Should You Lighten Up On the S Fund in Favor of Larger Company Stocks?

The recent rise in the value of some stocks may mean this is a good time for TSP investors to take a closer look at their TSP investments. Here are ideas for consideration.

A major index of the stock market is hitting new highs. Your TSP investments are undoubtedly changing as a result of changes in the market. This may be a good time to take a closer look at your TSP portfolio. Here are several factors to consider.

Small companies have been beating the pants off of larger companies in terms of stock prices. This is also true for your TSP investments. Here is a quick summary of the results of the S fund over the past several years.

2005: 10.45%
2004: 18.03%
2003: 42.92%

Compare the returns of the S fund to these returns for the TSP’s C fund:

2005: 4.96%
2004: 10.82%
2003: 28.54%

Obviously, your money has been a better investment in the S fund over this time period than the C fund has been.

In the past three months, there has been a significant change in the return rates. Consider these figures for the S fund in July-September 2006:

July 2006: -2.79%
August 2006: 2.15%
September 2006: 0.88%

Compare the S fund return rates to these returns for the C fund during the same time period:

July: 0.65%
August: 2.36%
September: 2.58%

With the latest record setting prices for larger companies as part of the Dow Jones Industrial Averfage (DJIA), you may be wondering if you should ditch some of your S fund holdings and put the money to work for you in the C fund. Is that a good idea?

Each person is different. Small companies tend to be more risky than large companies. Investors with a longer time frame before retirement can often accept more risk because they will not need the money as soon as someone who will be retiring earlier so they have more time to recoup losses.

Also, each person is different in terms of how much risk they are willing to take. You need to look at all of these factors in deciding how to invest your money.

But here is a consideration. Financial advisers often tell their clients to diversify. In other words, put a percentage of your assets into small companies, a percentage into larger companies and a percentage into international stocks. When your predetermined percentages get out of whack as often happens when one sector makes a significant change, make periodic adjustments to bring your portfolio back into line with the risk you are willing to accept and the time before you are planning to retire.

Having said all of this, bigger companies are currently performing better than small ones. That is not surprising. Some analysts have been predicting the trend for months. In the early stages of an economic expansion, small companies often do better than large companies. As the economic cycle advances, the trend often reverses. The larger companies do better later in the economic cycle for a variety of reasons. They are usually more diverse. They are larger and cost-cutting measures can have an impact to drive the profits higher for larger companies. Finally, it is often the case that the price to earnings ratio of the larger companies has changed and these companies have become relatively less expensive as the cycle progressed.

For reasons such as these, there is now a trend in the investment community in favor of larger companies while smaller ones are more out of fashion.

No one can consistently predict the future of the stock market (we all get lucky occasionally) and the safest approach is to diversify your investments. But even if you decide to stick with your current investment amount in the S fund, it is a good idea to take a close look at how much of your money in now in the smaller company funds. Once you have done that, consider whether your investment percentages are still within your comfort zone or whether you need to make changes.

Here is another alternative. If you are uncomfortable making changes to your account and just do not like having to keep up with your investments, you may want to consider investing in the newer lifecycle funds now offered by the TSP. Some investors are likely to do better with these funds as the changes are made for you automatically although you are giving up some control over your investments.

The choices are yours to make.

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