Is the TSP’s F Fund a “Risky Investment”?

Several readers have asked about the risks of investing in bonds. Our advice: Investing in a bond fund is necessary to have a diversified investment portfolio.

Recently, several readers have asked what risks, if any, are involved in investing in bond funds. One reader phrased the question this way: “I have invested in the TSP F fund. How can I lose money in this fund? I thought these funds were designed to be safe investments?”

Several readers indicated they have sold all or part of their C fund investment and put at least some of these funds into TSP bond funds. Generally, they ask if that is a good idea (since they have already sold their investment, one could wonder why they are asking now?).

FedSmith doesn’t provide individual financial or investment advice. Each person’s situation is different and many are complex. But the questions are good. They reflect the concern each investor should have about his own retirement and they also reflect a misunderstanding many people have about investing in bond funds.

As an investor in the TSP, you need to understand the relative risks and advantages of each fund. You can’t make good decisions for your particular situation without knowing potential risks and rewards of your choices.

Here is a quick summary of risks and rewards of bond funds such as the TSP’s F fund. (The TSP G fund is different; it has less risk and less potential reward.)

What is the F fund? Simply put, the Fixed Income Index Investment (F) Fund tracks the overall performance of the American bond market. It is a good investment to have in anyone’s retirement portfolio.

The F fund is not a risky investment (think of “junk bonds” when you think of a risky investment). But, having said that, there is some risk in your F fund investment. This fund will not always go up and, as some of you know from personal experience, it may go down. This does not mean you should avoid investing in bonds. A bond fund is-and should be-an important part of a balanced, diversified investment program. Millions of investors invest in bond funds. Bonds offer diversification making your investments safer because they act as a buffer to the volatility of stocks.

As of this writing, bond funds may have more risk than is often the case. That is because interest rates are very low. Since they are very low now, it is likely interest rates will rise. When interest rates rise, the value of a bond fund will go down as current fund investments have less value as interest rates rise. They have less value because new bonds being issued pay more than older bonds issued when interest rates were low.

Bond fund returns have been very good to investors for the past several years (the F fund has returned 8.63% for the past 12 months). Stock fund returns have generally not been good (the C fund has lost 20.50% in the past twelve months). In other words, F fund investors were about 29% ahead of C fund investors in the past year. On the other hand, in 1999, C fund investors had a positive return of 20.95% while the F fund went down .85%.

As a result of investment trends in the past three years, many investors have sold large chunks of stock funds (such as the TSP C fund) to go after higher returns in a bond fund and to avoid losing more money in stocks. While no one can accurately predict the future of the markets, it is likely that those that sold their stock fund investment in the past several months may have sold when the market was at its low point of the bear market. In fact, the C fund took a big jump in October so those who sold in July or August missed the recent stock rally.

In short, investors need to have a balanced investment portfolio. You need both stocks and bonds in order to increase your chance of having a financially secure retirement. Bonds and stocks often move in different directions. Trying to chase the higher returns of one or the other will generally not work and in some cases will actually decrease the value of your investments.

There are risks in bonds and certainly there are risks in stocks. Stocks usually make more for an investor over a longer term but they are more volatile than bonds. As a long term investor who wants to ensure your retirement funds are secure, you need both types of investments in your portfolio. But don’t put all of your money into a bond fund thinking you will sleep better at night because it can’t go down in value. It can go down; there are times it will go down. On the other hand, putting money in an account that has no risk will probably not enable you to retire because of the low rate of return.

Welcome to retirement planning in the 21st century!

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 on federal human resources. Follow Ralph on Twitter: @RalphSmith47