Not all investors are alike. Some take more risk. They’re willing to invest in stocks most of the time. Others are more conservative, giving up potentially higher returns to reduce risk.
In addition, some prefer long-term investing while others like a “swing trading” approach. They move in and out of stocks for shorter periods.
A strategy for every investor
Because of this, we offer three TSP strategies. Each fits a different investing style and risk tolerance level. You can see their performance here.
Stratege 1: 50 Day
50 Day is based on patterns that occur each year. It spends about 75-80% of its time in the G and F Funds. When a pattern sets up, it moves to the S Fund for 6 to 9 days. It’s called “50 Day” because it’s only in stock funds for a little over 50 days each year.
While 50 Day is more of a trading approach, it complies with the TSP’s two IFTs per month limit. It also has the highest backtested annualized return of our strategies, along with a lower max drawdown than the Legacy strategy.
Max drawdown measures the biggest loss of a strategy. Let’s say your TSP account reaches a peak of $10,000 before a market crash. Then it falls to a low of $7,000 before recovering. The drop from $10,000 to $7,000 drop would be a 30% max drawdown.
50 Day often performs as well or better in down years than up years. We’re not sure why, but it’s been quite uncorrelated to the stock market’s performance. For example, it had a larger return in the crash of 2008 then in the strong recovery year of 2009.
50 Day Pros
- It has the highest backtested performance of our strategies, with a relatively low drawdown (max loss) so far
- It’s only in stock funds for about 20% of the year
- It may perform well in years where the stock market has losses (not guaranteed, but has in the past). On the other hand, it often underperforms stock funds in strong years. This can be a pro or con. If you want your account to closely track stock market performance in good years, it may not be the best choice.
50 Day Cons
- It requires closely following IFT recommendations. Around 8 or 9 times a year, you’ll need to make IFTs during precise 6-to-9 day periods. Being a day or two off can change your results decidedly.
- So far, it’s avoided stock funds during the worst crashes (including March 2020). However, when it invests in stock funds, it uses a 100% S Fund allocation. It could be invested during a major crash at some point. Future results may not match the past.
Strategy 2: Legacy
This is a strategy we’ve used in real-time since 2017. It has very few interfund transfers (IFTs) and can remain in the same allocation for several years during bull markets. To determine if it should invest in stock funds, the strategy considers the market’s trend and economic data.
Strategies that follow the market’s trend have been popular for years. An example would be comparing today’s C Fund price to its price 6 months ago. The rules are simple. Buy (or continue holding) the C Fund if today’s price is higher than it was 6 months ago. Otherwise, move to the G or F Fund.
The problem with pure trend strategies are whipsaws. During good markets when the economy is strong, there are still corrections where stocks fall between 8-20%. It’s almost always better to hold stocks through these corrections. Otherwise, you sell stocks at a low point and buy them much higher when it’s “safe” (the trend is back up).
While using economic data as a “filter” gives better results, Legacy may not respond quickly in a black swan event since economic data is lagging. For example, the June employment report is actually for the month of May. So if something like COVID or 9/11 happens, Legacy will have a delayed response. But it works quite well for most market corrections in a strong economy. It’s better not to move out of stocks unless a true recession accompanies falling stock prices.
- Very few interfund transfers
- Performs similarly to the stock market most of the time. It had a 28.31% return in 2019, which was also a great year for stocks
- In an unexpected event it won’t move out of stocks immediately, especially if economic data has been strong. This can lead to larger drawdowns like the 1987 crash (not in our backtesting) or March 2020 with COVID.
- It often remains in stocks through 10-20% corrections. In the long term, it’s better to wait these out. However, some investors may want a strategy with less risk.
This strategy is never invested more than 50% in the C Fund. It doesn’t invest in the I or S Funds, and moves to an F/G combination when our indicator moves out of stock funds. The indicator measures the stock market’s health in a unique way. It was developed years ago and has held up well in real-time markets–something true of very timing indicators.
The returns have been slightly less than a 20% allocation in each TSP Fund (60% stock/40% bond portfolio). However, its max drawdown so far has been just over 8%, while the 60/40 portfolio’s max drawdown was 37%. During the COVID-related market crash, it moved fully out of stock funds at the end of February 2020. It’s ideal for low-risk investor. LR protects your TSP’s principal while enjoying occasional double-digit returns in really strong years for stocks.
Low Risk Pros
- It has by far the lowest drawdown of all of our strategies. LR protects your TSP’s principal while still enjoying occasional double-digit returns in years like 2019.
- It has very infrequent IFTs. It typically has about one or two IFTs per year.
Low Risk Cons
- It has by far the lowest annualized returns of our three strategies. This is because it’s invested in either 0% or 50% stock funds.
- Unlike Legacy, it doesn’t use economic data. When the market has sudden fall, it may get whipsawed (selling stocks at a low point, buying later at a higher point). However, since it’s not moving from 0% to 100% allocations in stocks, it’s not as affected by whipsaws as some other strategies.