There are two things that never fail to shock me when I’m talking to soldiers. The first is how many of them do not contribute anything to their TSP. The second is how few of them that actually DO contribute know WHAT fund they are contributing too.

If you read my article on the High-3 vs Blended Retirement System then I’m going to assume that you at least have a basic understanding of how the Thrift Savings Plan works and have committed to investing between 5-10% of your base pay into your TSP each month. Congratulations! This is a great first step!

The next step is to figure out WHAT you actually want to invest in order to meet your savings goals.

“I want to make as much money as possible without losing any of it!”- Every new investor ever

This sounds great, but actually requires a deep understanding of yourself and how much risk can you tolerate. Will you freak out if the stock market starts to dip and start shifting around all your money (please don’t do this)?  Additionally, it requires a basic understanding of the different types of TSP funds so that you understand the pro’s and con’s of each in order to truly maximize your investment.

Let’s begin.

Bottom Line Up Front

If you are still in the Army and your money is sitting in the G Fund, go switch it RIGHT NOW. The system will automatically invest your money in the G Fund. DO NOT make the mistake I did and leave your money stagnating the G Fund for over 7 years because you didn’t know better.

If you don’t know anything about investing or do not desire to be actively involved in the allocation of your assets then I highly recommend putting your money in a Life-cycle Fund (L-Fund).

However, if you are like me in that you have a very long time until you can withdraw your money at age 60, want to make up ground due to early ignorance and poor investing strategies, and desire the highest rate of return on your investment; then I highly recommend you allocate your money into either the C, S, or I Fund or a combination of all three.

To drive the point home, my average rate of return from 2007 to 2014 was between 1.5% and 2% (100% G Fund). Since switching to 50% C Fund and 50% S fund, my average rate of return grew to 17-18%. It is mind boggling the difference a few mouse clicks can make. If everything I just described to you sounds like a foreign language, it’s time to educate yourself.

In addition to reading this article. I HIGHLY encourage you to read If You Can: How Millennial’s Can Get Rich Slowly by Dr. William Bernstein and The Little Book on Common Sense Investing by John Bogle. These two books are fantastic and are my bibles when it comes to making decisions about investing in my family’s financial future.

Amplifying Information

I am NOT Warren Buffett and every person has a vastly different time horizon, tolerance for risk, and family situation. This article will NOT turn you into an overnight millionaire or turn you into a day trading guru. Nor will it pick the next Apple or attempt to teach you every nuance and strategy that exists when in investing in the TSP.

Instead, it WILL cover the “big blocks” that each service member should be familiar with when it comes to investing in their TSP. This is a BIG article. Please feel to bounce around to what you care about. The big blocks are:

• Key Terms & Definitions
  • Compound interest, index fund, stock, bond, etc
• The Difference between TSP Funds
  • What does investing in the G, F, C, etc. Fund actually mean?
• General Investment Strategies
  • OMG just tell me what to actually invest in!
    
• Real life Vignette
  • My personal journey with all this adulting stuff
• Key Takeaways
  • TSP investing summarized in less than 30 seconds

One of the things I can’t stand about most articles on investing is that they automatically assume everyone reading it knows what they are talking about. It’s almost as bad as listening to Navy SEALs brief a CONOP…

Alright shut your pie holes! My is name is “Smokey” and I’ll be the GFC for this goat rope. At zero-dark-thirty the HAF will get on the birds and conduct a nap-of-the-deck infil to about 2 clicks off the coast and then do a feet wet OTB to OBJ BEACHBOD.

Once we get to the OBJ, “Sunshine” and “P-Dawg” will send-it and then “G-Money” will breach the hatch. “Salty” and “Jackrabbit” will bang it and then flow through and grab the HVT. We’ll call up JACKPOT, bring in the birds to the HLZ, and be back on the boat in time for the Season Finale of the O/C.

“Blazer” don’t forget to put batteries in your helmet cam. Hooyah!

Translation:

Gentlemen, please be quiet for one moment, we have important things to discuss. My name is Master Chief Dalton and I’ll be the Ground Force Commander for tonight’s mission. At around midnight the Helicopter Assault Force will board the helicopters and fly very close to the ocean to about two kilometers off the coast. We will doggy paddle to the coast and walk Over the Beach to Objective BEACHBOD.

Upon arrival at the Objective, Senior Chief Smith and Petty Officer Heflin will shoot the guards and Petty Officer First Class Nelson and Chief Spencer will throw a concussion grenade into the room before running in and detaining the High Value Target.

We will inform our higher headquarters that we got the bad guy, bring the helicopters to the Helicopter Landing Zone, and be back to the aircraft carrier in time for the Season Finale of the BEST SHOW EVER MADE FOR TELEVISION.

Lieutenant Wilson, make sure your helmet cam works so we can sell the footage to Hollywood later. Hooray!

While I say all this in jest, it really is frustrating when you are trying to learn about something, and you have opened up 18 different tabs in Firefox just to figure out what someone is talking about. So before we get started, here are some important definitions. If you already know this stuff, feel free to forge ahead.

Key Terms and Definitions

Rate of Return

The gain or loss on an investment over a specified time period expressed as a percentage of the investment’s cost. If you buy a stock at $100 and its value raises to $120 after a month, your monthly rate of return was 20%,

Principal

The original sum of money borrowed in a loan (house, car, boat, etc.), or put into an investment. For stocks, it is the original cost of the stock when you purchased it.

Interest

When it comes to calculating interest, there are two basic choices: simple and compound. Simple interest simply means a set percentage of the principal every year and is rarely used. Compound interest essentially means “interest on the interest” and is the reason many investors are so successful. This is probably the most important term we will talk about so I want you to fully understand it.

Simple vs Compound interest

Let’s say you invest $10,000 at 8% simple interest. This means that after the first year, $800 is added to your account. In the second year, another $800 in interest is paid, and the same with the third year, fourth year, and so on.

If your investment paid 8% compound interest on an annual basis, it wouldn’t make a difference at first. After the first year, you’d receive the same $800 interest payment as you would with a simple interest calculation. However, this is where it starts to get very different.

In the second year, your 8% interest is calculated on your entire new balance of $10,800, not just your original $10,000. This produces an interest payment of $864 for the second year, which is then tacked on to the principal when calculating your interest for the third year.

You may be surprised at how quickly this can add up. At 8% simple interest, your $10,000 investment would be worth $34,000 after 30 years. However, using compound interest, the value would balloon to more than $100,000. Just take a look at how simple and compound interest compare over a 50-year period:

Time Horizon

How many years you’ll have before you need to start withdrawing money from your TSP account. If you are 35 years old today and you don’t expect to start withdrawing from your TSP account until you are 60 years old, your time horizon is 25 years.

If you have a longer time horizon, you can afford more risk in your TSP account.

Market Risk

The possibility of your money losing value due to a decline in the market value of stocks or bonds. Understanding market risk determines what type of investor you are.

Inflation

The rising price of goods and services over time leading to reduced purchasing power of your money. Gas used to cost 90 cents a gallon, now it costs $2.55. Basically, inflation means that $1 today will not have the same value as $1 tomorrow. Typical planning factor for inflation is 3%. This means you want the rate of return on your investments to exceed 3%.

Stock

Shares in the ownership of a company, or investments on which a fixed amount of interest will be paid. Investing in a single stock (one company), is EXTREMELY risky. You cannot invest in a single company with the TSP, only index funds.

Dividend

A small portion of a company’s earnings paid to its shareholders. They are typically issued as cash payments or additional shares of stock. You can typically set dividend payments to reinvest in the stock automatically.

Bond

Bonds are loans made to large organizations such as corporations, cities, and national governments. An individual bond is a piece of a MASSIVE loan.

When an investor purchases a bond, they are “loaning” that money (the principal) to the bond issuer, which is usually raising money for some project. When the bond matures, the issuer repays the principal to the investor in addition to regular interest payments.

Diversification

Spreading your money among different investment funds to reduce the likelihood that your entire account will be severely affected by a single fund dramatically losing its value. Also called not putting all your eggs in one basket.

Equity

As it applies to the stock market, “Equity” refers to how much stock you actually own in a company.

Index Fund

Essentially a list of simultaneous investments in large groupings of companies in the stock market. When you invest in an index fund you are investing a small portion of your money in every company listed in that index. The most well known are the Dow Jones, the Nasdaq, and the S&P 500.

The C, S, and I Fund are Index Funds that invest in thousands of companies across different sections of the stock market.

Hedge Fund

Nothing more than an investment company that invests its clients’ money in hopes of achieving large financial gains through high risk investing strategies. They charge their clients insanely high operating fees with no guarantee of a high rate of return. They are extremely risky and dumb in my opinion. See The Great Hedge-Fund Mystery: Why Do They Make So Much?

Congratulations! You can speak the lingo! Now it’s time to learn about the different TSP funds you can invest in.

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The Difference between TSP Funds

G Fund: Government Securities Investment Fund

Risk

The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction of your money’s value due to inflation. Additionally, read this article on the proposed changes by Congress that would make the G Fund almost worthless for long-term investing.

Reward

You will never lose money. The payment of G Fund principal and interest is guaranteed by the U.S. Government. This means that the U.S. Government will always make the required payments.

How can I use the G Fund in my TSP account?

As you get closer to retirement age (late 40’s / early 50’s), you want to start protecting your retirement investment by gradually shifting money into the G Fund. This is because you have less time for the market to bounce back should it tumble right before you retire. For example, if you turned age 60 in 2008, but still had all your money invested in the C or S Funds, let’s just say you would have had to delay your retirement for another 4 or 5 years while you waited for the market to fully recover.

The only other time to invest in the G Fund is if you are an investing wizard and can time the ebbs and flows of the stock market and manage to shift all your money into the G Fund right before the market tanks, and then shift it back as the market rises. However, if you can do that, you probably need to go work for Warren Buffet (and give me a holler too!).

Remember, if you choose to invest a significant portion of money in the G Fund, you are placing a higher priority on the stability and preservation of your money rather than on the opportunity to achieve greater long-term growth through investment in the other TSP funds.

Over time, the C Fund has drastically outperformed the G and F Fund. However, as you can see below; it is volatile, meaning it is prone to drastic swings in value. Look at that big ole dip around 2008. Nevertheless, over its lifetime, the C Fund has averaged a 10.53% rate of return with an 8.55% rate of return over the last 10 years. It has always outpaced inflation.

Intermission

Let’s take a brake from all this boring “planning for your future” and watch this Epic Rap Battle between a Navy Seal and Army Ranger! (*Trigger warning for foul language and “bikini snap”)

S Fund: Small Cap Stock Index (Dow Jones)

Performance

Like the C Fund, the S Fund has drastically outperformed the G and F Fund, with a lifetime average return of 9.36%. Again, as you can see below; it is very volatile, meaning it is prone to drastic swings in value (see 2008, 2011, and 2015). This fund has only been around since 2001 and has really picked up in the last two years, posting an average rate of return of 18.22%

Risk

Your investment in the S Fund is subject to market risk because the Dow Jones Total Stock Market Index will move up and down in response to overall economic conditions. Since you are investing in smaller, emerging companies, there is greater potential for these companies to fail or become overvalued.

Reward

Your reward is that you may be investing in the next Google, Uber, or Apple without even knowing it, and you are investing in them at a time when their stock is very cheap because the company is still emerging.

Remember, this is an index fund, so you aren’t just investing in one small but growing company, but in the performance of 4500 small but growing companies. So while 500 of them may fail, 4,000 of them may start crushing it.

How can I use the S Fund in my TSP account?

Copy and paste from the C Fund, because the uses are the same.

The S Fund is useful in a portfolio contains stock funds such as the C Fund (large U.S. company stocks) and the I Fund (international stocks). The C, S, and I Funds track different segments of the overall stock market without overlapping. This is important because the prices of stocks in each market segment don’t always move in the same direction. By investing in all segments of the stock market (as opposed to just one), you reduce your exposure to market risk.

The S Fund is also useful in a portfolio that contains bonds, because the prices of stocks and bonds don’t always move in the same direction. So a retirement portfolio that contains a bond fund like the F Fund, along with other stock funds, will tend to be less volatile than one that contains stock funds alone.

I Fund: International Stock Index Fund

Performance

The I Fund is the most volatile of all the TSP Funds. It has been around since 2001 and has only posted a 2.23% rate of return over the last 10 years. However, it really picked up last year posting a 25.42% rate of return. It will be interesting to see if that lasts.

Risks

Your investment in the I Fund is subject to market risk because the Index returns will move up and down in response to overall economic conditions.

Because of its exposure to currency risk, your returns will rise or fall as the value of the U.S. dollar decreases or increases relative to the value of the currencies of the countries represented in the index.

Rewards

While investment in the I Fund carries risk, it also offers the opportunity to experience gains from equity ownership of non-U.S. companies.

How can I use the I Fund in my TSP account?

Because it represents the stocks of companies in many developed countries (excluding the U.S.), it is another way to diversify the stock portion of your TSP allocation.

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L Fund: Lifecycle Funds

Each quarter, the L Funds’ asset allocations change, moving towards a less risky mix of investments as the target date approaches. So basically if you are young, the L Fund will invest a large portion of your money in more riskier options such as the C, S, or I Fund, and as you get closer to retirement, it will automatically start shifting more of your money into safer options such as the G or F Fund.

The strategy assumes that:

• The greater the number of years you have until retirement, the more willing and able you are to tolerate risk (fluctuation) in your TSP account value to pursue higher rates of return.
• For a given risk level and time horizon, there is an optimal mix of the G, F, C, S, and I Funds that provides the highest expected return.

Performance

For this example, I picked the L Fund 2050, because that is the L fund that anyone under the age of 33 would use. As you can see, it contains a mixture of all five TSP Funds. Since 2011, it has posted a 10.53% return.

Risk

When you invest in the L Funds:

• You are subject to the same investment risks associated with the G, F, C, S, and I funds depending on how heavily your money is split between those funds.
• You can’t shift your funds manually to respond to economic market changes
• Your account is not guaranteed against loss. The L Funds can have periods of gain and loss, just as the individual TSP funds do (see 2015 in the chart above).

Reward

Simplicity. You choose the fund that is closest to your target date and “fire and forget.”

• You can be sure that your TSP account is broadly diversified.
• You don’t have to remember to adjust your investment mix as your target date approaches – it’s done for you.

How Can I Use the L Funds in my TSP Account?

Use the L Fund if you are looking for a simple, low maintenance way of investing money in your TSP account. The L Funds make the investing process easy for you because you do not have to figure out how to diversify your account or how and when to re-balance.

All the Funds Compared:

For ease of reference, here is a chart of all the TSP Funds stacked up against each other over the last 10 years. The S Fund won, with the C Fund in a close second place.

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General Investment Strategies / OMG JUST TELL ME WHICH TSP FUND TO INVEST IN!

I can see you right now. Some of you are thinking, “Dude, all this investment nerd shit is great and all, but I just want to be told what I should actually invest in.”

I’m not going to tell you explicitly what to invest in, because my personality and situation may be vastly different than yours. However, I will give you some sound, general investment strategies as well as my personal opinion.

60/40 Strategy

Many well known investors recommend a 60/40 strategy of either 60% stocks (C, S, or I fund) / 40% bonds (F fund) or 60% bonds (F) / 40% stocks (C, S, I). The logic behind this strategy is that it broadly diversifies you and protects you against either stocks or bonds doing terrible because they historically never do terrible (or really good) at the same time.

My personal opinion is that it’s all about your time horizon. You only care what the market does over time; not what it does tomorrow. You only actually lose your money if you sell or transfer. I will shift to something similar to this in my late 40s.

90/10 Strategy

This is Warren Buffet’s advice to non-professional investors (aka you). If you don’t know who Warren Buffet is, then well you live under a rock.

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds (G Fund) and 90% in a very low-cost S&P 500 index fund (C Fund)… the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

In 2007, Warren Buffett bet a million dollars that an index fund would outperform a collection of hedge funds over the course of 10 years. Last year he won that bet, absolutely crushing the competition. Mr. Buffett’s S&P 500 index fund returned 7.1%  The competing hedge fund only returned a mere 2.2%.

Index funds are easy and boring. If you want your investments to be a hobby that’s engaging, exciting, intriguing, challenging and a source of bragging rights, you probably won’t like index funds.

But if your priority is achieving above-average returns with little or no work, index funds should be just your cup of tea.

My personal opinion is that this is a great strategy for young to middle-aged investors. I’m currently doing a version of this, and foresee myself doing it for at least the next 10 years.

Crisis Response Strategy

If you had a Thrift Savings Plan account in 2008, did you ride out the panic? Did you continue to buy the C, S and I stock index funds while they were “on sale?” Or, like many investors, did you head for the super-safe G fund? Did you decide to “wait” until the market came back to return to stocks? It’s now at record-high levels. Are you still waiting?!

Investors who stayed put — who remained with the stock funds and especially those who continued to buy when share prices were low — did very, very well. It took several years, but in many cases, the value of their accounts doubled or tripled. The number of TSP millionaires also jumped dramatically.

The stock market is doing phenomenal right now, but eventually, it will take a big hit; its inevitable. My personal opinion is whether the stock market crashes next year or 10 years from now… I DON’T CARE! I can’t touch my money until 2045! If the stock market crashes, and you shift all your money from the C Fund to the G Fund, YOU JUST LOST ALL THAT MONEY! Be patient! The market always bounces back.

When the market is at the bottom is the absolute best time to put your money in the C, S, or I Fund because your rate of return will be insane once the stock market bounces back.

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Personal Vignette

When I joined the Army in 2007, my first line supervisor told me to set up an allotment to my TSP. 5% seemed like a good round number so that’s what I went with. I knew nothing about the TSP, investing, or what any of those random terms we talked about earlier actually meant.

I definitely didn’t know that the TSP defaulted your allotment into the G Fund, and even if I did, it wouldn’t have mattered because I didn’t know the difference between any of the funds! I just knew that old people always said to “make sure you save for retirement when you’re young ole chap or you’ll regret it” so I thought I was doing a good thing (which I was to be fair).

Fast forward 7 years later, and I decided that I should probably find out how much money was in my TSP. I hadn’t checked the balance in 7 years! Back then it was a SUPER ANNOYING process to get your username and password (they snail mailed it) and ain’t nobody got time for that! However, when I finally figured out how to check my balance I was horrified at how low it was. I did the math and I basically only had what I had put into it because my rate of return was so low, I’m talking an average of 1.8% (insert vomit emoji here)

I decided it was time to do some adulting and actually figure this shit out. I started reading books, asking questions and went down some pretty dark YouTube and Google rabbit holes. I learned about risk, time horizons, inflation, and all that good jazz.

I then made the decision to increase my allotment to 10% and start aggressively investing 100% of my TSP into index funds. I think L Funds are great, but I personally avoided them because it still invests a small portion of your money in the G Fund of which I have no interest in (see graphic above). I shouldn’t have to explain why by now. Since switching to 50% C Fund and 50% S fund, my average rate of return grew to 17-18%. I deliberately avoided the I Fund because it hasn’t performed that well in its short life, and I don’t fully understand currency exchange. Plus ‘MURICA!

via GIPHY

To reinforce the point, here are screenshots of my dismal and awesome rate of returns below. I definitely won’t have a 17% rate of return forever, but I have a very long time horizon to absorb ups and downs.

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Key Takeaways

If you don’t remember anything else from this article, here are your key takeaways:

• Read If You Can: How Millennial’s Can Get Rich Slowly by Dr. William Bernstein and The Little Book on Common Sense Investing by John Bogle.
• If you break out in hives with every dip in the market, stick with the F Fund.
• If you can tolerate periodic fluctuations in value in exchange for higher returns over time, stick with the C, S, or I Fund.
• If you don’t care to know anything about investing or do not desire to be actively involved in the allocation of your assets then put your money in a Life-cycle Fund (L-Fund).
• If you’ve just started your career, you have TONS of time before you’ll need the money in your TSP account.
• If you are nearing retirement, think twice before taking a lot of risk in hopes of earning bigger returns, because the market could turn against you and force you to delay your retirement
• You only lose money if you shift it or withdraw it

This is a long article and hopefully, it wasn’t too overwhelming. The intent of this article is to hopefully keep you from making some of the mistakes I made, and save you some time on feverish Google searches trying to figure this stuff out. I hope it helped.

If you found this information helpful, please share it on your social media outlet of choice, and subscribe to my email list to receive more articles like this delivered straight to your inbox. If there is something that I missed or something that didn’t make sense, please comment below and I’ll get right back to you.

Just please, for the love of God, don’t leave your money sitting in the G Fund for 40 years.

You’re Welcome