times, how many do you think will get heads 10 times in a row? Almost 1,000 (0.0977% * 1,000,000 = 977). Even something that has a low probability of success, repeated enough times, will have a successful outcome many more times than what you would intuit. This is just to illustrate that there are a lot of gurus out there promoting one strategy over another, but the chances that any one of them will be correct just comes down to statistics.
The TSP Funds
- G Fund - The safest fund. This is a fund of uniquely issued government backed securities, similar to very short term bonds. They are designed to preserve money, however, you'll also not make a lot of money with this fund.
- F Fund - The F Fund's investment objective is to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index, a broad index representing the U.S. bond market. Bond funds are less volatile than stock funds, but have historically returned less. This fund will be useful in guarding against economic downfall and providing a differing correlation in your portfolio.
- C Fund - Common stock fund. Matches Standard & Poor’s 500 (S&P 500, available as the ETF "SPY"). The top 500 companies in the United States. This is the index fund of Apple and Ford and Microsoft and General Electric and Amazon and so on. These are heavyweight corporations that form the backbone of the American commercial industry both at home and abroad.
- S Fund - Tracks the Dow Jones U.S. Completion Total Stock Market. All those medium and small companies the C fund leaves out, this one picks up. Slightly more volatile than the well-established blue-chip stocks, but these companies have more potential for major growth and historically has produced a higher return than the C fund.
- I Fund - Europe, Australia, and Far East index. The U.S. holds about a 50/50 of the global market cap. Investing internationally can provide diversification while maintaining or improving returns over the long run.
- L Fund - Lifecycle funds, the ultimate tool for the “lazy” investor. It is a portfolio composed of the other funds listed above, that automatically reallocates investments based off of a generally acceptable balance in respect to your remaining years until retirement (aggressive while you’re younger, gets safer as you age). You can see how it works here.
The second path you can take, is to utilize the G/F/C/S/I funds yourself and build a custom portfolio. Notice the L fund is not listed among the tools you should use in building a custom portfolio, as it’s unnecessary and will only blur how your assets are actually allocated. If you want to use the L Fund, just use the L fund. If you want to build a custom portfolio, exclude any L funds as they will only complicate things; the opposite of their intended purpose.
Custom portfolios can vary greatly, with 31 potential combinations of funds, and each fund can have a custom allocation between 0-100%. To help you get started, here are the generally accepted principles to consider:
- Stay within your risk tolerance and capacity.
- Try to maximize return while minimizing risk.
- Keep a long-term outlook.
- Past performance does not guarantee future returns.
- Diversification is the only free lunch, eat up.
- The “Buy-and-Hold” strategy is king. Other strategies may look flashy, but they consistently fail to beat buy-and-hold strategies.
- Time in the market beats timing the market.
- Have a glide path.
As of 2022, L 2065 has the following composition:
- G fund – 0.35%
- F fund – 0.65%
- C fund – 49.04%
- S fund – 15.31%
- I fund – 34.65%
- G fund – 0%
- F fund – 1%
- C fund – 49%
- S fund – 15%
- I fund – 35%
You’ll need to keep an eye on it over the years to make sure it stays balanced, and you will need to adjust accordingly as your risk capacity changes, but overall you should hold your allocation once it’s set and minimize changes that go against buy-and-hold philosophy.
You could also select a starting point from Vanguard’s, Schwab’s, or Fidelity’s target date funds. These funds may require an extra step or two in order to arrive at your decision for a TSP portfolio, but they offer more funds which may be more correctly tailored to your age, and you’ll get a better variety of opinions on what an ideal portfolio should look like.
Why not just 100% C Fund?
Sure, that's a fine asset allocation, is that's what you want and you understand the volatility inherent in a 100% stock portfolio.
With the C Fund you buy the 500 largest companies in America. If you did that over any 20 year period from 1900-2021, worst case you would have a 3.1% annualized return and best case 17.1% annualized return. On average about a 10% return before inflation. Check the compound annual growth rate of the C Fund (SP500) on MoneyChimp.
You have no exposure to small cap funds, bond funds, or international stocks with a 100% C Fund portfolio.
Other TSP Portfolios Examples
There are an infinite number of TSP portfolios. Back-testing on historical returns or looking at the 5 or 10 year returns of individual funds only tells you what happened in the recent past. It might suggest what may happen in the future, but past performance is no guarantee of future results.
Here are some examples of other funds you could construct. Which is the right one? No one knows. If you did, you'd be a trillionaire. No one knows what's going to happen in the next day, year, decade, so no one knows the perfect asset allocation. Far better to just pick one you can justify to yourself and stick with through good and bad performance.
Find a reasonable asset allocation you can stick with through good times (2009-2021) and bad times (2022). If a 30% drop in 30 days in the C Fund will spook you and make you move to the G Fund and miss out on 2 years of double digit returns, don't put 100% of your money into the C Fund.
However, if you can handle the volatility, which is the fee you pay for long-term good returns, then by all means, go with a stock heavy portfolio.
Here are some examples of other TSP allocations:
VTSAX (ETF: VTI) Vanguard Total Stock Market Index portfolio simulation in the TSP - own most of the publicly traded companies in America
- 75% C Fund
- 25% S Fund
Bogleheads 3 Fund Portfolio
- 34% C Fund (or 26% C Fund, 8% S Fund if you want to add Small cap exposure)
- 33% I Fund
- 33% G Fund or F Fund (or split 17% F and 16% G)
- 50% S Fund
- 50% C Fund
- 30% C Fund
- 40% I Fund
- 10% S Fund
- 10% F Fund
- 10% G Fund
- 45% C Fund
- 40% I Fund
- 15% S Fund