Thrift Savings Plan

The market has been on one hell of a decline lately. Thanks to our allocation, the performance isn’t as bad as the media would have you believe. The bright spot in our allocation is the Small Cap Stock Index (S) Fund. It was actually up 2% over the quarter.

While the jury is still out regarding the recession question, there is no doubt that this market is dramatically undervalued. When the earnings yield on the S&P 500 is greater than the yield on secure, US 10-Year Treasuries, it’s time to buy equities. As of this posting, the S&P 500 earnings yield is 4.72% and the 10-Year Note is 4.09%.

Therefore, I am advocating a tactical change in the portfolio. Below is a diagram indicating where we are today and how we plan to change the allocation. If you are actively making contributions to your TSP, be sure to change those allocations in addition to the overall portfolio allocation.

Why are we increasing the Small Cap allocation so much? I think this article sums it up nicely. It’s a little dated, but the theory and research (I need to find the actual research report… I had it in the past) are still valid.

So jump online, log into TSP and make your changes!

PLEASE READ THE DISCLAIMER BEFORE TAKING ANY ACTION!

After reviewing the TSP performance for the first quarter of 2007, we see positive returns across the allocation Here’s how the returns broke down:

Common Stock Fund: 0.67%
Small Cap Fund: 3.97%
International Fund: 4.06%
Gov’t Securities Fund: 1.96%
Fixed Income Fund: 1.53%

Looking ahead, I see large cap international companies performing well in light of the weakening dollar. This means your P&Gs, IBMs and Deers of the world will book higher income figures from foreign countries as they translate those local currencies back into US dollars. To mean, this isn’t a real reflection of how well the companies are actually doing but more a reflection of currency fluctuations. However, the markets will react positively sending prices higher.

Another fact to consider is the impact of the subprime implosion during the first quarter and how that will affect the housing market, loans, employment and interest rates. In my view, we will see more unemployment as those construction workers get laid off or scale back their hours. We will also see fewer, high-risk loans like 100% financing to people with less than stellar credit scores. This will drive these people to more rental units than home purchases placing more undue pressure on the housing market. Consumers will scale back their purchases since it’s no longer as easy to refinance a home to pay off credit cards if they’re already maxed out. Since consumer spending decreases, I expect to see lower overall profit growth among U.S. companies. The only chance for companies to see increases in net income will likely result in more overseas sales with favorable currency translations.

Therefore, I will make a change to the current TSP asset allocation model for my portfolio. I will increase my International Fund allocation from a current 15% to 20%. Since I’m still relatively young, I will eliminate my 5% allocation in the Gov’t Securities fund and shift it into the International Fund.

To achieve this allocation, I will need to request an Interfund Transfer from the TSP Account Access page. When you request a transfer, you will be prompted to enter an email address so they can send you a confirmation of your trade. If you have been following my previous allocations, this is how your transfer fund screen should look (your “Current %” column may vary):

• G Fund: 4.10% change to 0.00%
• F Fund: 4.09% change to 5.00%
• C Fund: 24.24% change to 25.00%
• S Fund: 50.97% change to 50.00%
• I Fund: 16.60% change to 20.00%

I also need to make the same percentage changes to my Contribution Allocation. The only change here will be 0% to the G Fund and 20% to the I Fund. So the final submission should be:

• G Fund 0%
• F Fund 5%
• C Fund 25%
• S Fund 50%
• I Fund 20%

We’ll see how these changes perform over the coming months. I’m not prone to making big changes very often. Only when I see a sustainable, long-term economic shift will I take action. I believe I see one of those shifts occurring in the international markets.

Stay tuned.