I Fund Hitting Its Stride

The I fund is making TSP investors in this fund pleased with their investment decision so far in 2017 with a return rate of more than 14%.

In the recent past, international stocks have not performed well for investors. In 2016, for example, the I fund had a total return of 2.10%. The only fund with a lower return rate in 2016 was the G fund.

The Thrift Savings Plan’s (TSP) International stock fund had negative returns in 2014 and 2015 but more than 22% in 2013. The C fund has had much higher return rates over the past several years.

Investing in the I Fund

But, so far this year, the I fund is on a tear. It had the best return among TSP funds for the month of May (3.76%) . It also has the highest rate of return for the year-to-date (14.31%). Coming in second place for the year-to-date among the TSP funds is the C fund with a return rate of 8.67%.

There are several reasons for the turnaround. In large part, American stocks have been bid up to a much higher level in recent years. Foreign stocks are now viewed as a better buy among some investors as they are less expensive and probably a great chance of better returns. So far this year, at least, that rationale has been working.

The dramatic turn in the I fund returns is an example of why investment advisors often advise their clients to diversify among different types of mutual funds. It is unusual to be able to predict when a particular segment of the market will make a significant move up or down. Trying to time the market by guessing which market segment will provide the best returns in the near term future is often a losing proposition.

TSP investors have largely ignored foreign stocks in their investments as only about 5% of TSP investments are in the I fund. Back in November 2009, about 9% of TSP investments were in foreign stocks.

A common percentage in foreign stocks recommended for investors is between 10% and 40%. Others think investing in foreign stocks will provide lower returns and higher volatility over time. With the volatility of the I fund, apparently many TSP investors concluded that foreign stocks were not a good place in which to invest their future retirement funding.

TSP Returns for May, YTD and Past 12 Months

Here is a summary of the returns for all of the TSP funds for the month of May, so far in 2017 (YTD) and the past 12 months.

G Fund F Fund C Fund S Fund I Fund
Month 0.19% 0.81% 1.41% -0.77% 3.76%
YTD 0.98% 2.57% 8.67% 4.96% 14.31%
12 Months 2.02% 1.86% 17.49% 18.74% 16.84%
L Income L 2020 L 2030 L 2040 L 2050
Month 0.55% 0.86% 1.22% 1.38% 1.51%
YTD 2.80% 4.59% 6.52% 7.46% 8.30%
12 Months 5.07% 8.41% 11.75% 13.45% 15.05%

What Should Retirees Do With Their Investments?

The Thrift Savings Plan is a big part of your financial future in retirement. What should you do if you are already retired or about to retire? How should you invest your money?

If you are an older investor, and now retired, you probably wish the days of higher interest rates would return. From 1988-1997, the lowest annual rate of return for the G fund was just over 6%. The last year in which the G fund had a return of 6% or more was in 2000. In more recent years, the G fund has returned 2% or less.

More Bonds and Fewer Stocks in Your Portfolio?

The Federal Reserve raised interest rates twice last year and expected to raise rates again a few more times in the next 18 months or so. Is this a good time to sell stocks and put more money into the G and F funds if rates are going up?

The G fund is the fund that is the most popular fund among TSP investors. It is also the fund that frequently has the lowest rate of return. 34% of TSP investments are in the G fund. 28% of TSP investments are now in the C fund.

One mistake some older investors make is to underestimate how long you will need to receive retirement income. You may live longer than your estimated in your financial planning. That could be a big mistake.

Federal retirees have an advantage over many in the private sector as both the CSRS and FERS provide a monthly annuity with an annual COLA feature. A monthly annuity that will be unlikely to retain your current purchasing power during your retirement years. Even if the current COLA calculation remains the same, it is highly likely your financial status will not remain the same.

As a result,  the TSP can be a very significant part of your retirement income, particularly for those in the FERS system.

Comparing Rates of Return

Over time, those who invest in stocks will have a better rate of return than investing only in bonds (the F and G funds are bond funds). While bond funds are “safer”, you will want to ensure that you do not outlive your money. Stocks will provide a higher rate of return than bonds over time but are more volatile.

A financial advisor will help an individual come up with a way to spread your investments to minimize the possibility of outliving your financial assets. For many investors, a mix of stock and bond funds will provide diversification.

The TSP lifecycle funds (the L funds) automatically provide diversification using a formula for an allocation between the stock and TSP bond funds. That is undoubtedly one reason why the participation rate in the lifecycle funds continues to go up.

The annual rates of return for all TSP funds, including the lifecycle funds, are available in one chart at TSPDataCenter.com.

Stocks that pay dividends tend to hold up better when the market goes down than stocks that pay low or no dividends. Unfortunately, in the Thrift Savings Plan, an investor cannot pick a fund that contains only stocks paying dividends. The closest fund for this purpose is the C fund which largely tracks the S&P 500 index. A dividend growth fund such as the Vanguard Dividend Growth Fund has 45 stocks and an average growth rate of more than 8% going back to 1992.

To invest in a fund that features dividend paying stocks, you will have to invest outside of the Thrift Savings Plan.

The C fund is generally less volatile than the S fund or the I fund. That is a factor a person who is retired will need to keep in mind. If your investments go down significantly in one year, and the stock market will go down periodically, a retiree will have less time and probably less income to make up the difference until the market recovers.

Keep in mind, the C fund has provided an annual rate of return of more than 10% going back to 1988. By comparison, the G fund has had an annual return rate of about 5.2% beginning in April 1987. That difference in return rates will be very significant over time.

Our congratulations to those TSP investors who are taking advantage of the benefits of investing in the TSP.

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