Lyn Alden

The Thrift Savings Plan was fortunately an early adopter of low-cost index investing.

This means that federal investors who stick to a balanced equity-focused hands-off strategy have generally outperformed most actively-managed equity funds over the long term, and did so at a much lower expense ratio.


According to the S&P SPIVA Scorecard, 92-95% of money managers fail to beat their respective indices over a 15-year period. TSP investors can easily match the performance of the indices instead and outperform the majority of actively-managed funds.

But, many TSP investors deviate from what is often viewed as a “standard” stock/bond portfolio, and this often ends up costing them a lot of money.

For example, many investors put most of their money in the G Fund, which over the past ten years has only grown at a 2.63% annual growth rate according to the G Fund factsheet.

Considering that inflation during this period averaged about 2% per year, the real rate of return was negligible. While it’s the lowest risk fund, and certainly a worthwhile place to have some money as you close in on retirement, the hidden risk is that many years of focusing heavily on the G Fund can leave you with too little money in retirement.

Another common error is improper market timing. Some investors were heavily invested in equities, but then in 2008/2009 when the market crashed, they pulled money out and put it into the G Fund. U.S. stocks then went on to triple in value over the next 8 years, and many investors missed out on that recovery.

Columnist Mark Hulbert from Marketwatch recently shared an interesting statistic:
“Currently, according to Ned Davis Research, stocks represent 40% of total household financial assets, much higher than the 28.2% average allocation since 1951. There’s been only one other occasion since 1951 in which stock allocation was higher than it is today — at the top of the late 1990s internet bubble, when it rose to 47.5%.

Every other major stock market top of the last seven decades, in contrast, occurred when households’ equity allocation was lower than today’s level. At the 2007 stock market top, for example, the allocation peaked at 37.1%.”

In other words, now that we’ve had a very long bull market with outstanding returns, investors are piling heavily in equities. A lot of those investors will probably pull money out the next time we have a market correction, which is what leads to results like this:

fedweek.com | Thrift Savings Plan buy and hold

Source: JP Morgan Guide to the Markets, 3Q 2017

Studies show the average investor significantly underperforms equity and bond indices. Mostly this seems to be because they’re going into stock and bond indices at all the wrong times, which would be alleviated by a simple buy-and-hold diversified strategy. This is not surprising given that professional investors also underperform statistically as a group, so non-professional individuals tend to do even worse.

A final mistake I’ll mention is when people wait too long for a market correction. Many investors know that the market is very historically overvalued right now. But if you keep all your money out of stocks always looking for that one big crash, you’ll miss out on multiple 10-20% year gains just to avoid getting hit with that once-a-decade 30-40% market crash.

For example, I’ve been concerned about high market valuations for the past few years, but instead of pulling money out of stocks, I’ve maintained a steady, balanced portfolio, and have only made mild adjustments. The result is that I’ve continued to participate in the ongoing bull market, while being prepared for a bear market. Whenever we encounter a correction, I’ll be re-balancing accordingly, which means buying more equities.

There are two approaches that historically perform quite well:

Strategic Asset Allocation: This is where you buy and hold a set ratio of stock and bond funds, and occasionally re-balance back towards those predetermined ratios. The TSP Lifecycle funds are a good example of this, and they do the re-balancing for you. Over the last several decades, strategic asset allocation approaches with 60% or more exposure to stocks have performed almost as well as a pure stock portfolio, but with significantly less volatility, which makes it easier for investors to stick with.

Tactical Asset Allocation: This is a more active approach where you adjust your bond and stock exposure a bit based on market conditions. The key here is slow and steady. You don’t try to go all-in or all-out of stocks based on valuations. But you might gradually dial up your equity exposure when stocks are cheap, and might gradually dial-back your equity exposure when stocks are expensive. If international stocks are cheap, you might gradually dial up your exposure to them. Basically, it’s like over-balancing rather than re-balancing; occasionally shifting a bit more money into historically cheap things but without making big sweeping changes all at once or going too far in any direction.

Either way, history shows us that the emphasis should be on having a long-term view.

Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.