There's been a resurgence of poor investing ideas surround TSP lately. I've posted on the subject prolifically, but like fighting a hydra, as I tackle one bad argument for 100% C fund allocation, 3 more replace it. I'm going to try and combine a lot of my previous posts into this and just cover everything.
If your portfolio is any of the following, you have a sub-optimal or illogical portfolio:
Here's my old post on how I created a portfolio with a 15% F fund allocation that had better return than a 100 C, 50/50 C/S, and 60/20/20 C/S/I portfolio, and less volatility to boot. And I've updated the backtest from that post to today, and an 80/20 S/F portfolio is still doing better than all the ones I've mentioned above.
So that should at least give you an idea of why your portfolio is potentially sub-optimal. But I'll briefly explain why it's nonsensical too. The argument for a 100 C or a 50/50 C/S is usually along the lines of, "I'm a young, cold-blooded, perfectly rational robot with diamond hands. I want risk to get the best return." If that's the case and you are a pure risk machine and past performance is all that matters, why are you not 100 S? That's the only logical outcome to such thinking. Anything else is illogical if you believe past performance predicts future returns and care not for risk. Now, this isn't me telling you to switch your portfolio to 100 S, this is me showing you that you aren't thinking logically and you might not be designing a portfolio based on logic and reason.
And let's talk about the I fund. I first talked about it here. People think they can look up the past performance of the funds and make a good portfolio going off that sole number. Well you can't. Absolutely nobody who actually knows what they are talking about will ever recommend you a 100% domestic allocation for your equity. The people who do that are redditors, bloggers, and youtubers that lack any sort of credentials, education, or self-awareness of their own ignorance. You know who recommends a healthy international equity allocation? Seriously every professional and the firms they work for, along with every academic along with the entire body of peer-reviewed papers on the subject. Go ahead. Try and find a legitimate source that espouses a 100% C fund allocation. It doesn't exist. When you get tired of looking for that, try instead to look at the target date funds from different firms. From Vanguard, Charles Schwab, Fidelity, JP Morgan, Blackrock, GS, etc. They all average around 35% of their equity allocation going international. And that's what's in line with all the academic research we have.
And lastly let's talk about the L funds. First of all, they've changed. Long have they had the stigma of being "too conservative" but now they've been updated to be more in line with industry peers. If anything, they are now more "aggressive" than industry norm. Secondly, you suck at investing. Yes you, Mr. Illusory superiority. And I say Mr. intentionally because it affects men more than women. This particular fallacy is rampant in the field of personal investing. Take that and combine it with all the data and research we have on investor psychology and behavior and how we've shown time and time again the terrible results that come from investors monkeying with their own investments, and I feel comfortable saying that if you're reading this, your brain is not built for investing and you are your own worst enemy. Which is why the L fund is a god send. You should be thankful for the L fund, sent to save you from yourself. It doesn't make poor decisions. It has a great asset allocation. It automatically rebalances. It will never betray you.
So here is my conclusion and advice. Investing is really complicated, but your actions can be really simple. Pick the L fund that's appropriate for you and never change it. Or if you can't manage that. Please at the very least make it your primary recommendation. We have a lot of junior enlisted members on here who don't know jack about finances or investing. Teenagers that are just trying to build something for themselves, and the new L funds are without a doubt the best option for them.
If your portfolio is any of the following, you have a sub-optimal or illogical portfolio:
- 100 C
- 50/50 C/S
- 60/20/10 C/S/I
Here's my old post on how I created a portfolio with a 15% F fund allocation that had better return than a 100 C, 50/50 C/S, and 60/20/20 C/S/I portfolio, and less volatility to boot. And I've updated the backtest from that post to today, and an 80/20 S/F portfolio is still doing better than all the ones I've mentioned above.
So that should at least give you an idea of why your portfolio is potentially sub-optimal. But I'll briefly explain why it's nonsensical too. The argument for a 100 C or a 50/50 C/S is usually along the lines of, "I'm a young, cold-blooded, perfectly rational robot with diamond hands. I want risk to get the best return." If that's the case and you are a pure risk machine and past performance is all that matters, why are you not 100 S? That's the only logical outcome to such thinking. Anything else is illogical if you believe past performance predicts future returns and care not for risk. Now, this isn't me telling you to switch your portfolio to 100 S, this is me showing you that you aren't thinking logically and you might not be designing a portfolio based on logic and reason.
And let's talk about the I fund. I first talked about it here. People think they can look up the past performance of the funds and make a good portfolio going off that sole number. Well you can't. Absolutely nobody who actually knows what they are talking about will ever recommend you a 100% domestic allocation for your equity. The people who do that are redditors, bloggers, and youtubers that lack any sort of credentials, education, or self-awareness of their own ignorance. You know who recommends a healthy international equity allocation? Seriously every professional and the firms they work for, along with every academic along with the entire body of peer-reviewed papers on the subject. Go ahead. Try and find a legitimate source that espouses a 100% C fund allocation. It doesn't exist. When you get tired of looking for that, try instead to look at the target date funds from different firms. From Vanguard, Charles Schwab, Fidelity, JP Morgan, Blackrock, GS, etc. They all average around 35% of their equity allocation going international. And that's what's in line with all the academic research we have.
And lastly let's talk about the L funds. First of all, they've changed. Long have they had the stigma of being "too conservative" but now they've been updated to be more in line with industry peers. If anything, they are now more "aggressive" than industry norm. Secondly, you suck at investing. Yes you, Mr. Illusory superiority. And I say Mr. intentionally because it affects men more than women. This particular fallacy is rampant in the field of personal investing. Take that and combine it with all the data and research we have on investor psychology and behavior and how we've shown time and time again the terrible results that come from investors monkeying with their own investments, and I feel comfortable saying that if you're reading this, your brain is not built for investing and you are your own worst enemy. Which is why the L fund is a god send. You should be thankful for the L fund, sent to save you from yourself. It doesn't make poor decisions. It has a great asset allocation. It automatically rebalances. It will never betray you.
So here is my conclusion and advice. Investing is really complicated, but your actions can be really simple. Pick the L fund that's appropriate for you and never change it. Or if you can't manage that. Please at the very least make it your primary recommendation. We have a lot of junior enlisted members on here who don't know jack about finances or investing. Teenagers that are just trying to build something for themselves, and the new L funds are without a doubt the best option for them.