Remember that scene from Indiana Jones where he has to drink from the Holy Grail, but no
one tells him which cup is the Holy Grail? And if he messes up, he immediately dies a painful death
Your Thrift Savings Plan is kind of like that. You have multiple funds you can choose
While messing up won't immediately turn you into a skeleton, you might end up regretting
your decision later. In this video, I do a deep dive into the F Fund vs. the G Fund to show how these funds
have performed against inflation and whether the extra returns you get from the F Fund
might be worth the extra risk. Please do not confuse this YouTube video for financial advice, tax advice, or an official
position of the U.S. government. Annual Returns – F Fund vs. G Fund Since Inception
I'm going to start off by assuming you know what the F Fund and G Fund are and jump straight
into a comparison of the two. If you don't already understand the difference between these two funds, check out my previous
videos on the topic or my blog. I've linked to these resources in the notes below
The TSP website lists annual returns for the F and G Funds. However, it's hard to tell what's going on from this data
In my day job, I turn data into stories, so I decided to take the raw data from the TSP
website and tell a story. You can see that the G Fund never loses money
The F Fund bounces around a lot. It's lost money in five years since it was created 35 years ago
Most of these years, it was a very small loss. However, the F Fund lost 15% this year alone
Not great if you're counting on the F Fund to provide stability in your portfolio
While there's nothing wrong with this data on the TSP website, it's not the complete picture either
To understand that, you need to see if these investments are providing you real returns
after inflation. Inflation-Adjusted Returns Overall, there have been six years where the G Fund has had a negative one-year inflation-adjusted return
The F Fund only has seven years with a negative one-year inflation-adjusted return
However, the magnitude of these losses are quite a bit different. The F Fund has had its worst year ever in 2022, dropping by almost 24% inflation-adjusted return
If you are a retiree with money in the F Fund, this has got to hurt
Annualized Inflation-Adjusted Returns To get a better picture of how the F Fund versus G Fund performs over time, I calculated
inflation-adjusted annualized returns over a five- and ten-year window. This takes into account the compounding of these returns year after year
The data show that in general, the F Fund outperforms the G Fund. However, both funds have provided positive returns against inflation every five-year
window prior to 2021, when inflation erased any gains these funds had
The data also illustrated that these funds performed much better in the 1990s and early
2000s than they currently are. The ten-year picture provides the same general trends, but with less noise
Over time, both funds have provided diminishing but positive returns before finally crossing
over into a negative return this year. I know people often talk about a lost decade for stocks, but we are literally seeing a
lost decade for bonds in both the F and G Funds. If you invested money in either of those funds in 2010, you have less purchasing power today
than you did then. And you're still better off with the G Fund than you would have been if you kept your
money hidden in the mattress. However, it's been a lost decade for bonds
Average Returns Over Time Windows Is the F Fund worth the extra risk
Instead of looking at the data as a function of time, it's often good to see the average expected performance as well
Here I break down the average one-year, five- and ten-year returns for these funds against inflation
You can see that the average one-year return is less than 1% higher in the F Fund than
the G Fund. They both beat inflation by about 2%, but the F Fund is a little bit higher than 2
and the G Fund is a little bit lower. Prior to doing this analysis, I thought that surely the F Fund was the superior fund
My assumption was that the F Fund had higher returns and would be more likely to beat inflation
I also used CFIR SIM to predict whether my portfolio will withstand my withdrawal strategy
in retirement. The bond fund used in CFIR SIM is equivalent to the bond index that the F Fund tracks
Therefore, I thought that I needed to invest in the F Fund to be consistent with my retirement calculation
However, making this video has made me rethink my strategy for key reasons. The F Fund has some horrible one-year losses
The long-term performance of the F Fund is similar to the G Fund. I want bonds to mitigate the risk in my portfolio and help preserve my capital in a market downturn
The F Fund clearly failed at that this past year. While the F Fund typically has outperformed the G Fund, the difference in performance
is not so large. It's really a more difficult decision than I previously thought
What's your bond portfolio like? Do you have bonds in your CFP? Are they in the F Fund or the G Fund
Or both? Maybe you invest in one of the life cycle funds. Tell me by dropping a comment below and please don't forget to like and subscribe as well