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TSP Allocation Model

TSP Allocation ModelThe TSP, or Thrift Savings Plan, is a defined contribution retirement savings and investment plan for Federal employees and members of the uniformed services. This is one of the most effective retirement plans in use today, but it must be managed on an ongoing basis if you expect it to be a primary source of retirement funding.

Many Thrift Savings Plan investors are lulled into a sense of complacency by the simplicity of their TSP accounts. They are led to believe that they can simply choose a fund or funds, set up a contribution amount, and their retirement will grow on autopilot. TSP members are encouraged to update their allocations frequently, but few take the time to do this, and even fewer know how to do it strategically.

Find Out How to Use the TSP Model to Manage Your TSP Account

If you are enrolled or are eligible to enroll in the TSP, the TSP Allocation Model (TSP Model) can help you earn higher returns while taking on less risk. The TSP Model is designed to keep your account allocated to the strongest performing funds, while still maintaining adequate diversification. Like all of our investment models, the TSP Model contains a built-in mechanism for moving to a position of safety (in this case the G Fund) during severe market declines.

The chart below shows the back-tested performance of the TSP Model over the last 15 years (since the TSP’s current incarnation). For comparison, the performance of each of the individual TSP funds is included in the chart. Make sure to read this entire page to understand how the results below were achieved and how you can apply these results to your own portfolio.

TSP Allocation Model

Model performance represents total returns and includes reinvestment of dividends and interest. No management fees or transaction costs are included. Historical performance is not an indication or guarantee of future performance.

 

Notice that the TSP Model was able to largely avoid the losses associated with the dot-com collapse and the financial crisis. This was achieved by dynamically reallocating investments into the F and G Funds during these periods of market turmoil. When the other funds resumed their ascent, the TSP Model shifted back into the market to capture the growth in those funds.

Not only was the TSP Model able to outperform each of the TSP funds and the broader market, it did so with less portfolio volatility and overall risk. The table below contains a series of portfolio statistics that allow you to compare the performance of the TSP Model against each of the individual TSP funds.

TSP Portfolio Statistics
Strategy Compound Annual Return Alpha1 Beta1 Standard Deviation Maximum Drawdown Sharpe Ratio Sorentino Ratio Treynor Ratio
TSP Model 9.84% 5.99% 0.42 10.70% -12.68% 0.84 4.60 0.21
G Fund 3.27% N/A 0.02 1.27% N/A 1.58 45.46 1.27
F Fund 4.75% N/A -0.03 2.95% -3.76% 1.19 7.01 -1.29
C Fund 6.73% 0.00% 1.00 18.16% -50.92% 0.39 0.53 0.07
S Fund 9.39% N/A 1.14 21.60% -52.22% 0.48 0.77 0.09
I Fund 5.43% N/A 0.99 20.72% -57.16% 0.31 0.43 0.06
Data for 15-Year Period (2002 – 2016)           1 Benchmarked against the C Fund

The TSP Model earned the highest compound annual return while experiencing only half the volatility (risk) of the other stock funds (C, S, and I Funds). As a result, the TSP Model achieved the best risk-adjusted returns, measured by the Sharpe, Sorentino and Treynor ratios. Another measure of risk, maximum drawdown, shows that the greatest peak-to-trough decline was significantly lower for the TSP Model than each of the other stock funds. The C, S, and I Funds each lost over half their value during the financial crisis. The TSP Model was able to sidestep those losses by repositioning the portfolio into the F and G Funds.

For a complete description on how to interpret various portfolio statistics, please click here. Or for a quick reference guide, see here.

The TSP Model utilizes the five individual funds below to achieve its high risk-adjusted returns. Please note that the TSP Model does not use the Lifecycle Funds (L Funds) because it is the position of Model Investing that target date funds are not a suitable option for TSP investors. For more information on why investors should stay clear of target date funds, including the L funds, please click here.

TSP Investment Options
TSP Fund Description Objective Benchmark
Domestic
C Fund Common Stock Index Investment Fund Match the performance of the S&P 500 Index S&P 500
S Fund Small-Cap Stock Index Investment Fund Match the performance of the DJ U.S. Completion TSM Index DJ U.S. Completion TSM Index
International
I Fund International Stock Index Investment Fund Match the performance of the MSCI EAFE Index MSCI EAFE Stock Index
Stable Value
G Fund Government Securities Investment Fund Maintain a higher return than inflation without risk N/A
Income
F Fund Fixed Income Index Investment Fund Match the performance of the Barclays U.S. Bond Index Barclays U.S. Aggregate Bond Index

The specific TSP Model performance seen above is based on the following criteria and allocations:

  • The performance of each TSP fund is analyzed monthly and the portfolio is reviewed and adjusted on the first trading day of each month.
  • The portfolio balance is allocated to the top 3 ranked funds, based on the following allocation percentages:
TSP Model Allocations by Rank
Fund Rank: 1 2 3
Allocation 50% 30% 20%
  • If any of the top 3 ranked funds do not meet specific performance criteria, that allocation is placed into the G Fund.

The end result is an innovative strategy that achieves steady growth, while protecting investors from major losses associated with market crashes. Regardless of how much you currently have or contribute to your TSP account, the TSP Model can help you achieve better returns with less overall risk.

The current TSP Model selections and ongoing monthly updates are accessible with a premium subscription. Updated recommendations are provided on the first day of each month. Sign up today for access to the TSP Allocation Model and all of our other models.

Find Out How to Use the TSP Model to Manage Your TSP Account


The information provided here is for informational purposes only. Model returns do not reflect any management fees, transaction costs or expenses. Investing involves a great deal of risk, including the loss of all or a portion of your investment. Nothing contained herein should be construed as a warranty of investment results. Past performance is not an indication of future results. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. Model Investing maintains positions in the funds discussed within this site according to model recommendations.
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