Big to Small

Long term charts provide perspective that we lose in the daily charts and noise.  Let’s take a look at the TSP fund performance over different time frames and gain that perspective. First let’s start with the long view using the SP500 index which accounts for 80% of the market value of the US listed companies and is tracked by the TSP C fund.

Now let’s move to a relative performance chart of the five TSP funds starting shortly after the TSP I fund started posting daily prices in 2004.  It can be slightly misleading since this chart starts not too long after the bottom of the first bear market in the last 20 years.

One might also come to the conclusion from the chart the smaller capitalized non-SP500 stocks (TSP S fund, VXF ETF) always outperform the Sp500 during bull markets.  This was not the case in the bull market that ended in 2000.  Each bull market is different with different driving factors. Small caps lagged significantly during the tech bubble until a final melt up in late 1999 that quickly punished late comers.

Generally speaking what I see in the long term charts of the indexes since 1995 is that the broader US indexes all end up back close to even in terms of performance by the end of the full cycle (bull & bear market).  If this trend holds the non-SP500 index as represented by the TSP S fund will lose more than the SP500 index that the TSP C fund tracks.  It already has a good start since mid-2015.

The next chart starts at the 2007 market peak.  Here we see the last bear market lost about 55% of its value from its peak in a very short period of time.  It then embarked on one of the longest bull markets in history and in my opinion peaked in 2015.  While the SP500 index’ latest rally and sideways extension allows some to consider the current action a correction, the non-SP500 (TSP S fund) gives the bear away.

Was the 2011 correction a bear market?  I believe it may have been the start of one, but the Federal Reserve decided to blow another bubble.  If the 2000 top was the Tech bubble and the 2007 top was the housing driven bubble and I am dubbing the latest bubble the QE bubble.  We will not go into the details of Quantitative Easing (QE) but I believe much of the rally since 2011 can be attributed to QE that conveniently flowed to financial assets and very little to economic growth as advertised.  This is backed up by the recent release of records show the Fed Chairman initiated QE2 and QE3 due to concerns over the European crisis and not for economic reasons.

It should be noted that corporate profits are lower today than the last quarter of 2011 as reported to the SEC using GAAP instead of the fluffy earnings propagated by the never-say-sell wall street analyst.  It also appears a lessor portion of the US QE made it to the rest of the world’s stock markets as seen in the TSP I fund was only able to reach the level of its last two bull market peaks.

What about the TSP F and G funds

You may also be mislead by the out-performance of the TSP F fund over the G fund during the last cycle.  But once again QE caused a distortion in financial asset pricing.  The manipulation of interest rates below the rate of inflation and to the lowest historical rates accounts for the out-performance.  The TSP F fund captured capital gains caused by falling interest rates while the G fund does not because of how G fund interest is determined.

You may be surprised to learn that the F fund yield and G fund interest rate are historically not significantly different.  Most of the difference in performance comes down to capital gains and capital losses.  Only in a declining interest rate environment will the F fund outperform and this defines the entire life of the TSP F fund thus far.

I do not recommend the TSP F fund to long term investors since you are betting on the Fed to continue manipulating interest rates further down below already historically low manipulated levels.  Note:  Speculators should only be in the TSP F fund when interest rates are declining and then shift back to the G fund for constant or rising interest rates. Foreign central banks are driving interest rates into negative territory and this is putting downward pressure on US rates.  The risk is inflation forces the Fed to play catch up in raising US rates.  Again, the G fund provides a steady interest rate with little risk.

The 3 year view

Our three year relative performance chart provides another perspective.  Here we see most of the non-SP500 (TSP S fund) out-performance occurred early in the bull market.  The S and C fund tracked pretty close in performance until mid-2015.  In mid-2015 investors preference for holding risk begin to decline and this included moving away from the smaller cap stocks, high yield bonds and emerging markets.  Large Cap stocks have the benefit of being viewed as less risky and continue to benefit from record setting corporate stock buy-backs.

US corporate executives in aggregate have bought back approximately 10% of the SP500 outstanding shares during this cycle increasing those fluffy Earnings Per Share numbers by 10%.   They are also responsible for the the bulk of new inflows into the stock market the last few years as institutional clients, private investors and even hedge funds have seen net outflows.  Buybacks are not sustainable.  Many of those corporations borrowed to buyback shares.  The prices of these companies are already being punished relative to those who did not engage in this balance sheet weakening game.

So how to invest for the long term

In the next chart I have added the relative performance of our Seasonally-Modified Buy & Hold strategy applied to the TSP S fund since the 2007 market top.  Blatant advertising, but also it shows why I adopted the strategy.  I know it sounds too simple, but the seasonal tendencies have been academically proven to exist for over 300 years in England’s stock markets, over 100 years in the US.   Now with tax deferred accounts and minimal trading costs, the strategy makes sense for those who lean toward buy & hold over trading so they can get on with their lives.  I doubt many “traders” have beaten the strategy over the full cycle, but it is hard for many to give up the speculative bug.

The small cap TSP S fund benefits the most from the seasonal tendency, but it works well for the SP500 tracking TSP C fund or any other index tracking mutual fund or ETF.  What you see in the chart is an objective non-emotional timing based on our seasonal formula until October 2015 when I recommended not re-entering the markets when our seasonal models said it was time to shift funds back to equities.  Why?  All of my bull/bear indicators tripped to bear market in August of 2015.

In my research the only way I found we could have improved on the seasonal strategy was to avoid more of the bear market draw downs  This improvement also increases sleep levels.  The strategy ran through 2008 and 2009 without an override and you see how it still avoided most of the losses.  But it was those gut wrenching moves in late 2008 and early 2009 that I really wanted to avoid this time.  So far so good.

I call our timing signals unemotionally derived, but that is just the model.  Many still have a hard time watching summer rallies appear to leave them behind, so you have to remember – it is a full market cycle strategy.  For those who can take the long term perspective, there is no easier strategy to follow.

More about TSP & Vanguard Smart Investor

I like to say my basic service is for reluctant investors as well as serious investors.  Many TSP account holders find after a career of investing they have amassed a large enough balance to become worried about the markets.  It is hard to see an entire year’s salary vanish in a single market correction.  I know.  It is why I looked for a simple-to-execute strategy to capture most of the markets gains and avoid the larger losses.  What I found was a strategy that if you stretch your time horizon beyond the 3 – 5 year returns often advertised and instead look at the full market cycle (bull & bear markets), the strategy I adopted and improved upon has beaten the index’ returns with only half the risk while only requiring you to log into your account twice a year.

Do I think the strategy will gain 231% again in the next 8 years or so?  No!  Why,  because I do not think the market is going to gain as much as it did the last 8 years.  But if you avoid the bulk of the bear market and invest in the favorable months during the bulk of the bull market you should achieve a respectable return *over* the indexes while *avoiding* market risk.  You can learn more by clicking around my website and learning more about our seasonal strategy, view the strategy’s results, or start with the basics in our Allocation Guide, or learn more about our service.

Our Investor Dashboard is also a good place to start,

Michael Bond

Categories: TSP Charts