C, S, I, F, G Funds

C, S and I Funds

Although you have five fund options to pick from, you really only have three choices to invest in.  Here’s why we say that.  The C, S, & I Funds are your stock index funds.  The common stock index fund (C fund), small capitalization stock index fund (S fund), international stock index fund (I Fund) are all one asset class: Stocks/Equities. Even though these are three different indexes, they are correlated assets.  Correlation means that they are moving in the same direction almost all the time.  So, when the stock market is up, the C, S, I Funds are up.  And when the stock market is down, the C, S, I Funds are down.  They almost always move in the same direction together.  Unlike individual stocks, which can move in opposite directions, indexes generally do not as they are a large group of individual stocks.  They might earn a little more or less than the other, but they are moving in the same direction.

If we know that we have 3 options/funds to invest in within the same asset class, then we want to find the BEST-in-class fund.  There is a clear winner amongst the C, S & I Funds.  Only one of these funds we advise our clients to invest in.  One of these funds has greatly out-performed the other two, and has done so with considerably less risk.  In our professional opinion, the only stock fund worth putting your hard-earned money into is the C Fund.  Here is why.  The data never lies:

• In 2008 the I Fund lost -42%…the C Fund only lost -36%

• In March of 2020 (due to Covid) the S Fund lost -21%…the C Fund only lost -12%

• In 2022 the S Fund lost -26%…the C Fund only lost -18%

These are but just a few examples of the C Fund not losing nearly as much as the two riskier funds.  Yes, the S & I have the potential to have a higher single rate of return then the C; and in fact, this has happened in the past, but what we are trying to help you understand is that not having as big of losses as the other two allows the C Fund to outperform the I & S Funds over time. This is because the C Fund is a more conservative stock index Fund; it comprises around 500 big US companies.   Let’s look at the historical return data to help cement this concept:

• Since inception (1988), the C Fund has averaged 10.88% as of 4/30/24

• Since inception (2001), the S Fund has averaged 8.87% as of 4/30/24

• Since inception (2001), the I Fund has averaged 5.09% as of 4/30/24

F Fund

The F Fund is the fixed income index fund.  It is a blend of over 11,000 bonds and notes.  In our professional opinion, the F fund is not a great option. Even the Lifecycle funds agree, there is no significant allocation to the F fund in any of the 10 current L funds.  Before we show you why the F Fund is not an ideal investment, let us first explain why it was originally added.  For the longest time, bonds tended to be considered the “gold standard of conservative investing.”  This is because bonds tend to be non-correlated with the stock market.  In other words, when the stocks go down, bonds are supposed to rise slightly; maybe 2%-5% on average.  This is a great hedge on the more aggressive stock market.  The problem with the F Fund is that is a huge basket of many different types of bonds.  Therefore, it behaves differently than owning a bond outright.

The F Fund has not been performing well over the last 10-15 years.  Here is what we mean:

• Over the last 10 years the F Fund has averaged 1.39% as of April 30, 2024.

Even worse, the F Fund was heavily correlated with the stocks in 2022.

• The F Fund was down -12.83%. Comparatively speaking, the C Fund was down -18.13%

Here is what we ask all of our federal employee clients: “Do you really want to risk experiencing double digit loss to potentially gain 1.39%?”

G Fund

The G Fund is the government securities investment fund.  The G Fund earns interest set by law at the weighted average yield on outstanding US Treasury securities with four or more years to maturity.  In other words, it doesn’t make much money: the 10-year return to-date is 2.36%.  This creates a very big problem for federal employees who are in the retirement horizon of their career.  The G Fund is truly the only safe investment fund the TSP main core funds have to offer.  It guarantees no losses, which is very important, but it does not keep up with inflation most years historically.  This creates an investment dichotomy, as one hand, the G fund protects the investor from dangerous market downturns, but on the other hand the value of their G Fund balance reduces as they suffer from inflationary loss each year.  Ex: Inflation = 5% & G Fund return is 2.36% means that the balance of the G fund suffers –2.64% inflationary loss.

The other problem the G Fund presents the federal retiree is that it oftentimes creates income loss.  As a federal retiree begins to withdrawal money from their G Fund in retirement, we often see folks suffering from income loss.  The national average retirement income withdrawal rate out of 401k/IRA type retirement accounts is about 5%.  Therefore, as the federal retiree withdraws 5% out of a G Fund balance only earning 2.36% then that person suffers -2.64% in income loss.  The balance reduces because the interest rate is less than the withdrawal rate.  So, in the end, both income loss and/or inflationary loss creates a negative situation in the G Fund balance and has the potential to greatly reduce retirement income over time.