Best TSP Fund for the Long Haul?
By Ralph Smith
Tuesday, July 22, 2008
In investing for your retirement future, which of the Thrift Savings Plan (TSP) funds will provide the best return and leave you more money to spend during your retirement years?
No one can predict the future but looking at the past record may give all TSP investors some guidance as they make their investment decisions. Keep in mind, your investment strategy may be different than your colleagues. Your retirement timing may be different, you may be more willing to take more risk with the possibility of gaining a higher return, or you may have a more in-depth knowledge of investing.
The current market is one that can easily create stress as investors watch their portfolio balances decline as the stock market sinks into bear market territory. (See TSP Stock Funds Nosedive in June)
Most TSP participants' money is in the G and C funds. At the time of this writing, the C fund is now down about 13% for the year and the G fund is up about 2% for the year. The I fund is down almost 13% for the year to date.
But those investing for retirement should have a longer time frame in mind. Using figures from the July report of the Thrift Investment Board, all of the lifecycle funds have outperformed the C and I funds in 2008 and, since their launch in 2005, the lifecycle funds have outperformed all of the underlying TSP funds with the exception of the I fund which is up almost 12%.
Here is a chart that displays the difference in performance in these funds. The returns are based on information compiled by the Thrift Investment Board from August 1, 2005 through mid-July.
The number of participants in the lifecycle funds is continuing to grow each month. There are now almost 600,000 TSP participants investing in the lifecycle funds. There were just over 566,000 participants at the end of December 2007. The main reason is probably that the lifecycle funds offer automatic diversification between the different funds without requiring an employee to rebalance the funds throughout the year as it is done automatically.
There is one interesting statistic that shows up though. The number of FERS participants with their entire account balance in one lifecycle fund: 5%. The number of CSRS participants with their entire account balance in one L fund: 4%. The number of TSP participants under the FERS system with balances in the L funds: 15%. The number of TSP participants under the CSRS system with balances in the L funds: 11%.
As the concept behind the lifecycle funds is to place money into one fund and have the computer program allocate the funds throughout the underlying funds, the low percentage of TSP investors putting their money into one fund is striking. Looking at this set of figures, one can conclude that TSP participants have not yet placed their trust in the concept of the lifecycle funds as the most desirable way to invest their future retirement funds, although the number of people investing in the lifecycle funds is continuing to go up each month. Or, alternatively, perhaps TSP participants just like to try their own hand at shaping their financial future--including those who have decided to put their entire TSP investment into the G fund.
So which fund is the best one for your long-term investments?
A rational person could look at the chart above and conclude that the international stock fund is the best investment. It clearly has been the best one for the time period covered by the chart. Anyone who is making a decision on how to invest in the TSP funds should be sure to put at least some of their money into the I fund as it may continue to do well in an increasingly global economy.
But the I fund could also be the most risky investment. International stocks have had a good run and that may be an indication that other types of investments may do better in the future. The message for many passive investors seems clear: putting money into the appropriate lifecycle fund may be a better long-term investment strategy to provide higher returns through the inevitable "ups and downs" of the financial markets.
Most TSP participants invest their money in the G fund (38% of their allocation from those in the FERS system and 45% of their allocation from those in the CSRS system). That is the safest investment in a down market although the lifecycle income fund has provided a better return than the G fund over a longer period of time.
As we have noted before, shaping your financial future is a personal decision and you can invest your funds as you see fit. Enjoy the ride and take pleasure in making your own financial decisions.
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