personal finance

My Investment Portfolio

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I write a lot about personal finance. If you are wondering what I’m doing for my own finances, here’s a detailed look at my own portfolio. I’m not going to give you dollar amounts, but percentages. If you want to know the dollar amounts, they can be expressed in one word. I have…enough:

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds,“Yes, but I have something he will never have . . . enough.”

Assets

My financial assets from largest to smallest include: (all percentages are rounded to the nearest whole percentage)

  • 24% – My taxable mutual funds, which is where I put our retirement savings when I fill our retirement accounts. It is currently invested in:
    • 56% – Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
    • 37% – Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
    • 7% – Vanguard Prime Money Market Fund Investor Shares (VMMXX)
  • 21% – My Thrift Savings Plan (TSP) – Currently invested in this proportion:
    • 91% – US stocks
      • 75% – C Fund
      • 25% – S Fund
    • 1% – International stocks (I Fund)
    • 9% – US bonds split evenly between the G Fund and F Fund
  • 15% – My paid off house.
  • 12% – My wife’s TSP, which is invested 100% in US bonds with a 50/50 split of the G and F Funds.
  • 12% – My wife’s Roth IRA, which is invested in:
    • 53% – Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
    • 47% – Vanguard Total International Bond Index Fund Admiral Shares (VTABX)
  • 9% – We have two 529 plans with Vanguard invested in their aggressive age-based portfolio.
  • 6% – My Roth IRA, which is 100% invested in the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).
  • 1% – My wife’s individual 401k, which is 100% invested in the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).
  • 1% – My wife has a 401k that is invested in the Fidelity® 500 Index Fund (FXAIX).

Liabilities

None. Aside from credit cards we pay off every month, we’re debt free.

Overall Asset Allocation

Excluding the pension and my house, here’s my overall asset allocation courtesy of our favorite tool that made all of this easy, Personal Capital:

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Reader Question – Does the TSP G Fund Count as a Bond or Cash in my Asset Allocation?

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A reader wrote in and asked the following question:

Hi there. I thoroughly enjoy your website! When determining what my current asset allocation is, should I consider the TSP’s G Fund as “cash” or as a bond fund? I have a Vanguard account, and their website shows you these great “pie charts” reflecting one’s asset allocation. But what’s the best way to think of the G Fund in this context? Thanks a lot!

The Answer – It’s a Bond Fund

I can see why people might consider the G Fund a cash equivalent in their asset allocation, but I think it is best considered a bond because it is not liquid and is paying intermediate-term interest rates. Plus, Personal Capital agrees with me.

What is a cash equivalent? Here’s what Investopedia says:

Cash equivalents are one of the three main asset classes, along with stocks and bonds. These securities have a low-risk, low-return profile and include U.S. government Treasury bills, bank certificates of deposit, bankers’ acceptances, corporate commercial paper and other money market instruments.

The G Fund invests in “a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP.” That makes it sound like a Treasury bill, which is listed as a cash equivalent above, but remember that the G Fund offers you a free lunch. It is a short term security but the interest rate it pays is:

based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. Generally, long-term interest rates are higher than short-term rates.

In other words, it is really a hybrid between a short and long-term Treasury.

The other aspect of the G Fund that makes it a bond and not a cash equivalent is that it is not liquid. In other words, because it is in a retirement account you can’t sell it and use the proceeds to buy a car, deal with an emergency, or whatever else you need it for. Cash equivalents like CDs, money market accounts/funds, checking/savings accounts, or cold hard cash are all accessible and could be used for these purposes. Unless you are retirement age and withdrawing from your TSP account, the only way to get to the G Fund would be to take out a TSP loan, which I would not recommend.

Just to double check myself, I went to my favorite tool to automatically track my asset allocation, Personal Capital, to see what they considered my G Fund holdings. Personal Capital is also considering the G Fund a U.S. Bond holding.

The Easiest Way to Figure Out Your Optimal TSP Investment Plan

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If you invest in the Thrift Savings Plan (TSP), you need to come up with a plan for how you are going to invest. Here is the easiest way to come up with that plan.

Step 1 – Figure Out Your Asset Allocation

In the TSP, you can only invest in two broad asset classes – stocks and bonds. Because of this, the first decision you need to make is how you are going to divide your TSP among these asset classes.

To figure this out, take this Vanguard survey.

At the top of the page it will give you a suggested allocation, such as 80% stocks and 20% bonds. Jot this down somewhere.

Step 2 – Find the TSP Lifecycle Fund That Most Closely Matches This Asset Allocation

Here are the current broad asset allocations of the TSP Lifecycle Funds as of 13 OCT 2019:

FUND STOCKS BONDS
L Income 21% 79%
L 2020 26% 74%
L 2030 60% 40%
L 2040 72% 28%
L 2050 82% 18%

Pick the one that is closest to your suggested asset allocation from the Vanguard survey. For example, if the survey said you needed 80% stocks and 20% bonds, I’d pick the L 2050 fund because it is closest.

Step 3 – You’re Done

Seriously, it is that simple. I’m not saying this is the best strategy, but it is the easiest and in all honesty, if someone MADE me do this, I’d be fine with it. It is very reasonable way to approach saving for retirement, which is why I’m telling you about it.

Why do I make you take a Vanguard survey instead of just picking the Lifecycle fund that is closest to the year you want to retire? Because the Lifecycle funds are a little too conservative for my tastes and when you compare them with other target date funds. For example, the Lifecycle 2040 is 72% stocks and 28% bonds. The Vanguard Target Retirement Date 2040 is more aggressive at 83% stocks and 17% bonds, which I think is more appropriate.

TSP Fund Deep Dive – The Lifecycle Funds – Hitting the Easy Button

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Target date funds are popular. You just pick the approximate year you want to retire, and you invest in the fund that has a year close to that in its name. Nothing could be easier!

Let’s take a look at the Thrift Savings Plan’s (TSP) target date funds – the Lifecycle Funds or L Funds.

Inception Date

1 AUG 2005

Fund Management

The L Funds are invested in the five individual TSP funds based on professionally determined asset allocations.

Investment Strategy

To provide professionally diversified portfolios based on various time horizons, using the G, F, C, S, and I Funds. The objective is to strike an optimal balance between the expected risk and return associated with each fund.

The L Funds’ strategy is to invest in an appropriate mix of the G, F, C, S, and I Funds for a particular time horizon, or target retirement date. The investment mix of each L Fund becomes more conservative as its target date approaches.

The strategy assumes that:

  • The greater the number of years you have until retirement, the more willing and able you are to tolerate risk (fluctuation) in your TSP account value to pursue higher rates of return.
  • For a given risk level and time horizon, there is an optimal mix of the G, F, C, S, and I Funds that provides the highest expected return.

Each quarter, the L Funds’ target asset allocations change, moving towards a less risky mix of investments as the target date approaches. So if you are invested in one of the L Funds, you will notice that as you get closer to your target date, your allocation to the riskier TSP funds will get smaller while your allocation to the more conservative G Fund gets larger.

The rate of change in the target asset allocation is small when the L Fund target dates are in the distant future. The rate increases as the funds approach their target dates.

When an L Fund has reached its target date, it will be rolled into the L Income Fund. The L Income Fund:

  • Is the most conservative of the L Funds.
  • Focuses on capital preservation while providing a small exposure to the TSP’s riskier assets (C, S, and I Funds) in order to reduce inflation’s effect on your purchasing power.
  • Is designed to produce current income for participants who plan to start withdrawing from their TSP accounts in the near future and for those who are already receiving monthly payments from their accounts.
  • Has a set asset allocation that does not change over time.
  • The progression from a target date L Fund to the L Income Fund is automatic.

New Lifecycle funds will be added for distant target dates as they are needed.

What is the Risk?

Investors in the L Funds are exposed to all of the types of risk to which the individual TSP funds are exposed. Your account is not guaranteed against loss. The L Funds can have periods of gain and loss, just as the individual TSP funds do.

What is the Benefit?

The L Funds simplify fund selection, and investment risk is reduced through diversification among the five individual TSP funds. You choose the fund that is closest to your target date (or, if your target date falls between the target dates that are offered, you can split your account between the two target date funds closest to your time horizon).

When you invest in the L Funds:

  • You can be sure that your TSP account is broadly diversified.
  • You don’t have to remember to adjust your investment mix as your target date approaches – it’s done for you.

If you want to see the historical performance of the five L Funds or a visual representation of how the asset allocations change over time, go to this page and click on the tabs:

Screen Shot 2019-10-09 at 6.45.05 PM

Types of Earnings

The L Funds earn the weighted average of the earnings of the underlying G, F, C, S, and I Funds calculated in proportion to their L Fund allocation.

Expenses

The net expenses paid by investors is 0.04% or 4 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It costs $0.40 for each $1,000 invested.

How Should I Use the L Funds in my TSP Account?

Use the L Funds if you are looking for a simple, low maintenance way of investing money in your TSP account. The L Funds make the investing process easy for you because you do not have to figure out how to diversify your account or how and when to rebalance.

The L Funds are designed so that 100% of your TSP account can be invested in the single L Fund that most closely matches your time horizon (or in the two L Funds closest to your time horizon). Any other use of the L Funds may result in a greater amount of risk in your portfolio than is necessary in order to achieve the same expected rate of return.

Determine the date when, after leaving Federal service, you will need the money that is in your TSP account. Then identify the L Fund that matches your target date:

Choose If your target date is:
L 2050 2045 or later
L 2040 2035 through 2044
L 2030 2025 through 2034
L 2020 2019 through 2024
L Income If you are already withdrawing your account in monthly payments or expect to begin withdrawing before 2019

Advice from One of My Favorite Short Investing Books

Here is what one of my favorite investing books, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits), says about target retirement date funds like the L Funds:

Target-date funds can be an excellent choice, not only for investors who are just getting started with their investment programs, but also for investors who decide to adopt a simple strategy for funding their retirement.