Thrift Savings Plan Strategy: Buy Low and Diversify
The Thrift Savings Plan (TSP) is a "a retirement savings plan for civilians who are employed by the United States Government and members of the uniformed services" (see http://www.tsp.gov).
In general, it has 5 funds
Your hard-earned money can be allocated among these choices many ways.
- G: Government securities
- F: Barclays Capital U.S. Aggregate Index
- C: S&P 500 (Large and Medium sized U.S. companies)
- S: Dow Jones U.S. Completion Total Stock Market Index (small to medium sized U.S. companies not included in the C fund)
- I: Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index (international stocks of 21 developed countries)
There are two main rules of investing:
What follows is a TSP investing strategy that satisfies both of these, and is simple to carry out.
- Get the prices of each fund. Call these G, F, C, S, and I.
- Then take the inverse of each price. In other words, calculate 1/G, 1/F, 1/C, 1/S, and 1/I. Weighting by the inverse of the price incorporates the "buy low" rule.
- Then take the sum of the inverses, ie. SUMINV = 1/G+1/F+1/C+1/S+1/I
- Then take each inverse and divide by the sum of the inverses, and round that number to the nearest integer (because your allocation percent has to be a whole number), ie. calculate
- G% = round((1/G)/SUMINV)
- F% = round((1/F)/SUMINV)
- C% = round((1/C)/SUMINV)
- S% = round((1/S)/SUMINV)
- I% = round((1/I)/SUMINV)
These resulting percents are your allocation.
- Check if G%+F%+C%+S%+I% = 100%. Because of rounding to the nearest whole number, the sum may be off from 100% in either direction by 1 or 2 percent and therefore you may have to tweak the percents slightly to make sure they add to 100%. Say you do steps 1-4, and you're off from 100% by a number we'll call DIFF, then an example of one strategy would be
- If DIFF < 0, then C% = C%-DIFF (that is, add a "boost" to C%)
- If DIFF > 0, then G% = G%-DIFF (that is, take away from G%)
And now G%+F%+C%+S%+I% = 100%.
- Using daily data from http://www.tsp.gov, calculate these percents periodically and change your allocation accordingly. Consider reallocating when your current allocation, (G%,F%,C%,S%,I%), has a "large" distance away from a calculated allocation, (G%*,F%*,C%*,S%*,I%*).
- Let distance = abs(G%-G%*)+abs(F%-F%*)+abs(C%-C%*)+abs(S%-S%*)+abs(I%-I%*), where abs is the absolute value
- If distance > 5 then reallocate according to (G%*,F%*,C%*,S%*,I%*)
The spreadsheet can be found here.
Remember, don't consider anything in this article beyond "Buy Low" and "Diversify" as investment advice. This article is just my musings/experiment on how to buy low and diversify, at the same time, in the TSP. Have fun!
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