Do Foreign Stocks Have a Place in Your TSP Investments?

Do shares of the I fund move in correlation with those of the C fund? Should TSP investors consider investing in stocks of foreign companies?

In a recent article on the changing fortunes of TSP investors in the stock market, I wrote that there were advantages to TSP investors in spreading your retirement investments among the different retirement funds, including at least some investment in international stocks (the I fund).

Many investors are hesitant to invest in foreign company stocks. We don’t know what the political or economic situation may be in foreign countries and, with America having the largest economy in the world, why invest anywhere else?

Several readers asked a variation of this question: “Why should I invest in the I fund? Don’t foreign stocks move in the same direction as the American stocks that are in the C fund?”

First, this is not a question of questioning your patriotism or loyalty to your country. Even if you are an employee of the federal government, a wise investor will look for the best return, especially when investing your retirement funds. Putting some of your money into foreign stocks does not indicate a lack of confidence in the American government or our economy.

Look at it this way. If you are bothered by investing in foreign company stocks for this reason, remember that your own government has set up a fund of International stocks in which you can invest.

Second, the business cycles in countries outside of the United States do not always move in the same direction as the business cycle here. Moreover, different events will impact countries in a different way.

Third, political, economic or natural events impact countries in different ways and these events can (and often will) impact stock values in different ways.

As we have seen in the past week, shares of the I fund will sometimes move in a different direction from the C or the S fund. The most recent moves are related to the falling value of the dollar.

This is because the value of foreign companies is usually in the local currency. A company in Germany, for example, will probably be based on the value of the euro. If the euro rises in value as the dollar falls, the shares of the German company and the American company will be impacted in different ways. As a result, the value of your shares in the I fund will be impacted differently than the value of your shares in the C fund.

In addition, some countries have an economy that is growing much faster than the American economy. They also have the potential to fall faster. In either case, the stocks of companies in these countries will sometimes rise or fall at a different rate than the stocks of companies in the C fund.

Financial advisors will often advise their clients to diversify their investments in order to reduce the overall volatility of their portfolio. In other words, putting your retirement money into more than just one or two funds is likely to reduce your overall financial risk.

How much should you put into foreign stocks? That is a decision only you can make based on your particular situation, your investing temperment and your confidence in the overall economic prospects in and out of America. The advice of some financial experts may surprise you as recommendations of 20% – 30% of your investment portfolio in foreign stocks are not uncommon.

Whether you decide to invest in the I fund or not, the idea is worth your consideration.

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