Let me clear up a misconception: The TSP’s three stock index funds are better than a managed portfolio of individual stocks. At least, this is true if your TSP account is used as the source for reliable income in retirement – the purpose for which it is intended. The TSP’s three stock funds, the C, S and I Funds, are unmanaged (or nearly so) large samples of the stock markets they represent. Those are the markets for the publicly traded shares of U.S., Europe and Asia-based corporations.
By “better” I mean that the C, S and I Funds are better suited to the purpose of supporting lifetime retirement income and should be expected to produce better results than the alternative of picking individual stocks for the same purpose. This is true in the same way that accurately predicting the outcome of flipping one thousand coins is easier than doing so for flipping only ten.
In order to pick a stock that will outperform its peers, you must correctly identify an opportunity that has been overlooked by the other investors looking for similar opportunities. In today’s market of instantly available information and billion-dollar research budgets, this is so unlikely to happen that it should be considered to be impossible. The reality is that the expected return for that share of XYZ corporation is about the same is it is for similarly risky investment opportunities. The competition to exploit opportunities makes it so.
By owning lots of investment opportunities of similar risk – and expected return – you can diversify away much of the risk that is unique to any individual company, however. Therefore, it is always safer to own more companies of similar risk. Dividing your investment among ten companies of similar risk will give you the same expected return with less risk than owning any one of the ten, alone.
As index funds, the TSP’s C, S and I Funds help you to maximize the ratio of expected return to risk by dividing your investment in each fund among hundreds of companies of similar risk. While this may not be as exciting as speculating on a hot stock tip, or doing your own research, it is likely to be much more rewarding in the end.
Keep this in mind when you consider moving your TSP to an IRA for access to “better” investment opportunities or demanding that the TSP introduce less diversified investment options to its menu. While these alternatives may satisfy a speculator’s desire for additional risk, they don’t improve an investor’s need for optimal performance. The TSP’s selection of funds offers you everything you need to invest for retirement income, if you use them properly.
Written by Mike Miles
For the Federal Times
Publication August 2018