Top 5 TSP Investing Strategies

Top 5 TSP Investing Strategies

If you haven’t logged into your TSP account in a while, you need to do it today because TSP just went through some major changes last month. The Mutual Fund Window is now open, but you need a minimum TSP balance of $40,000 to gain access to those mutual funds outside of the TSP funds. But in this article, I’m only gonna talk about the C, S, I, F, G, and lifecycle funds. Besides, I personally think the TSP mutual fund window is a disaster with the extra fees they’re charging investors.

TSP Funds

So the TSP has 5 core funds and if you can’t remember which one is which, I have a way for you to remember them. C stands for common or Common Stock Index Fund, and I know this one is kinda confusing to memorize but just remember that common stocks mirror the performances of the S&P 500 index with Apple, Microsoft, Amazon, Google, and those other big stocks.

S stands for small or the small-cap stock index fund, and it’s the highest risk of all core funds because they track smaller companies like Uber, Square, Snapchat, and Lululemon that are more volatile in the stock market. You can also memorize the S fund as sexy funds.

I stand for international or international stocks outside the US. If you’ve ever heard of Sony, Louis Vuitton, or Toyota, the I fund follows the MSCI EAFE Index and tracks all of those companies and many more in Europe, Asia, and Australia.

F stands for a fixed or fixed income index fund that tracks over 12,000 notes and bonds from the US government agency securities, corporate bonds, and mortgage-backed securities. It matches the performance of the Bloomberg Barclays US Aggregate Bond Index.

G stands for government or government securities investment fund that basically tracks the short-term U.S. Treasury securities, and they’re guaranteed by the US government. There is no “credit risk” unless the US government goes bankrupt, which would be bad and nothing really matters at that point.

And L stands for a lifecycle or the target retirement funds that are mixed with C, S, I, G, and F funds, but they’re designed to automatically allocate those funds based on the lifecycle fund you choose. And when you choose the lifecycle fund, you should choose based on what year you reach your normal retirement age and not your early retirement age.

Let me break it down for you. If you’re brand new to my channel, my name is Psy, and welcome. So in this article, I’m gonna give you the breakdown of the lifecycle funds and other TSP investment strategies that people like Dave Ramsey and Warren Buffet recommend with the TSP single funds. I can’t personally recommend what you should do but I’ll reveal what I do with my TSP funds.

1. Lifecycle Funds

The first strategy is the lifecycle fund if you just want to invest and forget. This is the laziest way to invest if you don’t really want to stress about the stock market. However, if you haven’t logged into TSP and you became a federal employee or a member of the armed forces before 2018, your TSP is most likely all in the G fund.

If you joined after 2018, then your money should be in the lifecycle fund in accordance with your current age. Either way, you need to log in today and find out what you’re investing in currently.

Lifecycle Funds

When you choose your lifecycle fund in the TSP, the first thing you want to do is calculate what year you turn 60 years old because you’re eligible to withdraw from your TSP tax-free and penalty-free at 59 ½.

I turn 60 in the year 2046, so the lifecycle fund 2045 would be the best option for me. The L fund is a diversified mix of the 5 individual funds I mentioned earlier between C, S, I, G, and F funds. About every quarter, TSP adjusts the target allocations to shift gradually from high risk and high reward to lower risk and lower reward as they get closer to your target retirement date.

In the year 2045, my 2045 L fund will be rolled into the L Income Fund. And keep in mind that the L fund target allocation will stick to its risk-reward target no matter what the market does. If the C fund or S fund loses value significantly due to a bear market, the L Fund will still rebalance it at the end of every trading day to make sure it maintains the target allocation.

The 2045 lifecycle fund is the right choice if you’re going to turn 59 ½ between 2043 and 2047. The allocation in this portfolio right now is 15% G Fund, 8% F Fund, 40% C Fund, 10% S Fund, and 27% I Fund. As years go by, the C/S/I funds would be less allocated, and more money would gradually go into G and F funds.

Lifecycle Funds

If you look at the 2035 L fund, you found how the G fund is around 27%, the F fund is 7%, and that puts the fund at about 34% bonds and 66% stocks. As you get older, your stock-bond allocation will change from being more exposed to risk to being risk averse. The purpose of these changes is to preserve your capital as you get older.

The downside of investing in the L fund is it usually underperforms the overall stock market like the S&P 500, especially as years go by, the lifecycle fund is putting more money towards bonds. I chose not to invest in the lifecycle fund because it’s been underperforming the C fund, which is the S&P 500 index, and it’s very common for investors to use it as a benchmark. I choose to be more exposed to stocks than bonds while I’m still in my 30s.

2. Dave Ramsey

Dave Ramsey recommends 80% in the C Fund, which is the S&P 500 index, 10% in the S fund, which tracks stocks in small- and mid-sized companies that offer high risk and high return, and 10% in the I Fund, which tracks overseas companies like Louis Vuitton, Toyota, and Sony.

He believes the C Fund has the most upside potential and that investors should make that their core fund before adding anything else, which I agree with. If you want to be riskier in the market with the possibility of a higher return, then he recommends doing the 60-20-20 option, which is 60% in the C Fund, 20% in the S Fund, and 20% in the I Fund.

He says to just focus primarily on the C fund and leave your TSP alone, which I also agree with. For the year 2022, you can contribute up to $20,500 to your TSP and an additional $6,500 a year as a catch-up contribution if you’re 50 or older. If you get paid every 2 weeks, then it’s about $788 every paycheck or $1038 every paycheck if you’re 50 or older.

Dave Ramsey recommends investing at least 15% of your income towards retirement. If you make $100,000 a year, then $15,000 of that should go into the TSP if that’s the only investment account you have. If you’re under BRS or FERS, Dave recommends contributing to your TSP up to the employer match at 5%, max out your Roth IRA, and then investing more to the TSP to meet the 15% threshold.

If you’re on the FIRE journey, I would recommend contributing to your TSP up to the employer match like Dave says, and then I would max out the Roth IRA at $6,000 a year and HSA at $3,650 or $7,300 if you’re on the family plan. if you still have income left over, then try to max out the TSP up to $20,500. My wife and I are contributing at least 30% of our income towards retirement because we want to retire earlier than the normal crowd.

3. Warren Buffet

Warren Buffet recommends 90% stocks and 10% short-term bonds. And if you don’t know who that is, he’s like the legend of all legends when it comes to investing. Most financial advisors have recommended using the rule of 100 or 110 to preserve your capital when you experience a bear market.

However, I have to agree with Warren Buffet that people are now living longer, and having too many bonds in the portfolio might put your long-term growth at risk. Now, Warren Buffet didn’t specify if you should put 90% in the C fund or 10% in the G fund, but he believes in the low-cost index funds that track the performances of the S&P 500.

Every TSP individual fund is considered a low-cost index fund. The C Fund charges 0.043%, the S Fund charges 0.059%, and the I Fund charges 0.053%, which are all significantly lower than the actively managed mutual funds at 1% or more.

For example, if you have $10,000 in the C Fund, then the TSP only charges you $4.30 annually for the fees. That’s cheaper than an actively managed mutual fund that charges you 1% or more, which would be $100 for every $10,000 you invest in their fund. You should keep in mind that the 90-10 split doesn’t make sense for every investor.

You should factor in your age and the total amount in your portfolio before considering his aggressive investment strategy. If you’re near your retirement age and you don’t have a whole lot in your TSP, then doing the 90-10 investment strategy might be too aggressive if you’re going to rely on it for your retirement.

If you don’t need the TSP to fund your retirement because you’re a high-net-worth individual, then you may wanna consider having your portfolio exposed to more stocks so it can potentially grow more until you need it. Again, this is completely up to your risk tolerance.

4. Rule of 120

The other TSP investment strategy people use is the rule of 120. A lot of people are choosing to use the rule of 120 instead of 110 or 100 because they’re planning to live longer than their previous generations. Using the rule of 120 basically means you subtract your age from 120, and that gives you your stock allocation.

For example, if you’re 25 years old, 120 minus 25 would be 95, and that gives you 95% stock allocation and 5% bonds. The rule of 120 is simple and intuitive. As far as how much you want to invest in C, S, and I Funds are completely up to you.

Rule of 120

I have to agree with Dave Ramsey and Warren Buffet that we should all use the C Fund or the S&P 500 index fund as the core of our portfolio. The S Fund essentially puts you in the higher risk and reward category, and if you’re nowhere near your retirement age, it could potentially give you more returns in the long term.

The I Fund is just another fund that makes your portfolio more diversified. I don’t personally invest in the I Fund or any international stocks because they have grossly underperformed the US stock market.

5. My TSP strategy

My TSP strategy has been the same for the last 7 years. It’s been 50% C Fund and 50% S Fund. I don’t invest in bonds because I believe I can make every dollar work in stocks for the long term. There are a lot of people I know who are putting money into the G Fund because they believe there will be a long-term economic recession.

I don’t need to preserve my capital right now because I am nowhere near my retirement age. I have at least 24 years before I’m eligible to withdraw from my TSP at 59 ½. The best course of action for me is to ride out the bear market and keep buying the dip every 2 weeks I get paid.

Before the 2022 bear market, my TSP has performed on average 11% annually for the past 10 years. I don’t know what the stock market will do in the future, but I know there will be more bear markets and corrections. I don’t care how the stocks perform in the short term. I don’t care how the stocks perform today or tomorrow.

Putting all of my investment into a G Fund or F Fund won’t do me any good other than preserving my capital in the short term. But what happens when the market goes up 3, 5, or 7% next quarter? The best strategy for me has been to stay in the market and not time the market.

Disclaimer: Please keep in mind that I am not a financial advisor. I’m only sharing my personal experience and thoughts. All strategies, tips, suggestions, and recommendations shared are solely for the purpose of entertainment and education. Investing comes with some financial risks. You must conduct your own research and due diligence, and if necessary, seek the advice of a licenced advisor.

Also Read:

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7 Dumb Money Habits You Need To Quit Now

How to Invest with Bonds as a Beginner

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