Allocation Strategy

TSP Investing is So Easy

Okay, it is never easy to make allocation decisions even when you have a good strategy.  I still wonder if this year will be like 2013 and we will miss gains over the summer or will it start to look more like the bear market of 2007 and 2008.  So occasionally I have to remind myself how our simply strategy has performed by looking back over various timeframes. Then it becomes simpler to simply sell when the signal tells me to and enjoy my summer even if we have a 2013 repeat.

Instead of focusing on how the S fund did compared to the C fund this week, we are going to focus on stress reduction.  Our model does go 100% into the S fund in the Fall to capture the gains of the favorable season in equities and 100% into the G fund in the Spring to sit out he unfavorable season while earning interest in the G fund.  You would only invest up to your desired risk level based on your situation of course, but the model shows how the funds invested would have performed.  Let’s start with the recent bull market where a buy & hold strategy has done quite well.

TSP Smart Investor during Bull Market

TSP Smart Investor during Bull Market

While our strategy lost ground in 2013, it still managed to stay ahead of the buy & hold investors during the current bull market.  It is important to remember the strategy is NOT designed to beat the index every year, it is designed to achieve the best long-term returns.   And it does this by going against conventional advice and LOWERS your investment risk instead of increasing risk it.

A large part of its outperformance happens during bear markets since a majority of the market drawdowns have occurred in the unfavorable season for equities.   The market can go down during the favorable season, but the bulk of the losses have been in the unfavorable season which our strategy conveniently sits out.  The following chart includes both a bull market and bear market.  While a buy & hold investor was back to even in four years and up 95% today, our simple strategy is now up over 230% and was up within 1 and half years.

TSP Smart Investor since 2007

TSP Smart Investor since 2007

We can look even further back, if we use the indexes the TSP fund tracks.   The Dow Jones U.S. Completion Total Stock Market Index was developed and provides data going back to 1987.   In the chart below, we see 27 years of following our simple seasonal strategy.  Not bad.  Less stress more money.  Investing made simple.   Don’t let your friends buy & hope.  Or the more professional…increase your risk-adjusted returns with just two allocations changes a year.  Oh,  just look at the chart…

TSP Smart Investor since 1987

TSP Smart Investor since 1987

Okay, we need the disclaimers too.  You know the ones…past returns do not guarantee future results.  This is very true, but it also includes buy and hold investing.  I would even say it is more true today for buy and hold investors since market valuations are high and great returns need to start near bear market lows.

What I have found when I look at many different time frames with the simplest Sell-in-May seasonal strategy, is over the full market cycle it consistently beats buy & hold. And our advanced seasonal strategy beats the Sell-in-May strategy.  You see the results in the charts.

But what I like best about this strategy is we are going to get Sell signals soon, then we will enjoy our summers sitting on the sidelines while the market digests a decelerating economy, an “earnings recession”, expectations of a Fed rate hike, Operation Greece watch, China’s financial stress, concerns about negative interest rates in Europe and liquidity issues for the markets, and the list goes on.

I will still focus on our bear market indicators, so in the Fall we can determine if we can safely enter the market again or need to sit out longer.  But it is nice to allow six more months of data to come in while sitting in with no exposure to equities.  And just so it is clear, the charts above include investing through the bear markets.  We just think it would be nice to do even better next time.

It only costs $85 a year to get our e-mail alerts for our seasonal strategy, our bear market indications, and two annual reports on the economy and markets.   We, of course, think that is a good strategy too.