A Sensible Approach to The I Fund

By on March 8, 2006 in Current Events with 0 Comments

The I fund in your Thrift Savings Plan has been on a tear.

Many federal employees have been hesitant to invest in the international stock fund. Foreign stocks may seem unpatriotic. Why would a federal employee, whose current income and future retirement, want to invest in foreign companies?

Take a look at the returns of the I fund for the past three years.

  • 13.63% in 2005
  • 20% in 2004
  • 37.94% in 2003
  • How did your TSP returns compare to these numbers?

    No doubt, your overall return was considerably smaller.

    Having smaller returns than those produced by the I fund is not bad–in fact it probably means you are a wiser investor than someone who put his entire portfolio into the I fund and managed to score huge returns.

    No one wants to gamble with not having a retirement to look forward to. Diversifying your investments makes sense and the I fund is often seen as a being more risky than owning the C fund or certainly more risky than the G and F funds. (Note that the I fund went down considerably in 2001 and 2002.)

    The following will sound like conflicting advice. But read on carefully.

    First, you may have too much money in the I fund. For example, if you put 25% of your TSP investments into the I fund back in 2003, you now have a much larger percentage of your retirement money in foreign stocks than you did originally. No other fund has done as well as the I fund. That is good but watch your portfolio allocation. You don’t want to put too much of of your TSP money in this (or any other) fund. (If you do want to have most of your retirement funds in the I fund, more power to you. The rest of us will watch closely as you accept the risk. We will hope you do well!)

    Second, you may not have enough money in the I fund. If you have been avoiding this fund out of fear, patriotism or lack of knowledge, you may want to reconsider.

    No doubt, putting money into the I fund now is a little more scary. Any investment that has had the high returns that the I fund has had in the past three years may be getting too pricey. And the I fund could go down as fast as it has gone up.

    But if you don’t have any money in this fund, you could be making a mistake. Most American investors put between 10% and 20% of their investment portfolios in foreign stocks. The economies of some foreign countries are growing much faster than ours is growing and this disparity may continue. America has been on the cutting edge of technology and innovation for a long time. But new advances in automobiles, cell phones and other engineering disciplines are often coming from abroad. As one example, Toyota may surpass General Motors in the near future as the world’s largest automaker–in part because of the company’s innovative approach to automotive engineering. In the past, these advances would have been developed in America and copied or come later to overseas markets. That is no longer the case.

    And, as some readers have noted in comments on our site, a number of jobs that used to be in America are now overseas.

    The reasons why these major shifts are occurring are complex and beyond the capacity of most of us to influence or to understand. Countries like Brazil, India, China and Russia have relatively small economies but they are growing very fast and are using at least some tools of capitalism to help them continue to grow fast.

    These stocks certainly could go down but the trend is pointing toward foreign stocks continuing to perform well over a longer term. Putting at least some of your TSP money into this fund will reduce your risk through diversification and give you the possibility of a higher rate of return than you would otherwise have in your TSP portfolio.

    Your retirement future is largely your responsibility–especially if you are in the FERS program. Don’t be too patriotic and cling to American stocks just because you have been taught to believe that "Made in USA" is superior. We are living in a global economy. Your future retirement may depend, in part, on the success of foreign stocks.

    Take a closer look at the I funds if you have not done so. And, if you just don’t want to decide what to do, take a look at the TSP’s lifecycle funds where the investment decisions are made for you.

    © 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.


    About the Author

    Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters onĀ federal human resources.