G fund vs. bonds

[Keyboard Ninja]

I'm bored at my volunteer duty and decided to look for some nformation about the TSP "G" fund:

G-Fund
The G-Fund is the safest investment option in the TSP family of funds. An investment in the G-Fund is very similar to investing in Certificates of Deposits (CDs) at your local bank or having your money in a money market account. The most important thing to know about the G-Fund is it invests in short term government bonds. Therefore, your investment, both principal and interest in this fund is guaranteed by the U.S. Government. This is the only TSP fund with a guarantee that you will not lose money.
Investment:
The G-Fund invests in US Treasury securities (short-duration government issued bonds) with a maturity of 1-4 days, yet its returns equivalent to longer-maturity (4 years or more) Treasury securities. Normally in the bond world, the longer the maturity, the higher the interest rates. So, this arrangement of short duration with higher interest rates is a really great deal for us G-Fund investors because we get the higher returns associated with the longer maturity bonds, but because of the short maturity of the G-Fund securities the G-Fund has no interest-rate risk. Interest rate risk, a risk you incur when you invest in the F-Fund or any other bond fund for that matter, results from the fact that rise in interest rates causes the value of bonds to decrease. Think of the G-Fund as a savings account that earns 4% a year.

Would it help to diversify myself by buying "long-term" bonds? Or would that not even matter. I'm not purchasing any until I max out my TSP, but I figured I would ask anyways.

[Boxkicker]

Why not just throw your money into a L2040 fund? It will diversify for you at a lower cost!

[Keyboard Ninja]

Originally Posted by Boxkicker

Why not just throw your money into a L2040 fund? It will diversify for you at a lower cost!

Its already there . Just wanted to know a bit more about the G fund, and know more about "being diversified" I suppose .

[ats5g]

KN,

The G fund is just a stable value fund that earns the interest of intermediate and long term treasury yields. As yields on these bond goes up(down) the return on the G fund goes up(down).

The G fund doesn't really add any diversification from the L funds since the L funds are just made up of the other individual funds. For example, the L 2040 is currently:

8.3% G
9.7% F
40.8% C
17.4% S
23.8% I

If you added the G fund to the L 2040 fund you'd end up with the L 2030 fund. So just pick one of the L funds you're done.


- Alec

[Bimmerbill]

The G fund has such a short duration it can be considered cash. I don't even bother with the F fund since the G is super safe and always goes up.

IF you go with a lifecycle fund, its usually recommended you invest in them 100%. The exception I've seen is if you want to invest in an asset class that the TSP doesn't provide, like REITs or commodities sector.

[Nords]

Originally Posted by Keyboard Ninja

Would it help to diversify myself by buying "long-term" bonds? Or would that not even matter. I'm not purchasing any until I max out my TSP, but I figured I would ask anyways.

It depends on why you want to buy bonds. Diversification can be accomplished with other asset classes, and some investors may not need diversification.

For example, bonds will reduce volatility, which is why some people add them to a portfolio. For others bonds will return a steady dividend (spending cash) with the prospect of an occasional capital gain.

But although bond volatility risk is generally very low and usually uncorrelated to stocks, bonds also usually match inflation or lose to it.

You're young enough to have plenty of time to ride out volatility (if you can sleep at night). You're also pretty likely to have good continuity of employment for the next 3-4 years, if not for the next couple decades. And when you retire, a military pension can be thought of as the equivalent of a huge portfolio of Treasuries or I bonds. So for most veterans, bonds aren't a good addition to your portfolio.

The TSP is very attractive for its low costs, and it also gives you plenty of diversification opportunity through its lifestyle funds. If I were at your place in life again I'd be 100% stocks, probably split between the "S" and "I" funds. (Spouse's TSP, 2% of our ER portfolio, is 100% "S" fund.) Hugely aggressive but more likely to stay ahead of inflation and produce outsize returns. If that affects the quality of your sleep then you could put more of your TSP deductions in one of its lifestyle funds.

People despise volatility when they have to sell stocks into a down market. Another way to avoid volatility issues (instead of diversification) is to keep a cash buffer of 2-7 years' expenses. (Spouse and I keep 8% of our ER portfolio in cash, others are up to 28%.) In good market years you replenish the buffer. In not-so-good years you keep spending it and waiting for a good year to replenish it.

When the asset-allocation questions start coming, we usually refer readers to Bernstein's "Four Pillars". It has several sample portfolios in the back of the book for people to read about and match to their investor profile. Boglehead's Guide to Investing is another good review of asset allocation.

[RubberDucky]

Originally Posted by Nords

You're young enough to have plenty of time to ride out volatility (if you can sleep at night). You're also pretty likely to have good continuity of employment for the next 3-4 years, if not for the next couple decades. And when you retire, a military pension can be thought of as the equivalent of a huge portfolio of Treasuries or I bonds. So for most veterans, bonds aren't a good addition to your portfolio.

The TSP is very attractive for its low costs, and it also gives you plenty of diversification opportunity through its lifestyle funds. If I were at your place in life again I'd be 100% stocks, probably split between the "S" and "I" funds. (Spouse's TSP, 2% of our ER portfolio, is 100% "S" fund.) Hugely aggressive but more likely to stay ahead of inflation and produce outsize returns. If that affects the quality of your sleep then you could put more of your TSP deductions in one of its lifestyle funds.

Nords, I'd like your opinion on this concept based on my situation. I am a civilian federal employee with the Dep. of Navy and also young - early 30's with approximately 25 years (or less ) before retirement. Right now I am 100% invested in L2040 Lifecycle fund. When I retire, I should have a FERS pension equal to about 30-33% of my final high 3 salary. Also, my wife has a state gov't pension that we can safely estimate to be 65-80% of her highest year salary when we retire. Of course, medical insurance in retirement is also covered.

My questions:

Since we both have these gov't pensions, even though mine is not huge, should we completely eliminate all bonds and G fund from our asset allocations?

Should I also invest more aggressively (100% stocks - all C,S, and I funds) instead of the L2040 fund since we both have significant pensions?

Thanks for sharing your thoughts!

[Nords]

Originally Posted by RubberDucky

My questions:
Since we both have these gov't pensions, even though mine is not huge, should we completely eliminate all bonds and G fund from our asset allocations?
Should I also invest more aggressively (100% stocks - all C,S, and I funds) instead of the L2040 fund since we both have significant pensions?
Thanks for sharing your thoughts!

It's an emotional and a financial decision.

First, you have to both be able to sleep at night. If your spouse isn't on board then all our Vulcan logic & financial analysis won't matter. I don't want to get into the details of how I learned this, but stick to a common comfort zone.

Second, another way to analyze your asset allocation (after you've made the emotional committment) is to consider your civil-service pensions to be the equivalent of long-term Treasuries. Then just factor that into whatever you want for your total bond asset allocation.

Our aggressive investing is due to spouse and I each getting our military pension (mine now, hers at age 60) with a CPI COLA and essentially free healthcare. If you can match that with civil service pensions then you have the long-term time to be rewarded for investing much more aggressively. If you don't have a COLA, or if you're paying a substantial sum for healthcare, then you may be a lot happier with L2040.

Spouse and I also live a low-key beach-bum lifestyle that's more than covered by our pensions. If you're pushing the boundaries of your pension coverage then you may want the extra comfort/cushion of bonds.

[RubberDucky]

Originally Posted by Nords

Second, another way to analyze your asset allocation (after you've made the emotional committment) is to consider your civil-service pensions to be the equivalent of long-term Treasuries. Then just factor that into whatever you want for your total bond asset allocation.

Our aggressive investing is due to spouse and I each getting our military pension (mine now, hers at age 60) with a CPI COLA and essentially free healthcare. If you can match that with civil service pensions then you have the long-term time to be rewarded for investing much more aggressively. If you don't have a COLA, or if you're paying a substantial sum for healthcare, then you may be a lot happier with L2040.

Thanks, I value your opinion on this topic. I will examine this more closely in the next year to determine our intestinal fortitude - I'm OK, but good advice to check with my lady - and we'll come up with a more custom asset allocation based on these pensions and other factors.

Until now we've been on L-Fund autopilot (which is perfect for this) while we're just getting started and trying to ramp up contributions to the TSP and Roths to the maximums ASAP. I've been wanting to buy "The Four Pillars of Investing" anyway, and now is my excuse.

You mentioned if you did it all over again you'd go all S and I funds. Why not C also? I was think all C, S, and I - maybe 40%, 30%, 30%, respectively.

I guess I need to go read more on this asset allocation stuff based on our situation....

[Nords]

Originally Posted by RubberDucky

You mentioned if you did it all over again you'd go all S and I funds. Why not C also? I was think all C, S, and I - maybe 40%, 30%, 30%, respectively.

http://www.tsp.gov/forms/comparison.pdf

Mainly a personal preference. We're just going out a little further and more aggressively along the risk/reward curve. I didn't see any reason to invest in the S&P500 when there are smaller & international companies available-- especially as the dollar is dropping.

There are many roads to ER, and the key is finding one that makes you comfortable while remaining committed to finishing the journey...