What is the best fund for an IRA, 401k, or TSP retirement savings account? In my experience, there is never a single "fund" that you can put your money into all year long, but instead, the best "fund" is actually a variable asset "allocation mix" that adapts & changes during time periods when the odds of a stock market correction is higher than normal. Modern portfolio theory has shown that avoiding those time periods of stock market losses/drawdowns will result in a retirement account that grows faster than an account that had larger yields but suffered drawdowns during a stock market correction/crash.
For example, see on the chart below how much more money would be in a retirement account that "side-stepped" the stock market drawdowns during the last five years, even at the cost of being in a fund that returned a lower yield. The U.S. Government bonds/short-term debt fund (G Fund), which usually only yields between 1% - 4%, would have compounded to give you about a 20% return over this time period. Surprising to some, a retirement account that invested in the fixed income & corporate bonds fund (F Fund) would have approximately 20% MORE MONEY than if the account had invested in the S Fund (small cap/medium cap stock index fund) and nearly 35% MORE MONEY than an S&P 500 index fund (C Fund). Even worse, the I Fund (a fund of International stocks) is still worth LESS today than it was worth five years ago! (You'd have more money today if you had stored your money under your mattress rather than putting it into the I Fund five years ago.)
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| Modern Portfolio Theory proves that, in the long run, avoiding account drawdowns is far more important than chasing higher yields |
My investment philosophy is to "wait it out" in safer money market & fixed income funds during times of higher stock marker risk, and then move back into stock index funds after the market correction has occurred. I know that if I can avoid even just one or two stock market corrections over a decade, then my retirement account will have grown faster in the long run, even if it means I missed out during some months when the stock market was rising. My view is that it's better to be wrong about a stock market correction occurring and to "miss out" on that small percentage that the stock market gains, rather than to be caught in stock index funds when the stock market enters a correction and/or crash.
On May 23rd of 2011, I changed my asset allocation mix to 50% in a U.S. Government debt/bond fund and 50% in a Fixed-income/corporate bond fund (the equivalent of "G" and "F" funds in the federal TSP). You can choose to adjust your own retirement savings account TSP, 401k, or IRA in a similar manner as myself. I do have a lot of investment experience and spend more hours every week analyzing financial markets than the average person does in ten years, but because investing deals with only "probability" about what is likely to happen (not what is "certain" to happen), I can't guarantee better returns. Although having said that, I do believe that this "BestTSPfund" blog website will, over the years, have better returns than any "buy and hold" strategy that stays invested in a stock index fund. And I'm putting my own personal money where my mouth is. I invite you to follow along with me on this blog, where I will post any updates to my asset allocation mix in real-time. (Normally, I'll have only 2 or 3 changes during the course of a year.)
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