Investing, whether in an employer-sponsored retirement program or in stocks and bonds, is risky. Weighing the risk-reward ratio is important in determining where to invest your money. Stocks rise and fall often and learning as much as possible about these funds will greatly increase the potential of great rewards.
The Thrift Saving Plan has a few funds to choose to invest in. You may choose how to allocate that money any way you see fit. For this article, we will look at arguably one of the riskier funds in the TSP, the I fund.
What is it?
The I fund (International Stock Index Investment Fund) invests in international stocks. Its objective is to match the performance of the MSCI-EAFE (Europe, Australasia, Far East) Index; therefore, it invests in a stock index fund that fully replicates the MSCI-EAFE Index.
Earnings from this fund consist of gains or losses in the price of stocks, dividend income, and change in relative value of currencies. It’s a passively managed fund that remains invested according to its investment strategy regardless of stock market movements or general economic conditions.
So far in 2017, the I fund has a return of over 20 percent; up 2.52 percent for September, 20.30 percent year to date and 19.49 percent for the past 12 months. However, only 4 percent of TSP investors have money invested in the I fund.
Why is there fear surrounding the I fund?
The unknown brings a lot of fear. We buy products from foreign companies and some of those larger companies sell products in the United States. However, we may not always know if they are foreign companies. There may be more foreign companies than there are American companies and people are partial to companies from their homeland.
Putting money into the I fund provides greater diversification and can enhance your returns. In general, ignoring foreign stocks provides less diversification as an investor. Those who don’t invest in the I fund may want to consider putting some money into international stocks through this fund or Lifecycle funds. For example, the L2050 fund has about 25 percent of its investments in the I fund and about 44 percent in the C fund. The L2020 fund has about 11 percent of its assets in the I fund and about 20 percent in the C fund.
Investments in the I fund are subject to market risks because the MSCI-EAFE Index returns will fluctuate in response to the overall economic conditions.
Because of its exposure to currency risk, the EAFE Index (and I Fund returns) will rise and fall as the value of the U.S. dollar decreases or increases relative to the value of the currencies of the countries represented in the EAFE Index.
By investing in the I fund, you also exposed to inflation risk—your I fund may not grow enough to offset the reduction in purchasing power that results from inflation.
The I fund offers the opportunity to experience gains from equity ownership of non-U.S. countries. It represents stocks of companies in many developed countries (excluding the U.S.), so it’s a great way to diversify the stock portion of your TSP allocation.
As with anything, do your research on TSP allocation and the different funds it provides. The I fund is nothing to be afraid of, it just may present more risks than other TSP funds. It’s like the old sayings go, “No risk, no reward” “The greater the risk, the greater the reward”. The same may be true when it comes to your TSP.