As a retirement investment adviser, I find the Thrift Savings Plan’s five basic funds to be the best examples of their kinds anywhere:
• The C Fund is invested in the diversified group of stocks included in the Standard & Poor’s 500 Index and represents a diversified investment in the stock of large U.S. companies.
• The S Fund provides investors with exposure to the performance of medium and small U.S. company stock.
• The I Fund invests in the stock of companies in Europe, Asia and the Far East, the most developed foreign markets.
• The G Fund is a unique investment that offers the share-price stability of a money market fund, combined with the higher returns of intermediate-term Treasury notes.
• The F Fund represents an investment in a highly diversified “basket” of Treasury and corporate bonds.
Among them, these five funds offer diversified access to the three basic investment classes that make up the world economy — equity, debt and cash. They are low cost, well diversified, easy to manage — I could go on and on. But, if you’ve been reading my columns, you know this already.
Unfortunately, many investors and observers don’t seem to get it.
I will even be so bold as to say that most people don’t recognize the beauty of each and every one of the basic TSP funds. Some participants have decided that they consider one or more of the funds to be downright ugly.
In some cases, these opinions change on a monthly basis, and in others they are, more or less, permanent. It’s not unusual to hear a TSP investor say something like: “I hate the F Fund. It’s a dog. I don’t like bonds and won’t invest a dime in the F Fund.” More typically, however, I hear something like: “I read an article that said that the I Fund was the worst performer last month, so I want to sell the I Fund.”
In both of these cases, the investor is making a serious mistake in judgment. To omit any of the funds, or the asset types they represent, from your portfolio increases risk more than it increases the expected rate of return. In other words, by using all five of the funds in the right proportions, you can achieve the greatest level of expected return for the amount of risk you take, or the least risk for the level of expected return produced. Either way, it’s in your best interest to consider all five funds as useful tools to achieve your goals with minimum risk.
While it’s reasonable to consider the past performance of each of the funds, from time to time, it’s not reasonable to use past performance to declare a fund unfit for your portfolio. Most recently, I’ve been hearing that, since the I Fund’s performance during January lagged the other four funds, it should be sold. For starters, when an investment’s price is down or lags, it should be considered for purchase, not sale.
Think about it. When your home’s price is low, do you jump to sell? Probably not. When real estate prices are low, interest in buying usually rises. It should be the same with stocks and bonds.
But the bigger reason to avoid this kind of irrational judgment is that it contradicts the rationale for being diversified. The components of a retirement portfolio are not there for their ability to win every race. They’re there for the contributions they make to the whole. Sometimes, that means they will be contributing much-needed returns; at other times, they will help to reduce risk.
Focusing on returns alone is a serious, but all too common, investor’s mistake. Retirement investing is about managing risk first, then worrying about returns. Using all five TSP funds, all the time, to produce a properly diversified and allocated portfolio is the best strategy.