The Tactics of the Interfund Transfer (IFT)

The Interfund Transfer (IFT) is the way you move your money between the TSP funds.  Ideally, you want your money parked in the funds that are increasing over time.  When the stock market is trending up, you want to have your money primarily in the C,S, and I funds.  When the market is trending down, you want to have the majority of your money in the G fund.  The current IFT rules allow you to redistribute between accounts 2 times per calendar month.  After that, your only option is to increase the amount you have in the G fund.  This rule is a little tricky and very restricting, but it is the rule currently in place and we need to work with it.  Here’s how the rule works in real life and it’s effects on maximizing your TSP account.

Way back in 2003, the TSP moved to a Net Asset Value (NAV) accounting system which enabled the TSP funds to be traded on a daily basis.  From 2003 to 2008, TSP account holders had the freedom move their money between the funds on a daily basis if desired.  Unfortunately a small number of account holders traded so frequently, raising program costs for all account holders, that the TSP board changed the IFT rules in 2008.

While the current IFT rule helps to keep the overall cost of TSP extremely low, it also severely restricts your ability to react to big market swings.  The market does not operate on a calendar month basis.  It doesn’t care what day of the week it is or how many IFTs you’ve made so far in the month.  After the first 2 moves, you can’t get back into the stock funds until the beginning of the next calendar month.  The importance of this rule is being played out now in early Feb 2016.

By the end of the day last Friday 29 January, the S&P 500 had jumped 2.5% on big volume, confirming a new rally attempt.  If you acted on this breakout, you executed your first IFT on Monday 1 February.  By the end of the day on 2 February, the S&P had lost all of the breakout gains and by the morning of 3 February, the S&P was down again.  Some may have been scared back into the G fund for the 2nd IFT of the month.  This is the worst possible tactical position for 2 reasons.  If the market continues to rally from this point, you cannot get back into the stock funds until 1 March.  Even worse is deciding what to do on 1 March.  If the market is over extended at that point, then chasing it up is very risky.  Ideally, you want to save your 2nd IFT for late in the calendar month if possible but, the market is in the driver’s seat.

No one has a crystal ball.  Just remember that using the 2nd IFT early in the month takes you out of the game until the beginning of the next month.

Stay tuned!  We’re in for a wild ride in 2016…