The Thrift Savings Plan ended a strong year for 2020, despite the big shock that hit the global economy.
A large fiscal and monetary stimulus, resulting in the broad money supply increasing by 25% year-over-year in the United States, helped keep asset prices high.
This chart shows the year-over-year percent change in the US broad money supply. Broad money supply includes currency in circulation, checking accounts, savings accounts, and other cash-equivalents:
The S&P 500, which is tracked by the C Fund, closed the year at around 3,700:
Investor behavior was mixed, however. In March 2020, during the major sell-off across risk assets, many TSP investors sold their equity funds and even lifecycle funds, and went to the G Fund. That, ironically, was the best time to buy those other funds instead.
Overall, investors generally do well when they remain reasonably diversified, and keep adding new capital every month. It’s understandable to have pulled money out in March, since it was a very unusual event, but that is what makes investing very difficult.
Hopefully my weekly articles were helpful for investors. Each year, we would do well to review our investment decisions, and see what we did well, and what we wish we had done differently, so that we are more prepared with experience for the years ahead.
Last year in my February 3rd article, when markets were still at all-time highs, I cautioned about the virus and suggested prudence:
“Overall, risks are elevated in the market. The global response to the virus is likely to weigh on Q1 2020 GDP numbers, equity valuations remain historically high, and the recent bullish trend has become more volatile. Investors would do well to make sure their portfolios are properly diversified and rebalanced, and that their risk profile matches their risk tolerance.”
In my March 16th article, near the bottom in risk assets, I wrote about diversification and rebalancing:
“Based on historical data, most investors can protect themselves by remaining diversified, rebalancing their portfolio when the ratios get out of their target range (or let the Lifecycle funds do it for them), and making sure their personal financial situation is robust enough to get through periods of financial hardship.”
And in my March 24th article, days after the bottom in risk assets, I wrote:
“The G Fund held up the best year-to-date, but going forward, its prospects are concerning.”
The G Fund indeed was the worst-performing fund for the rest of the year. Anyone who stuck with a diversified portfolio, or used a contrarian tactical approach, did quite well in 2020.
After such a strong year for risk assets, it would be a good time again to check your allocations, and make sure that your portfolio and your risk tolerance are aligned. This includes TSP investments, and investments outside of your TSP.
Bitcoin’s Relentless Rally
When we think of asset classes, we normally think of things like stocks, bonds, real estate, precious metals, commodities, collectables, and perhaps a few other alternatives.
The best performing asset class in 2020 ended up being cryptocurrencies, which is only a 12-year old asset class, and a controversial one at that. Bitcoin, which now costs over $30,000 per coin, was the first cryptocurrency, and it celebrated its 12-year birthday yesterday, since its genesis block was created on January 3, 2009. It has captured the attention of the financial media this year due to its unexpectedly sharp rise. Many investment funds are starting to put a small allocation to it, while others remain fierce critics of it.
I don’t normally discuss it in this column since it’s not investable inside the TSP, but I occasionally talk about alternative investments that investors can diversify into via an IRA or other accounts, so it’s worth a mention.
Bitcoin had 347% returns for 2020, and the second largest cryptocurrency, Ethereum, had even bigger 493% returns. This compared favorably to gold with 24% returns this year, and both stocks and long-duration bonds that provided 18% returns this year.
Bitcoin now has a market capitalization of over $600 billion, which if it were a company, would be in the top ten companies globally. The linear price chart this year may look crazy and overbought, but if we look at Bitcoin on the long-term logarithmic price chart, it’s just doing what it has always done so far:
The open source globally distributed Bitcoin protocol generates a certain amount of new coins every ten minutes on average, when a new block is added to the blockchain. Currently there are approximately 18.5 million coins. Every 4 years there is a “halving”, meaning that the number of coins generated gets permanently cut in half. In the beginning, the protocol created 50 new coins every ten minutes, and then after four years it dropped to 25 per ten minutes, and then four years later it dropped to 12.5, and ever since May 2020 it has dropped to 6.25. In 2024, the production rate will get cut in half again to 3.125.
Although the sample size is small, the next 18 months or so after these halving points tends to be very bullish for Bitcoin, because demand has historically remained strong despite new supply getting cut in half, resulting in a supply/demand imbalance that pushes the price up and then attracts momentum traders.
Investors can choose for themselves what types of diversification to have. I personally like to add alternatives such as precious metals, digital assets, commodities, and emerging markets to my other investment positions, within the context of a highly-diversified financial position.
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.