TSP Allocation Strategy

TSP and IRAs: An Investing Lesson from the Lazy

If you head over to Paul B. Farrell’s Lazy Portfolios page on MarketWatch you will see a current table of eight portfolios designed for a diversified buy & hold portfolio.  These portfolios allow one to forget about your investments and spend time focusing on whatever is important to you.  The top performing portfolio is the Yale Universities Unconventional portfolio that holds 30% in the Total US Stock Market Index Fund in addition to five other Vanguard Funds.  In the last 10 years this portfolio’s annualized return was 8.19% versus 8.33% for the S&P 500 index, but it is a more diversified.

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You could set the Yale U’s Unconventional portfolio up in a self-managed IRA/401K if your account allows you to purchase Vanguard funds.   These portfolios are designed to be buy and hold, so you will take your hits during bear markets.  If you were not completely lazy and wanted to avoid most of the bear market’s hit, you could employ a simple seasonal strategy such as TSP & Vanguard Smart Investor’s simple two-trades-per-year strategy.   Using Vanguard’s VTI ETF (Whole US Stock Market index), we show in the chart of how the strategy performed during the last 10 years compared to buy and hold.

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How does it work?  The Seasonally-Modified Buy & Hold™  strategy designed for TSP & Vanguard Smart Investor simply switches from equities to a low-risk interest bearing fund, like the Thrift Savings Plan’s (TSP) G Fund for about half the year by combining seasonal filters with a timing signal.  This keeps investors out of the market during the seasonally weakest time for equities yet captures most of the market gains during bull markets.

The strategy makes its money during bear markets or corrections by avoiding much of the drawdown.   By simply moving to cash half the year VTI annualized returns would have increased from 8.85% to 10.66% during the same time frame.  Any earnings the other half of the year just pads the numbers.  Switching to the TSP G Fund would have boosted your annual return to from 8.85% to 12.16% during the same time frame.

Even a three percent increase over approximately 24 years will double your nest egg.  Vanguard offers extremely low expense fees as does TSP accounts for federal employees and the military.  Our allocation guide  under equity funds also compares all the low cost ETFs and Mutual Funds, not just Vanguard’s.  If you are in a retirement fund such as the TSP that limits your investment options to a few indexes, following a seasonal strategy is one of the safest ways to boost your long-term returns and sleep better during bear markets.