Want to try and catch a falling knife?

Less than four months ago, I moved my retirement money into fixed-income and bond funds (50% each into F and G funds equivalents) and also emailed out the following message to some friends and collegues:  

"The risk of a stock market correction occurring during this summer is still rather high.  Although still riskier than the "G" TSP fund, Bond/Fixed Income funds might do well during the next 90 days, so you may want to move some percentage of your account into the TSP "F" fund, while still keeping most of your money in the "G" fund during this summer.  The time to buy back into stock funds will be after the correction occurs, probably later this summer or early fall."

From the time I sent out that email on May 23^rd until yesterday (Sept 8^th), the stock market has entered a correction/mini-crash and the performance of various TSP funds has been:

  G Fund = a gain of 0.73%

  F Fund = a gain of 3.90%

  C Fund = LOSS of -9.42%

  S Fund = LOSS of -12.93%

  I Fund = LOSS of -12.84%

Percentage Profit/Loss of various TSP funds since May 23rd.  Fixed-income (F) and U.S. Government debt (G) funds are the only two funds that have not lost money since May.

One person had asked me in May what my reasons were, and I replied with the following (which I believed would benefit bonds & corporate debt funds like the TSP F fund):
     Reason 1.  Probable slowing economy
     Reason 2.  Probable European banking crisis
     Reason 3.  Possible Congressional budget crisis
There were also some minor technical reasons why I thought the correction was going to occur very soon, but the above were the main fundamental reasons why I thought the risk/reward ratio had turned sour for stock index funds. 

But now that stocks have dropped by about 10% - 20%, the question everyone is wondering is, "Do we get back into stock index funds now?"  I know that some investors have started to get back in, but I've learned through painful experience to patiently wait for more confirmation.  Back in the days when I was working at a private hedge fund, something that I repeatedly had drilled into me was that is was a bad idea to try to catch a falling knife.  And it's an *especially* bad idea to try to catch a falling knife when it's raining knives all over the place.  That's the situation we still have now, because all three reasons that I gave on May 23^rd are still valid today (although reason #3 has been delayed until November, pending the outcome of a Congressional budget "super committee.")

Additionally, we now have the "usual" threats to the stock market for this time of the year, such as the threat of a war between Israel and Iran, or a "9/11 anniversary" terrorist attack, etc.  Put these risks all together, and you have a risk "rain shower" of falling knives with a low probability of being able to catch a knife without getting hurt by one of the other knives falling all around you.  Sure, it's possible to successfully catch a falling knife sometimes, but it's a lot more difficult to do when it's raining knives everywhere.  I tend to be more cautious and protective with money that's in a retirement account than in a speculative trading account.  So I'm not going to stick my hand out there just yet.  But you can go ahead and try if you like.  But be careful.  You might decide that it wasn't worthwhile the first time you get your hand cut off and are forced to drive to the hospital.  Hopefully, your car is an automatic.  Sticks are hard to drive with one hand cut off.    :-)

The best fund for TSP retirement savings accounts / 401k / IRA

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.)  


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.)