Buy TIPS if you have access to the TSP G fund?

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MnD
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Buy TIPS if you have access to the TSP G fund?

Post by MnD »

I'm contemplating establishing a position in 5 and 10 year TIPS.
This would be only the 3rd change in the composition of my fixed income holdings since I started investing in 1986.
Any positive or negative thoughts on my proposed change would be appreciated.

I'm struggling with the idea that the TSP G fund could outperform inflation + 1.6% over the next 5-10 years.

1987-2011 I held a mix of the G fund (stable value like fund pegged to intermediate Treasury yields) and the F fund (total bond market) in the TSP.
In July 2011 when the 10-year Treasury rate went under 2%, I moved 100% of fixed income to the G fund in the TSP.
In 2014 when Dodge and Cox established their Global Bond fund (DODLX) I sold about 1/3 of my G fund holdings and purchased DODLX in IRA's.

So current versus proposed (for the 30% of my portfolio) in fixed income is:

Current:
66% TSP G Fund
34% DODLX in IRA's.

Proposed:
50% TSP G Fund
25% DODLX in IRA's
25% 5 and 10 -year TIPS in IRA's.

Age 60, retired since late 2018. My IPS is below
My IPS is silent on the composition of my fixed income holdings so I'm not violating it by mixing things up a bit.
Last edited by MnD on Mon Oct 03, 2022 3:09 pm, edited 1 time in total.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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vineviz
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Re: Buy TIPS if you have access to the TSP G fund?

Post by vineviz »

MnD wrote: Mon Oct 03, 2022 2:44 pm I'm contemplating establishing a position in 5 and 10 year TIPS.
This would be only the 3rd change in the composition of my fixed income holdings since I started investing in 1986.
Any positive or negative thoughts on my proposed change would be appreciated.

I'm struggling with the idea that the TSP G fund could outperform inflation + 1.6% over the next 5-10 years.

1987-2011 I held a mix of the G fund (stable value like fund pegged to intermediate Treasury yields) and the F fund (total bond market) in the TSP.
In July 2011 when the 10-year Treasury rate went under 2%, I moved 100% of fixed income to the G fund in the TSP.
In 2014 when Dodge and Cox established their Global Bond fund (DODLX) I sold about 1/3 of my G fund holdings and purchased DODLX in IRA's.

So current versus proposed (for the 30% of my portfolio) in fixed income is:

Current:
66% TSP G Fund
34% DODLX in IRA's.

Proposed:
50% TSP G Fund
25% DODLX in IRA's
25% 5 and 10 -year TIPS in IRA's.

My IPS is silent on the composition of my fixed income holdings so I'm not violating it by mixing things up a bit.
I don't see any reference to your age or expected time until retirement, and it's impossible to construct a sensible fixed income allocation without reference to that.

But in general, with just a 30% fixed income allocation, I can't imagine a good reason to split that 30% three ways instead of just one or two.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
makeitcount
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Re: Buy TIPS if you have access to the TSP G fund?

Post by makeitcount »

MnD wrote: Mon Oct 03, 2022 2:44 pm ...

I'm struggling with the idea that the TSP G fund could outperform inflation + 1.6% over the next 5-10 years.
...
I don't have a good answer to your question, but I am curious about the statement I highlighted above. Can you please explain why you think the G fund could outperform inflation by the noted 1.6+%?
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
Weathering
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Re: Buy TIPS if you have access to the TSP G fund?

Post by Weathering »

makeitcount wrote: Mon Oct 03, 2022 4:04 pm
MnD wrote: Mon Oct 03, 2022 2:44 pm ...

I'm struggling with the idea that the TSP G fund could outperform inflation + 1.6% over the next 5-10 years.
...
I don't have a good answer to your question, but I am curious about the statement I highlighted above. Can you please explain why you think the G fund could outperform inflation by the noted 1.6+%?
The G fund can never offer a rate below 0%. TIPS could have a negative nominal return if inflation is below zero.
There is no way to lock in the G fund rate (it adjusts every month). TIPS can be locked in by purchasing a longer dated maturity.


I like the way the OP is thinking. But I can’t predict future inflation rates or interest rates. In such a situation, I would diversify across both choices.
Topic Author
MnD
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Re: Buy TIPS if you have access to the TSP G fund?

Post by MnD »

makeitcount wrote: Mon Oct 03, 2022 4:04 pm
MnD wrote: Mon Oct 03, 2022 2:44 pm ...

I'm struggling with the idea that the TSP G fund could outperform inflation + 1.6% over the next 5-10 years.
...
I don't have a good answer to your question, but I am curious about the statement I highlighted above. Can you please explain why you think the G fund could outperform inflation by the noted 1.6+%?
I worded that poorly.
I can't think of how it could match or beat that current TIPS benchmark over 5-10 years.

Unlike nominal bonds, you don't get a price increase in the G fund if rates drop.
I guess if investors soured on nominal treasuries to the point where they demanded yields better than 1.6% over inflation for a prolonged period of time it could happen, but that IMO seems unlikely.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
makeitcount
Posts: 288
Joined: Wed Aug 01, 2018 8:07 pm

Re: Buy TIPS if you have access to the TSP G fund?

Post by makeitcount »

MnD wrote: Mon Oct 03, 2022 5:53 pm
makeitcount wrote: Mon Oct 03, 2022 4:04 pm
MnD wrote: Mon Oct 03, 2022 2:44 pm ...

I'm struggling with the idea that the TSP G fund could outperform inflation + 1.6% over the next 5-10 years.
...
I don't have a good answer to your question, but I am curious about the statement I highlighted above. Can you please explain why you think the G fund could outperform inflation by the noted 1.6+%?
I worded that poorly.
I can't think of how it could match or beat that current TIPS benchmark over 5-10 years.

Unlike nominal bonds, you don't get a price increase in the G fund if rates drop.
I guess if investors soured on nominal treasuries to the point where they demanded yields better than 1.6% over inflation for a prolonged period of time it could happen, but that IMO seems unlikely.
Gotcha.
I use the g fund so I am crossing my fingers about the inflation +1.6% number. :happy
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
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grabiner
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Re: Buy TIPS if you have access to the TSP G fund?

Post by grabiner »

How sensitive are you to inflation risk?

The G fund offers a better trade-off of return versus risk than a retail bond fund. However, there are multiple risks. Short-term inflation will not hurt the G fund as much as it hurts other bond funds, but since the G fund tracks long-term rates, its yield won't rise as fast. Thus, if you are unusually sensitive to inflation risk, TIPS might still make sense.

But most federal employees are less sensitive to inflation risk than the average investor. Their salaries will tend to track inflation. When they retire, they will have an inflation-linked FERS annuity and Social Security (or, for older retirees, a large inflation-linked CSRS annuity).
Wiki David Grabiner
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