If you find any of this useful, please consider donating via PayPal to help keep this site going. # Thrift Savings Plan Strategy: Buy Low and Diversify

7/4/10

The Thrift Savings Plan (TSP) is a "a retirement savings plan for civilians who are employed by the United States Government and members of the uniformed services" (see http://www.tsp.gov).

In general, it has 5 funds

• G: Government securities
• F: Barclays Capital U.S. Aggregate Index
• C: S&P 500 (Large and Medium sized U.S. companies)
• S: Dow Jones U.S. Completion Total Stock Market Index (small to medium sized U.S. companies not included in the C fund)
• I: Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index (international stocks of 21 developed countries)
Your hard-earned money can be allocated among these choices many ways.

There are two main rules of investing:

• Diversify
What follows is a TSP investing strategy that satisfies both of these, and is simple to carry out.

1. Get the prices of each fund. Call these G, F, C, S, and I.

2. Then take the inverse of each price. In other words, calculate 1/G, 1/F, 1/C, 1/S, and 1/I. Weighting by the inverse of the price incorporates the "buy low" rule.

3. Then take the sum of the inverses, ie. SUMINV = 1/G+1/F+1/C+1/S+1/I

4. Then take each inverse and divide by the sum of the inverses, and round that number to the nearest integer (because your allocation percent has to be a whole number), ie. calculate

• G% = round((1/G)/SUMINV)
• F% = round((1/F)/SUMINV)
• C% = round((1/C)/SUMINV)
• S% = round((1/S)/SUMINV)
• I% = round((1/I)/SUMINV)

These resulting percents are your allocation.

5. Check if G%+F%+C%+S%+I% = 100%. Because of rounding to the nearest whole number, the sum may be off from 100% in either direction by 1 or 2 percent and therefore you may have to tweak the percents slightly to make sure they add to 100%. Say you do steps 1-4, and you're off from 100% by a number we'll call DIFF, then an example of one strategy would be

• If DIFF < 0, then C% = C%-DIFF (that is, add a "boost" to C%)
• If DIFF > 0, then G% = G%-DIFF (that is, take away from G%)

And now G%+F%+C%+S%+I% = 100%.

6. Using daily data from http://www.tsp.gov, calculate these percents periodically and change your allocation accordingly. Consider reallocating when your current allocation, (G%,F%,C%,S%,I%), has a "large" distance away from a calculated allocation, (G%*,F%*,C%*,S%*,I%*).

• Let distance = abs(G%-G%*)+abs(F%-F%*)+abs(C%-C%*)+abs(S%-S%*)+abs(I%-I%*), where abs is the absolute value
• If distance > 5 then reallocate according to (G%*,F%*,C%*,S%*,I%*)

The spreadsheet can be found here.