An In-Depth Look at TSP Funds

By on Jul 8, 2013 | Investing, Military Finance | no comments yet, be the first!

An In-Depth Look at TSP Funds

If you are serving in the U.S. military or working for the federal government, you probably have a Thrift Savings Plan (TSP) account. TSP is a great retirement savings option that is similar to civilian 401k plans. Although TSP investment options are somewhat limited, it is still possible to create a well-performing, diversified retirement portfolio with TSP funds.

Here is a detailed breakdown of each of the 6 TSP funds that should help you decide which ones are appropriate for your retirement portfolio. The following was put together based on the information available on the TSP website.

The G Fund

Fund ObjectiveTo provide interest income with virtually no risk of loss of principle
Investment StrategyThe fund invests in short-term U.S. Treasury bonds, issued specifically to the TSP
RiskVirtually risk-free (some inflation risk)
VolatilityLow
10-Year Annual Return3.61%
Expense Ratio0.027%

The G Fund is the least risky, but also the worst-performing of all TSP funds. It should be considered only by the most risk-cautions investors, such as those approaching retirement age. A combination of the G and F Funds can serve as a low-risk portion of your retirement portfolio. The G Fund can also be used to generate income during retirement.

The F Fund

Fund ObjectiveTo match the performance of the Barclays Capital U.S. Aggregate Bond Index
Investment StrategyThe fund invests in U.S. Treasury, mortgage-backed, corporate and foreign government (issued to the U.S.) bonds
RiskLow (some default, market and inflation risk)
VolatilityLow to Moderate
10-Year Annual Return5.25%
Expense Ratio0.027%

The F Fund invests in a diversified basket of government and corporate bonds. It is a great low-risk investment that can be used to off-set the high volatility of other TSP funds or to generate income during retirement. While the F Fund is slightly more volatile than the G Fund, the increased return it offers is more than worth it, in my opinion.

The C Fund

Fund ObjectiveTo match the performance of the Standard & Poor’s 500 (S&P 500) Index
Investment StrategyThe fund invests in large and medium-sized U.S. publicly-traded companies
RiskModerate (market and inflation risk)
VolatilityModerate
10-Year Annual Return7.12%
Expense Ratio0.027%

The C Fund is one of the three TSP funds invested in stocks. It provides exposure to large and medium-sized U.S. companies, which tend to be slightly less risky and volatile, as compared to smaller companies. The C Fund should be used as the core holding in most retirement portfolios, as it provides a great potential for growth with moderate risk exposure.

The S Fund

Fund ObjectiveTo match the performance of the Dow Jones U.S. Completion TSM Index
Investment StrategyThe fund invests in small and medium-sized U.S. publicly-traded companies (not included in the C Fund)
RiskModerate to High (market and inflation risk)
VolatilityModerate to High
10-Year Annual Return10.79%
Expense Ratio0.027%

The S Fund can be a great addition to the C Fund, as it provides exposure to smaller U.S. companies, not included in the C Fund. Smaller companies tend to be more volatile than their larger counterparts, so the S Fund should be treated with caution. Its great long-term return, however, is a good reason to invest in it while you are young to increase the overall return of your retirement portfolio.

The I Fund

Fund ObjectiveTo match the performance of the Morgan Stanley Capital International EAFE Index
Investment StrategyThe fund invests in international publicly-traded companies
RiskModerate to High (market, inflation and currency risk)
VolatilityModerate to High
10-Year Annual Return8.39%
Expense Ratio0.027%

The I Fund provides exposure to international stocks from 21 developed countries in Europe, Australasia and the Far East. It can be used to provide diversification to a portfolio of U.S. stocks, although its performance has been similar to the C Fund in recent years.

The L Funds

Funds ObjectiveTo provide diversified, balanced portfolios tailored to meet investment objectives based on various time horizons
Investment StrategyThe funds invest in the G, F, C, S and I Funds using various allocations
RiskOverall risk is lower than that of each individual fund due to diversification
VolatilityOverall volatility is lower than that of each individual fund due to diversification
10-Year Annual ReturnVaries by fund
Expense Ratio0.027%

The L Funds (also called the lifecycle TSP funds) are unique, as they provide a complete, diversified portfolio through a single fund. Each of the 4 lifecycle funds is geared toward retirement on (or close to) a specific year – 2020, 2030, 2040 and 2050. When you pick an appropriate L Fund based on the year you want to retire, your portfolio is automatically allocated between the other 5 TSP funds.

Just like when setting up any retirement portfolio, finding an appropriate mix of TSP funds should start with setting your investment goals and determining your risk tolerance. Knowing your time horizon and preferences toward risk will help you pick an appropriate allocation for your Thrift Savings Plan account. You can also look at an appropriate L Fund to get an idea for how you should invest.

Do you allocate your TSP funds yourself? Or do you use an L Fund for an easier, more hands-off investing approach?

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