Is the S Fund for You? Why a Diversified Portfolio May Provide More Security for Your Retirement FundsView this article online at http://www.fedsmith.com/2002/12/10/s-fund-you-why-diversified-portfolio/
The TSP small company fund (the S fund) has done well the past two months. In fact, in November, it had a better rate of return than any other TSP fund. Should you invest in this fund? Is it risky?
The short answer is “yes.” You need to have a diversified retirement portfolio and the S fund may be an integral part of that portfolio. Of course, how much you invest in this fund (or if you should invest in it at all) will depend on a lot of factors including how long before you retire, how much you have to invest, and your ability to tolerate risk.
There is risk. You cannot avoid it. With more risk there is often more potential for financial gain. While you could put your savings in a mattress or your credit union savings account to ensure your savings are safe, that may be the most risky strategy of all because it will virtually ensure you will not have enough money to retire-there will not be enough of a gain to enable you to retire.
We are in a turbulent investment climate. In 2002, the stock market was more volatile than at any other time in the past 60 years. According to the most recent issue of Fortune Magazine, the last year the market had the same dramatic swings we have experienced in this year was 1938. For those who have forgotten their history, the market was worried about the Nazi advances in Europe and the wisdom of President Roosevelt’s New Deal policies.
It is hard to compare 2002 with the state of the world in 1938. But we are facing the possibility of war in the Middle East and we are recovering from a huge bubble in stocks from the 1990’s. While we do not know what the future holds, it is likely that 2003 will continue to be turbulent and there will be dramatic swings in investments in the next year.
All this means you cannot predict what will happen. You need a diversified portfolio as your best means of preserving and hopefully increasing your retirement funds.
Small stocks tend to have greater potential and greater volatility than larger companies, such as those in the TSP C fund. You may want to include these stocks in your portfolio. As you saw in November, they can be your best source of financial gain in some markets. The TSP fund is cited by some financial advisors as a model retirement fund. It gives you the opportunity for easily diversifying your investments over the full range of opportunities. You should consider taking advantage of it if you have not yet done so.