Of the five investment funds available in the Thrift Savings Plan, the C Fund is the most popular and, in
my opinion, should be considered a core component of most TSP portfolios.
The oldest of the three stock funds available to TSP participants, the C Fund is more volatile and hence
more aggressive than the G Fund or the F Fund, both based on fixed-income investments. C Fund
investors hope to achieve returns that significantly outpace inflation over the long term in exchange for
accepting the risk of loss over the short term. In spite of its volatility, however, the C Fund has historically
delivered valuable results to those who use it properly.
The C Fund’s returns closely track those of the Standard & Poor’s (S&P) 500 index — a weighted average
of 500 domestic corporate common stocks. The stocks in the index are chosen by a committee to
represent the biggest and best of America’s companies from across the spectrum of industries and
markets. You can learn more about this index at www.standardandpoors.com.
Except for some minor variance, the C Fund behaves identically to the S&P 500. Investors in the fund
should expect to achieve the same results as those achieved by the index, less the cost of managing the
fund. Because the C Fund’s expenses are relatively low — 0.1 percent per year — the annual returns will
be almost identical.
Because the C Fund is an equity-based security, its returns result from two components: dividends and
changes in share prices. The dividends are periodic cash distributions paid to shareholders from
corporate profits and can only add to, not subtract from, investor returns. Share price changes can be
either positive or negative during any given period, and so can either add to or subtract from investor
returns. The combination of these two components produces a net return for each stock in the index, and
in aggregate for the fund, that can be either negative or positive over any specific investment period.
As stock funds, the C Fund’s underlying investments are purely speculative and not based on any
promise of future income streams or investment returns. Investing in the C Fund is putting your faith in
businesses’ continuing ability to grow and prosper as fast and as far as possible. Because of the
speculative nature of the C Fund, its returns can be volatile as investors struggle to estimate the current
value of the underlying shares in relation to their expectations for their value in the future.
An important aspect of investing in the C Fund is to understand and accept the fact that share price
movements are completely unpredictable. It is impossible to reliably predict the future movement of stock
prices, period. Investing in stocks is a leap of faith that requires an assumption that past trends will
continue. A close look at a long-term history — say, 60 years or more — of U.S. stock prices reveals an
important fact: If you assume the trend will continue, the long-term results are more predictable than
those in the short term. It is more likely that stocks will be where you expect them to be in 20 years than
in 20 days. This is counterintuitive for many investors — an unfortunate circumstance that leads them to
waste large amounts of time and money trying to predict the unpredictable short-term movements in
prices. In reality, a C Fund investor’s best bet is to invest for the long term and ignore short-term price
Because of its history of long-term results and its reliance on the biggest and best U.S. companies, the C
Fund should probably be present, in some amount, in any portfolio or part of a portfolio with a time
horizon of five years or more. I typically recommend its use, even if a client is currently making regular
withdrawals, as long as a significant portion of the balance is expected to remain in the account five years
into the future.
In any event, the mainstream C Fund is the benchmark against which the other fund choices should be
evaluated. Do the alternatives carry more or less risk than the C Fund? How do their returns compare?
What effects can be achieved from combining them with the C Fund?
The average annual rate of return for the C Fund has been over 12 percent since its inception in January
1988. The fund produced a loss in only four out of the 17 years to date. The worst loss in any calendar
year was 22 percent in 2002, and the largest gain was over 37 percent in 1995. The attractive returns
over the long run come only at the price of considerable short-term volatility.
Most portfolios I’ve worked with over the years have benefited from a stock allocation of between 40
percent and 90 percent, depending upon the investor’s time horizon and required rate of return. Of this
allocation to stocks, it is not unusual for me to recommend that between half to two-thirds be invested in
domestic large company stocks like those tracked by the C Fund. Correspondingly, as a rule of thumb, I
would expect most prudently invested TSP accounts to have between 20 percent and 60 percent of their
assets invested in the C Fund. Of course, your account should be invested to meet your specific needs.
Written by Mike Miles
For the Federal Times
Publication December 13, 2004