Tsp Allocation Strategy - The performance of investment strategies can be measured using key financial indicators. These industry standards allow investors to assess the quality of the benefits and risks associated with a given strategy.
We have summarized these strategies for our TSP distribution process in the table below. However, unless you're a smart investor, there's a good chance you don't know what all those numbers mean. Don't worry, we'll break down each of these parameters in this section so you can better understand the true capabilities of the TSP model.
Tsp Allocation Strategy
Annual compounding is the rate of return that an investment strategy has achieved over time. It shows the actual effect of a series of gains and losses on the original amount of capital. In the chart below, you can see that the TSP model provides annualized returns relative to stocks (as measured by the S&P 500), bonds (as measured by the Barclays U.S. Aggregate Bond Index), and a mixed portfolio that includes both stocks and bonds.
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The reason the TSP model works so well is that it can move the portfolio between stocks and bonds as conditions change. During economic expansion, stocks will outperform bonds, while bonds will outperform. These changes are important in times of recession, however, when collateral is high and stocks tend to suffer. By investing during the trading period and taking strategic measures of its obligations, the TSP model takes advantage of the current market conditions.
Not only did the TSP model significantly outperform stocks and bonds in terms of total return, it did so while exposing the portfolio to less risk. We can see this by examining the three main parameters used to estimate risk: standard deviation, skewness, and beta.
Standard deviation is the most common measure of risk used in the financial industry. It measures the variation in income over time. The lower the standard deviation, the higher the return and therefore "safer" a certain measure is. On the other hand, high volatility means that returns are highly volatile from one year to the next.
In this chart, we can see that the TSP model has an experience of about 40% compared to stocks. The model shows more volatility than bonds, but this is to be expected and is consistent with the many benefits of the TSP model. The point here is that when the volatility of the TSP model is roughly equal to the volatility of the mixed portfolio, the returns are very good (as we saw in the first graph).
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Considering the risk associated with volatility is important, but to fully understand the benefits of low volatility, we need to look at how volatility can turn into big losses.
Limit reduction is one of the most profound ways to measure risk. It examines the largest rate of decline that any investment strategy has ever experienced. It's not surprising, the lower the maximum, the better. We see the maximum figures for the TSP model and our other responsibilities in the figures below.
Note that stocks, as measured by the S&P 500, are down more than 50%. In fact, this has happened twice in the last 20 years, during the dot-com era and again during the recession. The TSP model, on the other hand, was able to detect bad conditions in these fraudulent situations and shift the entire portfolio to bonds. As a result, the TSP model has a significant drop from peak to peak of 22.8%. That's a little trickier than even a mixed portfolio.
This table shows one of the main points of using the TSP model. By now, you should be able to realize that the TSP model allows you to have more leverage than a 100% portfolio can provide, but with less risk.
Diversification: Reducing The Risk In Your Tsp
For the S&P 500. A beta of 1 indicates the same level of volatility as the S&P 500, while a beta less than 1 means less risk and a beta greater than 1 means more risk. Again, we can see in the table below that the market impact of TSP type is much lower than the average impact, even lower than the literature.
In this chart, Fund C tracks the S&P 500 index, so it has a beta of 1. The TSP model has a beta of 0.43, which means it's only 43% volatile compared to stocks. Using this particular method to compare risk, we can also see that the volatility of the TSP sample compared to the S&P 500 is lower than that of the mixed portfolio.
At this point, you may have noticed that bonds are less risky than any other bond here. This is to be expected because bonds generally provide lower returns over time.
Now that we've looked at both volatility (standard deviation, standard deviation, and beta) and returns (annualized returns), we can combine these metrics to get a better understanding.
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Come back. It is considered the holy grail of investing because it shows how the capital is being used effectively. Anyone can increase their profits by taking more risk, but the best investment strategies offer the highest returns
The Sharpe ratio is an industry-standard method for measuring adjusted risk. It looks at returns that exceed the standard deviation (or volatility) of those returns. With Sharpe ratios, higher numbers indicate higher risk-adjusted returns (a good thing).
Here we can see that the TSP model is able to provide higher risk returns than both stocks as well as mixed portfolios. The Sharpe ratio is slightly lower than for the bond portfolio, but note that the TSP model produced a higher annual return (10.86% for the TSP model and 4.47% for the F fund).
When choosing an investment strategy, performance indicators are very important because they show the real performance of the investment strategy. Just looking at returns can be misleading, because you don't know how much risk was taken to get that return. The Sharpe ratio highlights this important information and gives you a complete picture of your reward-performance profile. Just make sure you look at the Sharpe ratio in terms of real returns.
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The Sortin ratio is another risk-adjusted ratio that is very similar to the Sharpe ratio. However, instead of comparing the return on the entire portfolio, it only compares the return on volatility (or volatility). The idea here is that high volatility (greater than expected return) is a good thing and therefore should not be penalized.
Than a stock or mixed portfolio. Fund F achieved the highest Sortino ratio, but again, Fund F provided the lowest return when compared to the TSP model.
Note also that the relative performance here is stronger than that of Sharpe. This suggests that a large portion of the TSP's volatility comes from higher-than-expected returns, as opposed to
The last adjusted return ratio we will look at is called the Treynor ratio, and as with the previous two measures we looked at, higher values are better. In this case, the risk factor is beta. Therefore, we look at returns that exceed those achieved with absolute volatility relative to the S&P 500.
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As you can see, the message here is the same. The TSP model has significantly outperformed the stock and hybrid literature.
If you're wondering why bonds don't matter, it's because the beta of fund F is very close to zero, which makes the Treynor coefficient higher (beta is the numerical value). There are also values that will skew the chart, and as we've said many times before, you don't want your portfolio to shift too much to bonds because of low returns.
Right now, the only parameter we haven't discussed is Alpha. Alpha is defined as the excess return on a certain index (in this case, the S&P 500).
What alpha is trying to do is answer the question: If an investment strategy is as volatile (risky) as the S&P 500, how much profit will it generate above that given by the S&P 500? In other words, what value-added investment strategy would otherwise be achieved by investing only in S&P 500 stocks?
Latest Tsp Fund Performance
Because of the nature of the alpha, it doesn't make sense to calculate a value for the expected income of Fund F. Also, since Fund C is itself an S&P 500 fund, it will have an alpha of zero. We can find the alpha value of the TSP model as mixed
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