How to TSP

Anyone ever taught you how to TSP? If you're like me, probably not. Every year, my agency requires me to take various trainings on the dangers of lead, a host of ethics classes, bloodborne pathogens, how to use a fire extinguisher, how to wear a respirator, how not to pick up a random thumb drive in the parking lot and then immediately insert it into a classified government computer (really, people?) and even the elimination of prison rape (really, people?!!)

But has my agency ever, and I mean EVER, come up with a required (or even optional) annual training on my TSP options, and how to come up with a plan that's right for me? Has your agency?

Several times a week, I get this email, "Chris, love your papers. Quick question: I have been in the (insert any allocation) funds in the TSP. I'm thinking of moving to the (insert any allocation) funds. Thoughts?"

I typically answer with a few paragraphs of general investment background, comment on their allocation, and then give my philosophy. I've gotten the question so much, I've decided to write about it publicly so people can see what I think.

Spoiler alert: What I think is virtually irrelevant. Each of you need to understand your situation enough to come to an investment strategy you feel strongly about. One that gets you through the rough times, and one that you can articulate WHY you invest the way you do. Don't just blindly follow Warren Buffett, Jim Cramer, The Motley Fool, some TSP allocation service, CNBC, or even little old me.

What is the TSP?

To recap, you have 5 TSP funds to choose from, two bond: G and F, and 3 stocks: C, S, and I. That's it. Nothing else. The L Funds are not different from the above. They are just combinations of the above. I'm constantly surprised at the number of people who think the L Funds are different from the rest of the TSP funds. They are the same.

My TSP Philosophy

• I don't believe in timing the market. I am a long-term investor. And by long-term, I mean decades. And I mean that even now that I am 48 years old. What that means is that I am not deterred by an election, a recession, a war, a virus, etc. I am in this for the long-haul. If the market crashes on Monday, or we bomb a country, or there's a new virus, that will not cause me to rush out of the market. I will keep doing what I'm doing.
• I believe the market is the best tool for capital appreciation and the protection against inflation. People are worried about the "risk" in the markets. I worry about the "risk" in the G Fund, where I make less than 1%. Compound that over decades and I will have WAY less money than I need. I don't mind protecting some money for the short term. But I only do that so that I can stay in the market with the rest of the money long term. In other words, the G Fund allows me to benefit from the C Fund. We'll see that in a second.
• I believe the I Fund is a dog. I don't like the I Fund and want nothing to do with it. It has consistently underperformed. Since it was created in 2001, it has averaged 5% annually. (Yes, it beat it's average in 2020, by about 3 points for a total of 8%). 5% is not very good, particularly for a stock fund that is very volatile. It is the highest risk fund we have in the TSP. High risk can be ok if it comes with high reward. But high risk/low reward is not my idea of a good time. It's expense ratio is also 7 times higher than the C Fund's expenses. For these reasons, I don't invest in the I Fund. Which also means what? I don't invest in the L Funds. Every single L Fund has the I Fund in it. Therefore, they don't have me in it. And just like that, I've narrowed my choices, and simplified my life. Which leads me to...
• I believe in simplicity. I like to easily know what I own at any given time. That's another strike against the L Funds in my opinion. They automatically adjust over time. Might be good for you; I don't like it. Some people will get several L Funds. 30% in the L2025 and 70% in the L2050 for example. Now, you'll have to do a tremendous amount of math to even see what percentage of your money is in, say the S Fund. And that will change every quarter. Too much for me. Based on my criteria, I'm now down to 4 funds: G/F in bonds and C/S in stocks.
• I believe in more stable, less volatile companies, given the choice. The C Fund is the (roughly) 500 largest US companies. The S Fund is the US companies that are smaller. Nothing wrong with investing in either. Or both. As a preference, I stick with the larger, more stable ones. So any money I put in the markets is in the C Fund. The S Fund has typically done better than the C Fund in years when the markets did well (like 2020). It can sometimes fall faster than the C Fund in bad years. Nothing wrong with the S Fund at all. I just like a little less volatility. I'm actually pretty conservative. This is more a preference thing, than a math thing. Understand that. I'm not talking down about the S Fund.
• I believe money NOT in the market should be protected. The only fund that is protected against loss is the G Fund. The F Fund is a bond fund that is designed not to fluctuate tremendously, and it's done very well lately. But it CAN lose money. And it probably will if inflation ever kicks in again. So it doesn't fit my parameters of protection. My only option then is the G Fund. Yes, it doesn't make money. That's not the point. The point is it doesn't LOSE money.
• I believe most market crashes will recover in a 5 year period. As such, I want to protect at least 5 years of withdrawals in the G Fund. That buys me time to sit back and chill, while I let the markets recover. In reality, I actually protect about 7+ years of generous withdrawals in the G Fund. To clarify, I determine how much I might withdraw annually from my TSP when I retire at 50. I multiply that by 7 and include some extra for inflation. That gives me a certain dollar amount. That amount goes into the G Fund. The rest is by default in the C Fund. For me, that percentage works out to 30% G, 70% C. I'm happy with that, and it allows me to not care one bit what the markets are doing in any given year. 2020 was super stressful for some investors. It was not at all for me. I put a high value on peace of mind.
• I don't believe I'm competing with anyone. While I'm a pretty competitive person, I don't see the TSP as a contest. I see it as a way to build wealth for my family over the long-term. If you beat me each year, I'm happy for you. Seriously. It doesn't make my account worth less money. If I beat you, I'm not any better or smarter than you. That's not how this thing works. Stop chasing returns, and stop chasing other people.

That's it. Take all that for what it's worth.

Please understand I am not trying to get you to adopt my philosophy or my allocation.

But I am strongly encouraging you to come up with your own investing strategy that works for you, given your age, goals, risk tolerance, investment timeline, etc.

If you're like the typical person that emails me that has been in different funds at different times, and has moved in and out with no real reason why, other than things they've heard, or fears they've had, or any other short-term influences, and you've wanted to get something a little more concrete in place, do it. Do your research, talk to professionals, set some goals (most people don't have goals, so most people don't know what they want to achieve in the first place!). In short, develop an investment plan. A plan that deals with "What if's" and your responses to those "What if's".

If you've read this far, thank you. I realize it's a bit wordy. But if nothing else, it allows me the opportunity to respond to some of these emails with a link to this article. That means they will get more information than what I could possibly type each and every time in an email back to them.

If you want to share your philosophies and what works for you, put it in the comments below. Others will benefit from it. I promise that, unlike a lot of people, I won't argue with you. If it works for your situation, I'm all in.

This is NOT investment advice. Don't take it as such. It's investment encouragement. Invest, if you're not, but also have a plan to invest that's RIGHT FOR YOU!

Above all, keep feeding your TSP!