Welcome to the 2020 edition of Seasonal Musings!
Before we get started: for those that are reading this for the first time, please understand that I am neither the owner nor creator of either the TSPCenter website or TSPcalc.com website. I’m just a regular member of the TSPCenter forum who got promoted to the admin staff. The owner of the TSPcalc site as well as TSPCenter is forum member mjedlin66. He was inspired by my work here in these Seasonal Musings threads and took it a step further, resulting in the TSPcalc website, and in mid 2020 he purchased the TSPCenter site from the original creator, TSPKing. There are differences in the datasets that this thread discusses and what the TSPcalc website uses, but both strategies use the same methodology. That said, please understand that neither TSPCenter nor TSPcalc.com have any affiliation with the official TSP.gov website or TSP program itself. We’re all just TSP investors like yourself who have taken the time to deeply assess the program, it’s rules, and figure out ways to optimize our retirement planning.
Ok, on to the thread itself…
Back in 2014 I decided to put together this series of lengthy threads because at the time it seemed like there was a dearth of information for active movers, market timers and buy-and-holders here at TSP Center. New forum members would show up, do some reading, run across something about investing using seasonal methods, and ask a question or two about it. Then it would be up to those of us who still remembered those days to dig up the information or the thread and point the newbie in the right direction. In the early days when TSPCenter’s forum membership started delving into seasonal investing methods (2011 or so), forum member Jahbulon was the de-facto expert on the method. Back then there wasn’t much information readily available on seasonal methods after he went quiet sometime in 2013 to pursue personal side projects. While I admit to reading, and following, much of his research (and some of it is replicated here), I’ve also incorporated other things I’ve learned from other sources. There is a total word count of about 15,000 words, which is an hour or so’s worth of reading if you don’t count digging into the charts too deeply. For comparison, the average novel is around 80,000 words long. I’m not asking you to read a book, just a few long-winded posts (that have nothing to do with politics or religion, for a change). I’m a late Gen-X’er, and don’t have problems reading a lot about a subject I’m interested in, so I tend to get long-winded myself when I write. However, if you like to skim through stuff, I won’t get offended – I get it, this stuff can get boring in a hurry.
That said, please do me a favor and take the time to closely read through this material. I’ve done my best to make it easily digestible and interesting, but it takes a building-block approach as a matter of necessity. I can’t just lay out the system for you if you don’t understand the basics first. I’ve tried to condense 6+ years’ worth of learning, research and knowledge into a few thread posts. I have to assume you don’t know the difference between an index and a bond, or why you should pay attention to the CAGR and PNR of a Fund before moving your money for next month. So I have to lay it all out for you one step at a time in a way that you should be able to grasp in a hurry, but that means you have to put in the work to try to understand it, and that means taking the time to read what I took the time to write. So sit back, grab some caffeine, turn on some decent music, and try not to skim because a lot of juicy know-how tidbits are hidden everywhere. Your older self will thank you later.
For those that are interested in history, my other Seasonal Musings threads are here:
Original 2014 thread: http://tspcenter.com/forums/viewtopic.php?f=14&t=10382
2015 version: http://tspcenter.com/forums/viewtopic.php?f=14&t=11076
2016 version: http://tspcenter.com/forums/viewtopic.php?f=14&t=12089
2017 version: http://tspcenter.com/forums/viewtopic.php?f=14&t=13214
2018 version: http://tspcenter.com/forums/viewtopic.php?f=14&t=15693
2019 version: http://tspcenter.com/forums/viewtopic.php?f=14&t=16647
A note to those that followed the old threads: this year’s threads don’t have all that much in the way of new information other than updated stats and figures. You might find some of the new information interesting, entertaining, or irritating. Whichever happens to be the case, know that I didn’t just copy-and-paste the old thread entries into this one without adding or changing pertinent information.
Please be aware that this thread isn’t an effort to prove that “Seasonal Beats All” or that it’s impossible to beat the market using market timing or that buy-and-hold is for lazy folks. In fact, I fully approve of investors using a buy-and-hold strategy over doing nothing at all to prepare for retirement. My work is simply an effort to give more options to TSP investors in the military and U.S. Civil Service. With the arrival of the Blended Retirement System for the U.S. Military a few years ago, I believe that the methods and strategies I discuss in this thread will be of great value to an ever-growing number of people. Regardless, I will consider the endeavor worthwhile if even a few benefit from my work. Bottom line: The data and trends I discuss in this thread are convincing enough to me that I’m following this Seasonal Strategy with my personal TSP accounts. I’m putting my money where my mouth is. I decline to say which one – I don’t want people to blindly follow me without doing their due diligence. Each person needs to decide for themselves what strategy – buy-and-hold, seasonal strategies, market timing, or something else entirely – best fits their retirement goals. All I’m doing is providing another option for you to consider.
I’ll caveat all of this by saying that I’m not a fiduciary, I’m not an advisor, I’m not an expert, and I’m not responsible for your monetary decisions. This thread is partly to inform, partly to document my own thoughts and musings, and partly to invite discussion on the topic of seasonal investing within the framework of the TSP. You’re all adults here (at least by law if not by mental faculty), and you each hit the “submit” button on the Interfund Transfer screen on http://www.tsp.gov
of your own accord.
Let me be clear: beyond the price of admission you paid to get here, I’m not here to take your money. Nor am I a troll that gets some perverse thrill out of convincing you to use a flawed system and end up losing your nest egg. I’m not here advising you to make any IFTs in any capacity. Instead, I’m hoping I can shine some new light onto investing in the TSP for those just getting started or the seasoned investor alike.
I invite you to take a walk with me into a new dimension of investing. Let’s get this show on the road.
What is this thing called “Seasonal Strategy”? Seasonal investing is a strategy that looks at historical monthly patterns in the market, analyzes the times of year that have good odds of having positive returns, and then playing those odds and letting the Law of Averages win out over the long term. This method of trading is a good option for those that don’t want to “set it and forget it” because they feel that they need to be aware of what’s happening with their money, but don’t have the time to devote to learning how to time the market or sitting in front of stock return candlestick charts for 2-3 hours a day. It’s also an option for the followers that like the late John Bogle’s take on investing, which was a buy-and-hold philosophy utilizing index funds (as opposed to mutual funds). These individuals feel that the best strategy is to stay in for the long haul and weather the storms, but don’t completely agree with his rationale when it comes to staying in the market when the odds are that it will be a negative month.
Think of it this way: The American Mensa Guide to Casino Gambling shows that one of the best possible odds for games where you play against the House - instead of other players as you do in poker - is Craps. In card-type poker games like Texas Hold’em, you don’t really play the hand, you play the other players. The game is more psychological than mathematical in poker games, but not in Craps. Craps is a purely mathematical game.
Craps is the long table where they throw the dice to the other end, which results in either a lot of cheering or a lot of groaning and cursing. My point is that it’s not about you playing against the other players at the table. It’s strictly a “You vs The House” game, and it’s all about the odds. The mathematical calculations show that the best odds - meaning the risk vs the payout - are just shy of 50/50 if you bet the Pass Line and take the maximum Pass Line “Odds” bet whenever you have the chance. All other bets available on the table are stacked against you, some very heavily, so the Pass Line is the best bet. Any other purely odds-based game in the casino is worse. Knowing that, if your goal is to have the best odds possible at a casino, why go anywhere else but the Craps table?
Seasonal investing is the same way. We’re taking a look at the historical returns, calculating the averages for each Fund for each month, and picking the best Fund to be in for that month based on the odds. It’s not exactly like a saying you sometimes hear in investing talk called “Sell in May and Go Away”, but it certainly follows the concept that there are certain times when it’s better to be in than out, and vice versa. We’re betting on those odds.
Market Timers do the same thing, just using different data and on a shorter timeframe to figure out their odds. “Buy and Hold” followers do the same thing in that they rely on the long-term market average to continue being the average for the next 30 years or so simply because it’s been that way for the past 200+ years. We’re all betting the odds, we’re just using different sets of data coupled with backtesting to determine our chances and for some clue as to what might lie ahead.
An example of how seasonal strategies work is like this: since 1988 the S Fund has been positive in December 27 out of 32 times, or 84% of the time. Over that time, it has a Cumulative Annual Growth Rate (CAGR – aka: average rate of return) of 2.43%. In the last 20 years it has been positive 15 times (75%), with a CAGR of 1.34%. And in the last 10 years has been positive 7 times, with a CAGR of 0.27%. The last 5 years has been positive 3 of 5 times, and the CAGR has been -2.16%. Of those 5 negative Decembers since 1988, the returns were -10.70% (2018 – the worst December since 1931), -4.32% (2002), -3.91% (2015), -0.4% (2007) and -0.04% (2012). An investor using these historical figures would conclude that there’s a darn good chance of December being a positive month for the S Fund. If it ends up being a negative month then it’s got a decent chance to be only a minor loss (a loss of -1% or less), so his risk of being in the S Fund during December is small for the gains he's likely to get. December is a good bet, even if 2018 was a really bad one. Although the investor would like to see all timeframes (Since 1988, Last 20 years, Last 10 years, and Last 5 years) all solidly in the positive, the investor knows that Last 5 and Last 10 are both overly influenced by more recent data, and they only show how recent returns have done compared to long term returns, which are more stable and a better indicator of how the month actually performs in any given year. Thus he realizes that the long-term returns expectations in December are good, even if the more recent Last 5 and Last 10 aren’t too good. Looking at the returns in multiple timeframes like this helps keep things in perspective.
On the other end of the spectrum, August is consistently terrible for the I Fund. It has been positive only 13 out of 32 times (41%), with a CAGR of -1.59%. In the last 20 years it has been positive 8 times (40%) and the CAGR -0.77%. The last 10 years it has been positive just 2 times with a CAGR of -2.19%. Finally, the last 5 years has seen only 1 positive return for a CAGR of -2.24%. The I Fund in August is a horrible bet! The odds of it being a negative month are staggering, both long term as well as short term, and should send any investor running for cover at the thought.
My Seasonal Strategy takes this line of thinking and applies it to the rest of the year, allocating a “best Fund” to each month based on historical odds. The investor makes, at most, a single move at the end of each month in order to be in the correct Fund at the start of the new month. All moves are 100%, meaning that all of the money in your account goes into the new Fund for the upcoming month.
In addition, the strategy isn’t blindly followed without re-assessment as time goes on. The strategy is re-analyzed each month to decide if a particular month’s Fund needs to be changed due to how it seems to be performing at that particular time of year, or if it should stay the same for next year. If the investor desires it, additional study can be devoted to learning “why” each month tends to be positive or negative for particular sectors of the market. December, for example, is affected by mutual fund managers and other investors needing to pad their annual numbers, end of year dividends and pay bonuses being rolled over into further purchasing to avoid tax burdens, the Holiday shopping season and by general optimism among people at that time of year. The collective effect is often called the “Santa Claus Rally”, and usually occurs roughly in the last two and a half weeks of the year.It’s not a 100% accurate method, but then again, no strategy is. Personally, I’m satisfied with an 80% success rate – if the strategy I use has positive annual returns at least 80% of the time with a CAGR of 12% or more per year, then I’m winning in the long run.
Why 12%? Because the C Fund has a historical 1988 – 2018 CAGR of 10.63%, and the S Fund has a CAGR of 11.30% for the same time period. If I can beat those benchmarks, then I will be winning over Buy-and-Hold in the long run.
Keep in mind that professional investment gurus say to plan for your retirement using an optimistic 7 or 8% annual return on your money. If I use a system that says I should get 12% or better every year based on history, and I end up getting only 75% of that, then I’m still within the guru’s advised 7-8% range. So I plan for my retirement using those 7-8% numbers. Even if the system only works half the time, I’m still sitting at 6% a year, and that’s a whole lot better than getting a measly 2% in the G Fund. The good news is that there are strategies I’ll talk about later that have an expected 30% failure rate worked in, yet still achieve a 15 - 16% average, so there’s even more wiggle room for error.
To those experienced, perhaps skeptical, investors who may not be eager to rigidly follow the Seasonal Strategy, I believe knowing the basics of my system can still be of use to you. I know of many people who use my system as just another indicator, a sort of barometer that shows what seasonal trends the market has to fight against or benefits from during certain periods of the year. They take this information and layer it in with all of their other indicators to come to an investment decision.
Depending on the way one uses the Seasonal Strategy, it can contain elements of both buy-and-hold methodology and technical chart analysis. It’s like buy-and-hold in that you follow a system and largely ignore the media, blogs, and world politics when making your investing decisions, and you stay the course by focusing on the long term goal. It’s like technical analysis in that you can use technical indicators to decide when the best time is to make your move. This can work if you’re not satisfied with just moving funds at the end of the month as per my program. Using technicals can give you +/- a few % each year due to moving a few days before or after the program’s normal move date. I won't cover technicals in this thread, that's something that's amply covered by other folks on the Forum.
Like any system, though, seasonal systems have Pros and Cons.
- Emotion is removed from the decision making process. Everything is analyzed logically by establishing quantified limitations of what a “good” month looks like, what the odds are of having a positive month vs the likelihood of a month being negative. Don't be fooled, you will still feel the emotion, but if you can keep it out of the decision making process then this is a plus.
- It’s a systematic approach that analyzes the data and makes adjustments as necessary. You don’t blindly follow the system, you understand “why” you’re in a certain Fund at a certain time and have factual data to support that understanding.
- It tends to produce consistent returns because you avoid the times of year when bad things often happen, and you make sure you’re invested when the good things usually happen.
- It’s simple to do: only about 6 moves a year for most plans, some a few more, some less. Either way, it’s a system that fits easily into the TSP’s restrictions on allowing only 2 IFT moves each month. In addition, you don’t base your moves on any fancy market indicators or some market guru’s opinion. You don’t use anything more than a simple statistical look at historical returns. KISS is the idea here, and as forum member TimboSlice is fond of reminding us: “People really need to stop overthinking this.”
- If you commit to the strategy, you must follow through with it and ride the emotions that come with rough times. I made the mistake of not doing so in Feb 2014. The market took a short dive in late Jan / early Feb while I was in the S Fund. I got scared and ran to the F Fund for the duration of Feb because the F Fund is the second-best Fund for that month. While that Feb ’14 was positive for the F fund (0.62%), the S Fund came back strong later in the month and had a return of 5.43%. This mistake on my part made a big difference in my ’14 return. I further compounded the problem when I went looking for an indicator to keep me from losing again – a “stop loss” trigger of sorts. That indicator ended up failing me because I didn’t fully understand it until I did a lot of digging and research. Before I could finish my learning, the indicator caused even more losses for me in Oct 2014, after which I finally figured out why the indicator didn’t work the way I thought it did. Fear caused me to leave the system, not once but twice, and it cost me dearly. I’ve learned my lesson: follow the data, trust the numbers. The Law of Averages works.
- No system works all of the time. Sometimes it just won’t work. We’re playing the odds with this strategy, and while the Law of Averages says we should win in the long run, it also says that we’ll have periods when we don’t. What we’re doing is stacking the deck in our favor and making an informed decision on where and when we invest. It’s the long-term end result you need to keep your focus on, not the short term dips and peaks. Followers of Bogle’s philosophy can appreciate this sentiment.
- Times when the markets move sideways for a long time are frustrating to this system because we’re looking for clear positives and negatives for each time period we use to make our decisions. At such times, we have to resist the urge to try to play Market Timer in an effort to try to do better. You avoid doing this temptation by remembering that a small positive is still a positive, and a small negative could be much worse if we aren’t good at our market timing decisions.
So what does it take to follow a system like this?
- An interest in paying attention to what our account is doing while acknowledging that we don’t know enough to play Market Timer with adequate skill to produce reliable returns.
- Dedication to following a logical system without letting emotion get in the way.
- A long-term focus: 12% a year over 30 years turns a biweekly $200 allocation into around $1,200,000. This would represent a FERS employee that makes $52,000 a year contributing 5% of his pay and gets the 5% match for 30 years, and doesn’t get a pay raise the entire time. For the military readers, if an 18-year old service member put $100 per paycheck into his account for 20 years and got 12% on average, it would turn into $180,500 by the end of that 20-year career. That $180,500 would grow into $2,739,700 by the time he turned 62, without having to put in another dime after he retired from the service. That’s not counting the new Blended Retirement System’s matching funds that would be on top of the $100 per paycheck.
You might be thinking “That’s all fine and dandy, but what data is out there to support a seasonal system?” Answer: tons of it. Many books have been written on seasonal trends in general. Specifically for the TSP, http://www.tsp.gov
has historical data going back to 1988 for the G, F and C Funds, and it’s easy to find similar data for the S and I Funds, data for which TSP has back to only 2001.
I’ve taken the time to make an Excel workbook that details all of the monthly returns for each Fund going back to 1988 and calculated the CAGRs as well as the annual Positive / Negative Rate (PNR) for each Fund for each month. Most months are pretty black and white as to whether or not it’s a good time to be in the market according to the odds. Then I track various seasonal mixes using that data, and even compare them against each other in order to find the best possible mixture of Fund / month matches. I freely offer a shortened version of this Excel workbook to anybody who asks nicely, just ask the couple dozen of forum members that already have a copy of it. But be forewarned: it’s big. There’s a lot of manipulation of data going on, and lots of little tweaks need to be done manually each month to keep it updated.
The purpose of this thread is to invite discussion on this strategy, and to document the monthly progress of several seasonal TSP Fund Mixes that I’ve seen. I’ll also do a monthly entry that documents how each Fund has performed in the past for the next upcoming month, and this entry will be towards the end of the month so interested members will have enough time to percolate on what the upcoming month looks like historically. I’ll also post how the various Mixes are set for the upcoming month. And at the end of the year I’ll do a wrap-up post before starting the next year’s thread.
And with that, I’ll end this lengthy post and use the next few posts to do an overview of the various Fund’s historical details and the seasonal mixes I’m actively tracking. They are as follows:
- Jahbulon’s Basic Mix
- gclapper’s M3 Mix
- TSP Center’s default setting on the “TSP Seasonal Calculator” page.
- tmj100’s Mix
- Boltman’s Mix
- Chindsey’s #1 Mix
- A benchmark “Sell in May and Go Away” using G and C
- A formula that’s in G all year, and S in December
There are many other Mixes I’m tracking as well. Some are doing ok, some aren’t. They’re mostly variations on the Mixes I listed above. I don’t post about them on a regular basis because there’s just too many of them (25 at last count), and it would take just too much time to write about them all. I can give those stats to anybody who is interested. Also, if anybody has another version they’d like me to add to the list and my ongoing tracking database, let me know and we’ll see if it’s promising. That’s how Chindsey’s #1 Mix came into being last year. None of the Mixes I follow use the L funds, and I don’t anticipate starting them anytime soon. The L funds don’t fit into the methodology and mindset that seasonality uses, and I’ll explain why a little later.
Stay tuned for some explanations of terms, the individual Fund History posts, the Seasonal Mix overview posts, and a final closing post to signal that you’re at the end of the starting posts I use to introduce this method of investing to interested parties.