Is This a Good Time for The I Fund in Your Portfolio?
By Ralph Smith
Thursday, September 2, 2004
It was a close call though. The S fund had a gain of 0.00%. So, your money in the S fund didn't go down but it didn't go up either. Take heart though. Your S fund money is still up 12.22% for the past twelve months.
The I fund has been beating all other investments recently. It returned 1% for August and is up 22.85% for the past twelve months. That is far and away the best investment return for the past year.
The C fund eked out a gain of 0.34% and it is up 11.33% for the past 12 months.
The F fund, which hasn't been faring too well recently, actually turned in the biggest gain for the month with a return of 1.88%. It is up 6.08% for the past twelve months.
The predictable G fund returned 0.38% and it is at the tail end of returns for the past year with a positive return of 4.36% for the past twelve months.
The question everyone wants the answer to (in part, because no one knows the answer) is: "What will stocks do in the next year?"
An article by Jonathan Clements in the Wall Street Journal provides one possible scenario.
Most investors know that stock prices are relatively high compared to an historic average. That doesn't mean stock prices will go down though and, if you look at your TSP returns since January, you will see that the C fund isn't a lot different than it was at the start of the year.
The author says it may take several years for stock prices to get in line with their historic average when compared to corporate earnings.
This may mean that the stock market will meander along without any major gains for the next several years while corporate earnings increase slowly. After several years, the value of stocks will be cheaper compared to the underlying value of the corporations.
Of course, it is also possible the market will drop a quick 10-20% and stock prices will then be more in line with historic averages.
So should you sell your TSP stock fund investments and stick the money into the super-safe G fund? That is certainly one possibility (and one that is not available to private sector employees with their retirement fund). But not having money in stocks also creates the possibility (or probability) that you will hurt your investment portfolio over time as stocks usually provide a higher rate of return than more conservative investments.
Another possible scenario, which is a radical thought for some TSP investors, is to invest more of your TSP money devoted to stocks into the TSP's I fund which invests your money in foreign stocks. Clements says that putting as much as 30% of your stock market money into foreign stocks may make sense since they are more reasonably valued (i.e. less expensive when weighed against corporate earnings) than American stocks.
The decision is yours and you get to live with the results of your investments. Do yourself a favor and carefully consider your options.
For more information on past returns of TSP investments, check out the FedSmith.com TSP page.
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