Sometimes we are asked why our TSP timing systems only trade between the S (US small cap), I (international stocks) and F (bond) funds. When we were developing our first TSP timing signal, it didn’t take long to come to the conclusion that these were the only funds worth concentrating a TSP trading strategy on. This was because when developing the trading system, a close look at the historic record for these funds and their stock fund analogs showed that when it was time to be aggressively “in” the stock market, it was far better to be invested in small caps or international stocks than to be in the large cap US segment (the “C” fund).

Switching between small caps and international stocks provided a much greater return than staying in large caps. So, if we are ready to be aggressive in our approach, it is better to move into the funds that will reward our risk appropriately. Similarly, although the G fund (a money market equivalent) seems on the surface to be the best place to be when taking a conservative “out” of the market position, an examination of the historic returns showed that the F fund provides better returns when out of stocks with only a small amount of additional risk. When we developed the TSP systems, our early efforts attempted to bring all of these funds into play.

However, placing the C and G funds into the mix did very little to reduce risk, but definetely reduced the overall returns – and did so dramatically. This is why the systems trade only the S, I and F funds – the risk-reward ratio for the systems did not improve enough when adding the C and G funds to the trading mix.