The I Fund and Its Role in Your TSP Portfolio

International stocks have recently been underperforming American stocks. Does this mean federal employees should avoid the I Fund?

The I Fund has been in the news lately, and not in a positive way.

Some financial writers have been critical of the I fund for its lack of performance. This is hardly a shock since international stocks are currently underperforming relative to US stocks after the long bull market American investors have been enjoying for much of this decade.

Investment researcher Lyn Alden recently wrote on her blog that the primary problem with the I Fund is its lack of diversification. She noted that it only follows developed countries and even then it is heavily concentrated in only five of those countries. (See the infographic below that she compiled which summarizes her concerns about the I Fund)

The notion of diversification, however, is the exact reason why other investment advisors would tell federal employees to keep a portion of their contributions going into the I Fund.

Ric Edelman and Dave Ramsey are two individuals who are well known in the personal finance arena. Both are New York Times best selling authors have have radio talk shows where they take questions from callers to give them advice about their personal financial situations.

Edelman has suggested to federal employees in the past that they put their investments in the TSP into the C, S and I Funds as follows: 40% in the C, 40% into the S and 20% into the I Fund.

He suggests this because he notes that if an employee invests over the long term (such as for the duration of his career with the federal government), these funds will vastly outperform the G Fund and the steady, regular contributions from each paycheck will allow dollar cost averaging to work in his favor over the longer period of time.

Dave Ramsey tells federal employees to invest in the same three TSP funds, but to weight the percentages slightly differently. He suggests putting 60% into the C Fund, 20% into the S Fund and 20% into the I Fund for the same reasons as Edelman.

Ramsey acknowledges that the I Fund has a weaker long term track record than the other two funds and for that reason doesn’t suggest weighting it as heavily, however, he does suggest it be included in one’s TSP portfolio for diversification.

For additional details on Edelman’s and Ramsey’s positions, see How Should I Allocate My TSP?

The basic premise behind diversifying one’s investments is that nobody can accurately predict what the stock market is going to do in the short term. While US stocks are far outperforming international stocks currently, one need not look far into the past to find a time when international stocks had the advantage for most of a decade. From 2000 to 2009, international stocks outperformed the S&P 500, on average. It’s happened before and it will almost certainly happen again in the future; we just don’t know when.

Author Rodney S. Morris recently wrote an article in which he noted that he asked Dave Ramsey why he would continue to recommend the I Fund given its recent lackluster performance. “He simply feels confident over time the I Fund will perform well enough to warrant being part of your investment portfolio,” wrote Morris.

Apparently in disagreement, Morris went on to add, “The paltry 3.2 percent growth the I Fund has produced over the last decade does not warrant being part of your portfolio. At least not right now and perhaps not for the foreseeable future.”

Ramsey did recently offer some additional details on including international funds inside of one’s investment portfolio. In discussing the notion of diversification with one of his callers, he said this:

The principle of diversification is to spread your money around to limit risk. My foreign funds have never, in 35 years of investing [been the strongest of the funds in my portfolio]; it’s the weakest of the four categories [that Ramsey recommends inside of a retirement account: growth, growth and income, aggressive growth, international]. Always; almost every year. It’s to the point I’m so disgusted that I’ve even thought about, after 35 years, of changing the formula, but I’m not going to. But it’s the one category that is just “blah;” it’s not horrible – I don’t lose money on them – but I’m just never excited about them. And I guess that’s a good thing; it means the American economy is outperforming the other economies, in general.

Contrarian investors would tell you that when the financial pundits start screaming the loudest about how bad a particular sector is, that becomes the time to buy because it means stocks in that area are out of favor and are on sale at a discount.

Everyone’s situation is unique, and only you can decide what is best for you with your retirement strategy. A good financial planner can help give you the information you need to make decisions that will be best for you and your family as you plan your future. While I am not a financial planner and cannot offer advice, several of the authors who write for FedSmith.com are financial advisors who specialize in working with federal employees.

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He has over 20 years of combined experience in media and government services, having worked at two government contracting firms and an online news and web development company prior to his current role at FedSmith.