The TSP G Fund is a remarkable security. It's one of the very few examples in the investment world of "having your cake and eating it too." It allows investors to earn interest rates similar to those of long-term U.S. Treasury Bonds, but without any risk of loss of principal. That's right: payment of principal and interest is guaranteed by the U.S. Government, and the G Fund doesn't have any credit or default risk.
The interest paid by the G Fund is set (and is recalculated every month) to the average rate of return of U.S. Treasury securities with 4 or more years to maturity. In the very long run, this has worked out to be a very good deal: the G Fund has earned a compound annualized return of 4.5% since August 1990. With practically zero volatility. If you look back further to the 1980s when interest rates were higher, the G Fund return was almost 9 percent, risk free. How do you like them apples? The chart below shows the historical performance of the TSP G Fund, and is updated every business day with the latest TSP G Fund price:
The G Fund is invested in short-term U.S. Treasury securities specially issued to the Thrift Savings Plan. But the securities actually earn a longer term rate, as discussed before. And because long-term interest rates are generally higher than short-term rates, the G Fund should earn significantly more than your average "safe" investment like U.S. T-Bills or a money market fund. Let’s take a look at how this has worked out in practice thus far:
From the graph above, it's clear that the G Fund has easily outpaced 3-month U.S. Treasury Bills. (During this period, the G Fund rate was on average 1.77% higher per year.) And if you've ever invested in commercial money market funds, you know that interest rates on these are even lower than T-Bill returns.
Ah, yes, inflation: one of the greatest risks to bond investors. While the TSP G Fund is not guaranteed to outpace inflation, since it's inception so far it has managed to do so, by a significant margin:
Most investors would like some portion of their retirement account to be completely protected from loss, and the G Fund is an ideal investment option for this purpose. If however your primary goal is long-term growth and not capital preservation, you have a sufficiently long time before retirement, and you can stomach the sometimes significant volatility of higher risk funds, then in the long run, one of the TSP stock funds such as the C, S, or I Fund have the potential to compound your investment at a higher annual rate.
In our tactical asset allocation strategy, we use the TSP G Fund as the default risk-free investment, allocating some or all of the portfolio to it as stock market conditions start to deteriorate. This allows us to lock in a safe investment return while the investment model waits for bullish market conditions to return.
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