poptopwater... Good point out, 110% would be nice. Change that to 74% in the G fund. The next comment explains why TSP does this for retirees.
Michael Johnson... It's true that if you do not need TSP income in retirement due to pensions and social security, you could accept more risk in retirement. It is also true the stock market has *averaged* 7-8% over many years.
The problem is very few years are average. The stock market goes through periods of 14% or greater returns for a many years, then gives back much of those gains in a couple of years. The longer the market trends up the more people are drawn into it. Most retail investors have the highest exposure to the market at the top and the lowest at the bottom. Not a good strategy, but the fear of missing out draws people in and keeps them in too long.
The stock market also does not maintain an average valuations relative to its underlying earnings or revenue, it goes from undervalued to overvalued and back again. If the stock market was near its mean valuation level then it might earn 7-8% annually averaged over the next 10-12 years.
I do not know how long the central bank will continue to pursue financial asset inflation in their red herring pursuit of the consumer inflation. But with the stock market sitting in the top 1% of its historical valuations levels (based on valuation methods that are highly correlated to predicting long-term future returns) you will not come close to "average" over the next decade. In the short term, anything is possible.
The market was rolling over in 2015. But thanks to central banks creating money out of thin air and buying of financial assets (bonds and even stocks) via massive credit expansion, the financial markets exploded higher. Estimated at 4 trillion in 2016 and on pace for about the same this year. And the economy and corporate profits only recovered a little. US corporate profits are sitting near late 2011 levels but look at how much the stock market is up since 2011. Serial "emergency" monetary measures have pushed the markets up to 1929 and 2000 valuation levels. At some point, something has to give.
I watch risk sensitive investors not the economy or corporate profits. All said and done, returns depend on what investors and speculators are doing not on valuation levels. Valuations simply tell us the stock market valuation levels can not double again in 12 years. It could lose half its value during that time which would bring it down to its "average" valuation levels since 1950.
The G fund will outperform the S and C fund substantially when stock market valuations revert to their mean. The question of course is when.
2.6% is not a bad place to be if you are retired and depend on your TSP income. CDs are paying less than 1% annually and come with risk. Which is why people are seeking returns in the stock market, which is why it is now so over-valued.
Cheers,
Michael Bond
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Posted by: Michael Bond <michaelhbond@yahoo.com>
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