Could G fund serve purpose of F fund?

[tsp34diy]

I am considering rebalancing my TSP, and in doing some research read that the G fund is one of the best bond funds available and can be used as the bond portion of a portfolio. I read that with the G fund you receive the low risk of an ultra short-term bond fund, but with the return of an intermediate term treasury bond fund. Before I dump the F fund, has anyone considered this possibility and agree with it? Just wondering. Tom

 

[nnuut]

Welcome to the Message Board tsp34diy, the "G" fund is a Government Securities Investment Fund. You make the rate of government Securities, you can never lose! It makes about a penny, either .08% or .09% every 4 to 6 days depending on the rate. Here is a link with all you need to know. You can lose money in the "F" fund and make more money than the "G", but with the "G" you are safe.
Norman
http://www.tsp.gov/rates/fundsheet-gfund.pdf
Click on Fund Sheets on the right and select the "G" Fund.

 

[rokid]

I am considering re-balancing my TSP, and in doing some research read that the G fund is one of the best bond funds available and can be used as the bond portion of a portfolio. I read that with the G fund you receive the low risk of an ultra short-term bond fund, but with the return of an intermediate term treasury bond fund. Before I dump the F fund, has anyone considered this possibility and agree with it? Just wondering. Tom

Many people consider the G Fund a "free lunch", i.e. no downside risk, always a positive return.

However, if you have a reasonably long investment horizon, e.g. > 5 years, the F Fund has returned approximately 1% more per year than the G Fund since their inception. In addition, the F Fund was a great diversifier for equities in 2000-2002.

In my opinion, the G fund is really a cash/money market fund. As such, I allocate a portion of my fixed income portfolio to it - 40%. However, since the F Fund also has low volatility and a higher expected return, I allocate approximately 60% of my fixed income assets to the F Fund.

I used to be 100% F. However, I like the idea of having at least one fund in positive territory when both bonds and equities are negative. This approach hurts my long term returns (~ .4% per year), but makes me feel better on a day to day basis.

Financialengines.com, Nobel Laureate William Sharpe's website, recommends 100% G - no F. Incidentally, financialengines is free to government employees trying to set up a TSP asset allocation. In addition, financial author Rick Ferri recommends 100% G. He feels it's better to increase equity risk rather than fixed income risk to achieve higher returns. I don't agree with his argument, but....

Ask your question on the Bogleheads website, http://www.diehards.org/forum/index.php, and you'll get lots of responses. However, 100% G, 100% F, or a mixture are all very defensible. 100% G probably won't hurt your long term returns too much.

Finally, I'm assuming that you're a buy and hold investor. If you're a market timer, ignore everything I've just advised. :laugh:

Good luck.-----Jim

 

[nelsonal]

The free lunch comes from getting long term rates without having exposure to duration risk. Normally, long term rates are associated with long term loans (I know, I know, but stick with me here). This means that if rates rise, your long term loan remains locked you in to a less valuable position. This is measured by duration (which is a measurement of how long a loan takes to get the money you paid at the beginning, back). Because this risk is significant (just ask anyone who owned a bond or bank in the 70s) long term rates are typically higher than short term rates. The G fund pays TSP holders that long term rate (including the duration risk premium, but doesn't subject holders to any duration risk. That's a free lunch.

However, duration can be good when rates are declining (which is why the F fund has risen faster than the G fund over the last few months (Sept 07-Jan 08). Someone could back test, but I'd bet just a simple fed following strategy (buying the G fund on the first fed Rate increase and F fund on the first rate cut) would be a pretty effective fixed income strategy).