Being Fearful When Others Are Greedy, Moving Into The G Fund

Warren Buffett once said, “Be FearFul When Others Are Greedy and Greedy When Others Are Fearful.” With the stock market hitting all-time highs...I’m fearful.

In November of 1999, the NASDAQ (major index tracking mostly technology stocks) hit an all-time high of 4,303 during the “dot.com” bubble. Now in June of 2015, the NASDAQ is sitting at 5,160 jumping from a bottom of 1,476 in November 2008. While most people are encouraged by this upward movement, I am fearful.

Military members and federal government employees can take advantage of the Thrift Savings Plan (TSP) which allows them to invest in specific funds in a 401(k) like program. When an investor contributes to the TSP it automatically invests in the “G” Fund which invests in Government Securities. It’s the safest fund yet offers very little returns. Since 2008, I’ve been advising people to move their money out of the “G” Fund to take advantage of returns after the financial collapse in 2008. For most people I’ve recommended not being in the “G” Fund at all. That advice was spot on for those that listened. For those that kept their money in the “G” Fund, their portfolios have barely moved.

For nearly 7 years, we’ve enjoyed a stock market rally fueled by historically low interest rates and two administrations (Bush and Obama) with uncontrollable government spending. Both of these have artificially pumped cash into the pockets of corporations and the people who, then in turn, spend it quickly. With our National Debt over $18T, these low interest rates and government spending can’t last forever. Despite gas prices going lower, all others commodities in our lives have seen price increases. As I joked in a Facebook post, “Inflation is coming”; borrowing the ominous warning from Game of Thrones.

I believe there will be a stock market drop soon. I believe Thrift Savings Plan (TSP) investors should consider moving money back into the “G” Fund to protect against major market drops. Each investor is different, but if the investor is under 30 then they should consider putting about 10-15% in the G Fund. If the investor is 31-45, then I recommend 15-35% in the “G” Fund. Anyone over 45 should very carefully analyze their current financial position and evaluate retirement goals before deciding on how much to put in the “G” Fund. If the retirement goal is to retire at 55, then there should be a larger percentage in the “G” Fund and if the retirement goal is later, then less in the “G” Fund. Retirees should be careful not to take all their money out of the stock market though with average life spans reaching 85 years old—they’ll need to make their money last better. As interest rates rise to fight inflation, investors will see increased returns in the “G” Fund as well.

Investors can either go to MyPay or change their allocation to start moving money into the “G” Fund or they can use one of their two a month Interfund Transfers (IFT) to move money out of one fund and into another. They can do this through www.tsp.gov. Please do your own research before making any investment decisions, but I really feel that this 7-year long rally is about to end.

Learn More About Your Thrift Savings Plan (TSP)

Source: www.tsp.gov

 There are some common misconceptions about the Thrift Savings Plan (TSP) causing investors to “lose” money. By understanding how the TSP works, you can make more money for your retirement. An active role in the TSP can earn you a better return and help you retire earlier. Here are some of the misconceptions with the TSP (Roth or Traditional) I’ve seen.

·         I’ve started my TSP, so I’m good right? If you’ve gone to MyPay or have gone to your local finance office and started your TSP, then you’ve only accomplished the first step. When you start TSP, by default, your money automatically gets invested in the “G” Fund. The G Fund is the safest fund, and as such, has the lowest rate of return. You will never actually lose money, but you mathematically “lost” money by not being in higher rates of return funds. According to TSP.gov, the G Fund has returned 3.4% over the last 10 years compared to the “C” Fund which returned 7.4% over the same time.¹ You must go to www.tsp.gov to change your fund allocation. This is a crucial step for retirement planning. If changing the allocation stresses you too much, then consider one of the Lifecycle (L) funds.  Pick your target retirement date (or the date nearest your 55^th birthday) and place it all in that L Fund.

·         I’ve changed my fund allocations, so I’m good right? Changing your fund allocation should be an annual event. Leaving your fund allocations stable, isn’t necessarily a bad thing and will earn you average returns from the Dollar Cost Averaging method. But if you want to maximize your earnings, you should check your fund allocation every year and change it as applicable. If the stock market is down then you should invest more in the C or S Fund to take advantage of the low market prices.  Or conversely, you’ve seen a huge increase in profits in your C or S Funds, so you can reduce those contributions and put more into your G Fund to take advantage of a potential sell off.

·         I’m following the market closely, but I can’t be as active because I have the TSP and not an active investment account. This is a very common myth. You can “buy and sell” out of your TSP funds at any time. Some people even engage in TSP day trading. “Buying and Selling” is accomplished by doing an Interfund Transfer (IFT) by going to www.tsp.gov or by calling TSP directly. There are some limitations, so day trading isn’t necessarily as easy as in a normal investment account, but you can actively trade. Instead of waiting for your annual allocation change (like mentioned above), you can take $10K out of your G Fund and move it to the S Fund and vice versa as the market changes. This differs from changing your fund allocation because you’re “locking in” the gains you’ve made in the fund you are transferring out of.

Bottom Line: Make sure, especially if you are under 45, that all your money isn’t being put in the G Fund. After you’ve adjusted your allocation to meet your investment needs, then consider changing it annually or more frequent if you do sufficient market research.

¹ Annual TSP Returns: https://www.tsp.gov/investmentfunds/annual/annualReturns.shtml