INCOMING! How To Take Cover From The Fiscal Cliff

Mitch is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Unless you've been on a remote Forward Operating Base for the last three months, you've probably heard about the fiscal cliff that's coming our way. Taxes on personal income and investments will go up, and government spending will be trimmed. On the one hand, it's standard stuff for any government, corporation, or household that is spending more than they're taking in. On the other hand, the dollar amounts start with the letter "T" and every single person taking part in our economy might find themselves with a little more money going to Uncle Sam and a little less money going to the companies making up the stock market.

So far we've been espousing the benefits of investing in a broad stock market index, namely the S&P 500 (SNPINDEX: ^GSPC). Now don't get me wrong, over a lifetime of investing this fiscal cliff stuff will just be a small bump along the way. I wouldn't bet against the S&P 500 over the long term. But with uncertainty on the horizon, and money being siphoned away from Mr. Market, the going has already started to get a little rough for the short term. It's going to get rougher yet. The uncertainty means there are still some investors clinging to the hope that the fiscal cliff and sequestration won't be that bad. There's a lot of talk about "avoiding the fiscal cliff." As if some deal might still be struck which preserves the economy. But I think that a close look at the political talking points reveals that even if a deal is struck, it's going to hurt. In the short term, I'd like to keep capital out of harms way until this thing blows over. Listen, when the "Big Voice" says hostile rounds are incoming, you should do what you always do: Take Cover!

If you are contentedly following a simple plan similar to this previous post that painlessly takes you from E-1 to millionaire then you might be asking yourself the following question: Is there a way to get out of the open and put a little cover between your capital and the fiscal cliff? You bet there is. To do that, let's take a look at two more great funds available to servicemembers: the TSP F and TSP G Funds. Like the other funds in the low cost TSP, the F and G Funds are managed by Blackrock Institutional Trust Company National Associates, a privately owned affiliate of Blackrock (NYSE: BLK)

The TSP F Fund emulates the Barclays Capital US Aggregate Bond Index. If you haven't heard of Barclays (NYSE: BCS) before, don't worry. That just means you're probably not British. Headquartered in London, Barclays is considered a pillar of the global banking system, has around 140,000 employees worldwide and traces its lineage back to 1690. Talk about old money! The Barclays Capital US Aggregate Bond Index is made up of U.S. government, mortgage-backed, corporate and foreign government bonds. In general this index describes the overall US bond market and tends to rise when interest rates fall and vice versa. It's considered low risk - basically there is the possibility that the organizations that issued the bonds tracked by the index decide not to pay. Because it's a wide index, no single default will do great harm. And when the government is talking about cutting spending and raising taxes in order to meet its financial obligations, things look pretty good for the F Fund.

Unfortunately, unless you are using Barclays or Bloomberg directly, you can't easily track the index outright. The next best thing is to track (or purchase) an ETF like Vanguard's Total Bond Market (NYSEMKT: BND) that is designed to simulate the Barclays Capital US Aggregate Bond Index. Vanguard funds are highly regarded due to excellent management and low expense ratios: only .10% for this ETF. That's not bad, but still doesn't beat the TSP F Fund itself with an expense ratio of only .024%!

Now, if you want to really put some armor up over your money then you can't do better than the TSP G Fund. According to the government's information sheet, the TSP G Fund is invested in short-term U.S. Treasury securities that are exclusive to the TSP. They are guaranteed by the U.S. Government and therefore have NO RISK! That's what I call a bunker for tough times! The returns are designed to "beat inflation". We aren't going to catch that 6% wind and make it to the land of the millionaires with all of our money in the G Fund, but as the saying goes, "Money you don't lose is just as good as money you earn."

Yearly Return Comparison

 

Barclays US Agg. Bond Index

Vanguard Total Bond Market TSP F Fund TSP G Fund
2005 2.43% - 2.4% 4.49%
2006 4.33% - 4.4% 4.93%
2007 6.97% - 7.09% 4.87%
2008 5.24% 7.5% 5.45% 3.75%
2009 5.93% 3.46% 5.99% 2.97%
2010 6.54% 6.25% 6.71% 2.81%
2011 7.84% 7.86% 7.89% 2.45%

The TSP F Fund, that is the Barclays Capital US Aggregate Bond index, is low risk and generates some nice income from all those bonds. Returns are consistently higher than the G Fund. It's a sturdy place to take cover and get your money out of stocks until the fiscal cliff and sequestration blows over. If Mr. Market overreacts to the increase in capital gains and lost jobs, be prepared to move your capital back out of cover and counterattack when shares are at a discount! Do you have other ideas to protect your capital or insight into the fiscal cliff and sequestration? Let's hear about it in the comments or on Twitter. Fool Up, Troops! There's wealth to be built!

Want to join the discussion or be the first to know when the next post is published? Join me on Twitter @MilitaryFool.


Mitch Rubinstein is not a financial planner and the opinions expressed in this blog are just that: one person's opinions. This blog is not endorsed, approved or associated with the Department of Defense. Mitch Rubinstein owns shares of the TSP F Fund and no positions in the other stocks mentioned above.. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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