In high school I was an uninspired Chemistry student but I get excited when I look at this periodic table of asset classes produced by the consulting company, Callan LLC. In fact, when I show our investment management clients my favorite periodic table during our portfolio discussions, I have to be careful not to talk too fast or use too much technical jargon!
How does it work?
The chart covers the 20 years between 1999-2018 and shows the return of nine different asset classes each represented by a different color. The top performing asset class for the year is on top and the worst-performing asset class is on the bottom. Some of the colors represent assets classes that you can buy in the TSP while others are not available in the TSP. Let’s look at the 1999 column as an example.
The C Fund (U.S. large cap equity) is represented by the dark blue color, third from the top. In 1999, large cap equity class returned 21.04%.
The S Fund is a blend of small and medium size U.S. companies. Though not an exact match, let’s consider the grey-blue color, second from the top as representative of the S Fund. In 1999, small cap equity returned 21.26%
The I Fund (Non-U.S. equity) is represented by the olive-green color at the top of chart. In 1999, non-US equity returned 27.92%
The F Fund (U.S. fixed income) is represented by the forest-green color, second from the bottom. In 1999, US fixed income returned -0.83%.
The G Fund is a special fund created for the TSP. For our discussion, let’s consider the sky-blue color (cash equivalents) as representative of the G Fund.
What five lessons can we learn?
1. As you look across the table, can you discern any patterns? Any pattern that you would be willing to bet would repeat in 2019 and beyond? I don’t see any real patterns; the returns appear random and that is what I like to emphasize to our clients – we don’t know what is going to end up number one next year so our best bet is to be as broadly diversified as possible.
2. Bonds, while not an exciting source of return at today’s yields, can really help out when stocks are in a bear market. Take a look at the 2000-2002 and 2008 bear markets. After the tech boom, US stocks lost about 45% over three years. U.S. fixed income (F Fund) returned 11.63% in 2000, 8.34% in 2001 and 10.26%. The U.S. stock market declined 57% peak to trough in from 2007-2009. Here again bonds really helped out as U.S. fixed income rose by 5.24% in 2008.
3. The U.S. market has greatly outperformed international markets since 2009. As a result, some investors claim that you do not need international stock exposure in the TSP. I like to show our investors the six consecutive years from 2002-2007 that non-U.S. equity (I Fund) outperformed large cap equity (C Fund). I also point out that since the 1970s, the U.S. has only outperformed 52% of the time, close enough that I think some exposure to the I Fund is always warranted. Don’t let recency bias cloud your investment decisions.
4. Another interesting observation is that for 10 of the last 20 years, Real Estate (blue-green color) or Emerging Markets (orange) have been the number one asset class. In other words, 50% of the time those with TSPs have not been able to own the best-performing asset class because the TSP does not offer these choices. What’s the solution? We want all of our clients to have a Roth IRA in addition to a TSP. A Roth IRA is a great way to further diversify and own assets classes not available in the TSP. (Read Pair a Roth IRA With Your TSP for more information.) It’s also worth noting that High Yield and Non-U.S. Fixed Income are not available in TSPs either but can add further diversification so are important to consider.
5. Cash (close to the G Fund) is on the bottom of this chart 35% of the time. In 2018, cash (and the G fund) were the top performing asset class. We wouldn’t advise you hanging out 100% in the G fund forever or you would lose too much purchasing power. A better approach is to find the right glide-path for your working career based on your own individual situation, not what is appropriate for your friends and neighbors. The perfect portfolio is one that you can live with, preferably checking your investments only once a year to rebalance and let compounding work its magic. If you are making big market timing moves, you may get lucky once in a while but, over the rest of your working career and a 30-year retirement, you are going to greatly underperform.
I hope I never have to take Chemistry again or use the real periodic table of the elements but I will happily continue to study my favorite periodic table each year to improve as an investor and asset manager. Happy studying!
As a former Foreign Service Officer and Air Force pilot, I’m passionate about continuing to serve those in government and the military. Our services and publications are designed for individuals and families in these communities. Follow me – Chris Cortese - on LinkedIn so you can continue to benefit from our expertise.
Chris Cortese, Financial Planner & Founder - Logbook Financial Planning, LLC
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