Do you have room for international stocks in your TSP portfolio?
Do you fear putting your retirement money into stocks where the companies in which you are invested are located somewhere outside of North America?
As Americans, we tend to be myopic in how we invest our money. Being able to call a company here in the United States or locate a company headquarters on a map of our own country is comforting. We understand our political process and generally feel confident in the stabilty of our government and our democracy.
Some of these feelings are natural and understandable. They can also be deadly to your retirement portfolio.
Numerous readers have commented (and complained) about American jobs going overseas. Many go to China or India or in countries we couldn’t locate on a map and can’t pronounce correctly. But those jobs we are losing are creating wealth in other countries.
Anyone shopping at almost any mall this Christmas will find most of the products we are buying are made somewhere in a foreign country. In fact, it has become so common, and some Americans react so strongly, that you will now read on a box "Designed in the USA." In other words, the product is manufactured or produced somewhere else. The box design may be from California but the software, the computer or the pots and pans under the tree are probably manufactured elsewhere.
Seeing American manufacturing capacity shipped overseas makes some people mad. They don’t want to buy a product if it isn’t made in the USA (good luck in your search!) but successful companies recognize we are now in a global economy. Manufacturing facilities and even more traditional "service" jobs may be sent somewhere else because the product can be obtained at a lower cost. Companies that don’t do this may find themselves in bankruptcy.
Successful investors look at a situation objectively. They try to see a situation as it is and not as they would like it to be.
The reality is that the economies of other countries are often growing faster outside the United States. The reality is, some companies outside of the United States will be more profitable than American companies.
If you don’t have some of your money in the TSP’s I fund (the "I" is for "international"), you are missing an investment opportunity. In, fact, you are already behind many investors who have taken the plunge and invested in foreign stocks. According to the Wall Street Journal, a record amount of American money is flowing into foreign stocks–as much as $115 billion in the past year.
The money is having the effect of reshaping some of the foreign companies which are now disclosing information for potential investors much as American companies do. Financial advisors are also advising their clients to put as much as 20% of their stock investments into foreign stocks.
Part of the reason is higher returns. As an example, the I fund had a 20% return in 2004–better than any other TSP fund. In 2003, the I fund provided investors with a return of just under 38% (slightly less than the small company TSP fund). For the past 12 months, the I fund has a return of just over 13%–again slightly less than the S fund but considerably better than the C fund or the bond funds.
The usual question on everyone’s mind is what will the fund do in the next year? With a stronger dollar, the I fund may not do as well as the stocks in the C fund. But a prudent investor will diversify to take advantage of the possibility that some investment sectors will fare better than others.
Those TSP investors that have been ignoring the I fund have already lost considerable potential in their TSP retirement funds. Continuing to ignore the rest of the world may mean you are missing a chance to enhance your retirement revenue.