How To Invest In TSP

February 21, 2013

How To, TSP

Thrift Savings Plan - Retirement

What Is The Thrift Savings Plan?

The Thrift Savings plan, better known as “TSP” is a retirement savings plan similar to 401K plans that is offered to federal employees and members in the military. The purpose of the TSP is to give these individuals the ability to participate in a long-term retirement savings and investment plan. Similar to the private sectors 401k plan, saving for your retirement utilizing the Thrift Savings Plan provides numerous advantages including:

  • Automatic payroll deductions
  • A number of investment options including managed lifecycle funds
  • Choice of a traditional (pre-tax) TSP or Roth TSP (Post-tax)
  • Low administrative and management expenses

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Investing In The TSP

The TSP offers you two approaches to investing your money:

The L Funds — Better known as the Lifecycle funds are invested according to a professionally designed allocation of stocks, bonds, and Government securities. You select your L Fund based on the date you plan to retire and start withdrawing your money. For Example: If you are set to hit the retirement age in the year 2039 you would invest in the L 2040 fund.

Individual Funds — These distinct funds allow you to make your own decisions regarding your investment allocation and risk tolerance. You can allocate your contributions to any of the following individual funds at your discretion:

The Government Securities Investment (G) Fund — The G Fund is invested in short-term U.S. Treasury securities. It gives you the opportunity to earn rates of interest similar to those of long-term Government securities with no risk of loss of principal. Payment of principal and interest is guaranteed by the U.S. Government. Basically, the money you contribute to this fund is secured by the U.S. Government and therefore should not result in a loss of your capital. However, you will only acquire interest on this account, no capital gains or dividends.

The Fixed Income Index Investment (F) Fund — The F Fund is invested in a bond index fund that tracks the Barclays Capital U.S. Aggregate Bond Index. This is a broad index representing the U.S. Government, mortgage-backed, corporate, and foreign government sectors of the U.S. bond market. In summary, the bond market is typically stable and offers a higher rate of return than the G fund.

The Common Stock Index Investment (C) Fund — The C Fund is invested in a stock index fund that tracks the Standard & Poor’s 500 (S&P 500) Stock Index. This is a market index made up of the stocks of 500 large to medium-sized U.S. companies. In short, this fund is supposed to mimic the S&P 500.

The Small Capitalization Stock Index (S) Fund — The S Fund is invested in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index. This is a market index of small and medium-sized U.S. companies that are not included in the S&P 500 index. Bottom line, this is considered the growth fund, which means in theory you should expect higher returns but more volatility as well.

International Stock Index Investment (I) Fund — The I Fund is invested in a stock index fund that tracks the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. This is a broad international market index, made up of primarily large companies in 22 developed countries. Let’s keep it simple, this is the high risk / high reward fund. During bullish periods this fund typically soars and during bearish periods it crashes hard.

How To Invest In The TSP Successfully

In order to invest your retirement successfully you should only pay attention to 2 of the individual funds (I will tell you why in a minute).

  • The G Fund, which acts as a money market account earning less than 1% return annually but preserves the capital that you contributed.
  • The C Fund, which is aimed at mimicking the return of the S&P 500.

1. How To Manage Contributions

The government matches up to 5% of government employees annual salaries. Therefore, I would recommend you only contribute up to 5%, any contributions over 5% will not be matched. For example, if 5% of your salary is $3000/year then the government contributes $3000/year to your account for a combined total of $6,000/year. A 100% return on your money instantly! You can’t beat it and if you are not doing this you’d better have a good reason! **NOTE** As of this writing the government does not match TSP Contributions for military service members.

When contributing money to your TSP you need to monitor 2 indicators to base your decision:

2. How To Use Our Trading Signal:

Let me be crystal clear, there is nothing magical about our trading signal. It is used to simply establish and follow a trend. The system is simple, so simple in fact a 3rd grader can understand and implement it. This is no scam or gimmick and I will prove it to you in a moment. At the end of every month, check the price of the S&P 500. If the price is ABOVE our trading signal, then leave your money vested in the C Fund. If the price of the S&P 500 is BELOW our trading signal, cash out of the C Fund and move your capital into the G Fund.

Take a look at how this strategy has worked over the past 20 years!

Market Cycle

As I said it is so simple a 3rd grader can understand it. Here is a general summary of how you would have performed:

  • 1993 – 2001: 225% Return
  • Mid 2003 – 2008: 40% Return
  • Late 2009 – Present: 42% Return (Not accounting for the whipsaws that occurred)

Please keep in mind that these returns DID NOT include dividends issued, which is a huge factor when calculating long term gains. The main take away for you is to FOLLOW THE TREND!!

3. How I use the Shiller PE10 Ratio

The S&P 500 consists of the “top” 500 publicly traded companies in the United States as determined by Standard & Poor. With that being said by purchasing shares in the S&P 500 you are purchasing 500 different companies. For long term investors it is wise to ONLY allocate NEW money when the the S&P 500 is trading at fair value or a discount.

What is a fair value for the S&P 500? I use the Shiller PE10 ratio to determine this, a Shiller PE Ratio of 15 is fair value!

  • If the Shiller PE Ratio is under 15 then you should allocate contributions from your paycheck into the C Fund.
  • If the Shiller PE Ratio is over 15 then you should allocate contributions from your paycheck into the G Fund.

It’s that simple!

Let’s take a look at how this system would have done over the past 20 years.

Shiller PE

Unfortunately there was only one buying opportunity within the last 20 years when the S&P 500 was trading under fair value. This is typical, rarely do good businesses trade at a discount to value.

4. How To Put It All Together

But wait a minute… you just said put your money in the C Fund when the S&P 500 trades above your trading signal but then turn around and say you only allocate new money to the SP 500 index fund when the S&P 500 is trading under fair value. I’M CONFUSED!!!

I apologize for the confusion, but I had to explain both steps separately in order for you to understand their purpose. Now that we have both concepts down I am going to give you the rules one by one.

  • Rule #1: If the Shiller PE Ratio is below 15 I allocate ALL capital into the C Fund.
  • Rule #2: Rule #1 trumps everything else!
  • Rule #3: Utilize the S&P 500 trading signal method when the Shiller PE Ratio is ABOVE 15.

5. Example

“Bob” was following the S&P 500 trading signal method so he transferred his money from the C Fund into the G Fund in January of 2008. HOWEVER in February of 2009 the Shiller PE Ratio dropped below 15. Therefore Bob transferred all of his capital from the G Fund back into the C Fund AND allocated all new monthly contributions to the C Fund.

Whew! There you have it. This is how to invest in the TSP successfully.

I know this requires an active approach in your TSP and far exceeds making a one time decision when you first join the government or military then forgetting about it. I will tell you however that it is WELL WORTH the 10 minutes a month. If you still need further convincing take a look at how this system actually maximizes your investment in the Thrift Savings Plan.

If you want to make it easy on yourself,  you can sign up to my monthly newsletter where I monitor these indicators and give you the results.

Questions?

Here’s to our Wealth!

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51 Responses to “How To Invest In TSP”

  1. Justin@TheFrugalPath Says:

    I was unaware of the power of investing in the S & P based on the trend. It wouldn’t work in my wife’s 401(k) because of limitations. However, I could use this for my IRA. My main investment for retirement are index funds and the S&P 500 plays a big role in it.

    Reply

    • Marvin Says:

      The 20 Month EMA is a fantastic long term trend indicator, I believe you’ll be very happy with it Justin.

      Reply

      • Morris Poston Says:

        Hello,

        I’m interested but need a little more convincing. I’m looking for a tool that will show me when to get in and out of the market. You mentioned that subscribers should check the 20 month EMA at the end of the month and act accordingly. Do you email subscribers at the end of every month this information? And will this transfer over to other areas of the market i.e. the Nasdaq etc.

        Reply

        • Marvin Says:

          Thanks for writing in Morris!

          Our tool has a trigger for when individuals should be in the market and should be out of the market (into the G Fund). Our newsletter is put out on the first of every month and we only cover the TSP at this time.

          Reply

      • Morris Poston Says:

        Can you send me a couple of sample emails that you normally send? Thanks.

        Reply

        • Marvin Says:

          While I would love to send a sample email Morris, that would not be fair to our paying customers. However, we are running a special right now that will allow you to try our service risk free for 3 months. I recommend you take it for a test drive and see if you like it.

          Reply

  2. Compounding Income Says:

    I use the TSP, and I think it’s horrible. Only 5 choices to pick from, can’t get any worse than that :( I park mine in the G and F since I don’t really want any of them. Might as well use it towards my fixed income allocation.

    “As of this writing the government does not match TSP Contributions for military service members”

    That is not 100% true. When I enlisted in 2008 one of my enlistment bonuses was matching TSP. I was part of the pilot program to test it. My original enlistment was 5 years meaning soon I think the matching will stop. Anyways, yes it is very very rare. Everyone in my MOS who had 5 or 6 year contracts did get this along with max bonus money, etc. It will never happen again now that the wars are drawing down. They no longer need to throw every bonus in the book at people to get them to join.

    Cheers

    Reply

  3. FNULNU Says:

    Thanks for the insight!

    Reply

  4. Marie at Family Money Values Says:

    I was unaware of this. Is this for the US military? Do they no longer get pensions if they serve enough years?

    Reply

    • Marvin Says:

      The Thrift Savings Plan is used for all federal employees and service members. Service members still receive the pension at 20 years the TSP is used as a supplement. I have read on numerous occasions that the military is looking at getting rid of the 20 year retirement pensions.

      Reply

  5. John S @ Frugal Rules Says:

    Thanks for the great breakdown Marvin. I’ve dealt with a few retail investors who have TSP’s but did not know exactly what they could be in or how they work in terms of options.

    Reply

  6. Martin Says:

    Marvin,

    Although I like the simplicity of the managing investments based on stastical data, but when taking a look at the chart, if you opened the account in 1995, you would keep your cash in C fund and then miss tripling your money, wouldn’t you? By 2000 the index grew to 1500 from 500.

    Reply

    • Marvin Says:

      Hey Martin

      If you followed trading signal you would have had your money in the C fund (S&P 500 index) and almost tripled your money. The indicator triggered a signal to get out of the C Fund around 1300.

      Reply

      • Martin Says:

        I had it backward, I meant if you entered the program in 1995 or around, when the S&P 500 was above your trading signal, then you would allocate your money into a money market fund and missed the run up, right?

        Reply

  7. adriana Says:

    Is there a web page where I can see the monthly results from the example above. If so can you please give me the link.

    Reply

    • Marvin Says:

      Thank you for writing in. Unfortunately I do not have monthly results for this system. When it comes to investing I am in it for the long term and typically am not concerned with monthly shifts in prices unless one of my indicators is being triggered.

      Reply

      • Jeff Says:

        What a crap answer! “Unfortunately I do not have monthly results for this system. When it comes to investing I am in it for the long term and typically am not concerned with monthly shifts in prices unless one of my indicators is being triggered.”

        so you have all of this data you use, but you can’t provide monthly results…SCAM!

        Reply

        • Marvin Says:

          Monthly results mean absolutely nothing in regards to long term investing within the Thrift Savings Plan Jeff. As always I welcome any and all comments but accusations of a “SCAM” are quite absurd. Furthermore my subscribers recorded returns of over 28% in 2013 alone and we’re doing great for 2014. If you are skeptical of our service I’d urge you to reach out to our 400+ subscribers.

          Reply

  8. Brasch Says:

    Quick question: I recently quit USPS and I am thinking of leaving my money in TSP. Is this a good idea? Will my money still grow? If so, how will it grow?

    Reply

    • Marvin Says:

      Unfortunately I cannot answer that question for you, you know your financial situation better than anyone else. But in response to your question on if the money will still grow I would like to point out that any money left in a TSP or 401K is still “invested.” That means it can either grow or fall in value. Whenever I leave a company or job I always “rollover” my retirement account into my new one to make sure I have all my money in one place and not scattered around multiple plans. Does this make sense? If you have any other questions/concerns please contact me directly at marvin@brickbybrickinvesting.com

      Reply

  9. Chris Says:

    Hi Marvin,

    I noticed that in your latest newsletter, issue 7, that all new funds were placed in the C fund of the TSP. Since the Shiller PE Ratio is above 15, shouldn’t all new funds be allocated to G using your method?

    Reply

    • Marvin Says:

      Yes, the general rule of thumb is when the Shiller PE Ratio is over 15 the market is fairly valued or maybe even overvalued. (Remember when it comes to finance there’s always a “but”) However, because markets can remain irrational more than we can remain solvent the method I use tracks the overall trend of the market and we want to ride that trend as high as possible before we head to shelter in the G fund. Does that make sense? If you have any more questions please email me directly.

      Reply

  10. Mike Says:

    Hi Marvin,

    I looked at stockcharts.com to find the 500 20 Monthly EMA. All I could find is the weekly one. Do you have to be a paid member to access the monthly data? Is it worth that money if you do not earn that much from TSP?

    Reply

    • Marvin Says:

      Hey Mike

      I have recently learned that stockcharts now requires you to be a paid member in order to see the monthly data. I personally find their site worth the money as it helps me analyze hundreds of charts. Therefore I would certainly recommend it. If you’re worried about the monthly fee then rest assured you can subscribe to my newsletter and I will send out the updates I make to my account monthly.

      Reply

  11. Joe Says:

    Thanks for the advise looking forward to being active with my TSP funds instead of just let it ride on the C Fund for since 09.

    Reply

  12. Chris Pace Says:

    Hi Marvin,

    I am a little confused with the chart shown in your latest newsletter, #8. Your chart shows the EMA(20) at 1486.91. Using the EMA(20) from stockcharts.com, I show 1657.70 for $SPX. From the chart I generated, The EMA(20) became greater than the $SPX on about 8/15/13 which would indicate all TSP funds to G?

    Reply

  13. Bryan Says:

    I’m a young/new fed. I only have $3500 in my TSP currently. I have it in L2050. Should I move it all to the C fund now? I signed up for you newsletter so I know what to do in the future, but was wondering what I should do with it now. Thanks!

    Reply

    • Marvin Says:

      Welcome Bryan! Unfortunately I cannot give you specific investment advice. However, I can tell you what I have done personally. I use to love the life cycle funds back in the day before I learned what I know now. So I had a considerable amount of my retirement capital tied up in life cycle funds. I simply liquidated that position and started following my system. As of today I do not have any of my retirement capital in any life cycle fund, nor will I ever. I hope this helps.

      Reply

  14. Jason Says:

    Hey Marvin,

    So as of right now the S&P 500 is trading above your trading signal

    If I was following your rules, I would allocate all my funds to C. And all my contributions to C as well?

    Thanks in advance.

    Jason

    Reply

  15. adriana Says:

    I just signed up to receive your updates… will it include your trading signal?? at end of month?
    please

    Reply

  16. David Says:

    Just found your site – thanks for the advice – I see on 19 Nov Jason asked about moving everything into C and new money into C as well – I think that in reading your lastest newsletter this is still good advice for today – 11 Dec. Also in the event that we have to move everything into the G fund – we can find that out by the newsletter only at the beginning of every month? I am still trying to figure out the 2 links you have in the article above and how to read them. Thanks for all the advice.
    R/Dave

    Reply

    • Marvin Says:

      Anytime David!

      Yes, I still have all of my TSP allocation in the C fund and have all new contributions going into the C fund. I send out my newsletter at the beginning of every month.

      Reply

  17. John Says:

    So, I think I get it when to move out of the C fund and into the G fund, but when do I move back to the C fund. Do I make this decision only at the end of each month? If you look at this month for example, NOW 12/15, would be a good time to move into the G fund as your trading signal is about 11 points lower than the S&P price, or should I just wait until the end of the month to make that decision?

    Reply

    • Marvin Says:

      Good evening John

      I only look at my indicator at the end of each month. As of right now I still have all of my TSP allocation in the C fund and have all new contributions going into the C fund. Please rest assure when it is time to go into the G fund I will let all my subscribers know. In fact I am sure they will get sick of me telling them to move into the G fund.

      Reply

  18. Mike Hsu Says:

    Great article! I have just started my career a year and a half ago and started a little late on my Roth IRA and TSP so I am trying to play a little catchup after missing out on the first half of last years gains. One issue I am having though is that it appears I only have a daily and weekly option on the stockcharts website, where can I find the monthly chart? Would I actually be able to follow the weekly chart and maybe even check up on my TSP bimonthly and yield similar results?

    Reply

    • Marvin Says:

      Hey Mike, unfortunately stockcharts only offers the monthly chart option to paying subscribers. I have not run the bimonthly numbers, I prefer to have as little maintenance as possible when it comes to our system. Additionally you can identify trends much better by looking at longer time frames.

      Reply

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