A reader wrote in recently and asked a question that went something like this: “The I fund has been doing great in recent months. I did not want to invest in foreign stocks because I thought they were too risky. Is it too late to invest in these stocks or are they too risky now?”
First, there is no question that the I fund has been a good investment for TSP investors in the past couple of years. In 2004, it was up 20% and in 2003 it was up almost 38%. In both years, the I fund gained substantially more than the C fund. The I fund has also been very good for TSP investors in 2005. (Check out the TSP corner for detailed information on returns of all the TSP funds.)
But time heals all wounds. If you go back to 2001 and 2002, the I fund went down almost 22% and 16% in those respective years.
So, clearly, there are risks in investing in foreign stocks, just as there are risks in the C fund.
Foreign stocks have done well in part because the value of the dollar is going down. If you were to travel to Europe three years ago, you could get a bargain on a variety of good. 88 cents would buy you one Euro. Now, Europeans are traveling to American shores to go shopping. The reason is because it now takes $1.34 to buy one Euro. In other words, Americans pay a one-third premium to use dollars in Europe.
Foreign companies have often benefitted from this fluctuation in the value of our currency. Even if the profit of a foreign company has not zoomed upward, a company’s stock may have gone up because, in American dollars, the value of that stock has increased.
Will the dollar continue to fall? If you think it will continue to fall, that means that American goods will continue to sell better overseas because they will be cheaper. It is also likely to mean that the value of foreign stocks will continue to rise. Therefore, the I fund is likely to be a good investment.
Do you think that foreign stocks are relatively lower priced than American stocks and does that mean the value of those stocks will continue to rise? In general, foreign stocks are still under valued compared to American stocks but that varies widely from region to region. And, in some regions, the political stability is not what we are accustomed to in Europe and America so there may be a reason for the lower value of stocks.
Finally, do you want more diversification in your TSP investments? Having at least some foreign stocks in your TSP investments is generally a good idea. No one can definitively answer the questions posed here and, despite rosy or pessimistic predictions, even the experts can be wrong.
The reader posing the question cited at the beginning of this article is correct. The I fund has been a good investment. But the longer the good returns keep rolling in, the greater the probability the value of this fund will go down. We just don’t know when the downward trend will begin.
As always, the risk and rewards are yours. Invest wisely and carefully.