Author: Joel Schofer, MD, MBA, CPE
Throwback Thursday Classic Post: TSP Fund Deep Dive – The I Fund – The TSP’s Most Controversial Fund
There are only five investments available in the Thrift Savings Plan (TSP), so let’s take a detailed look at them one at a time. In this post we’ll cover the I Fund, which is the most controversial of all the TSP funds.
What’s all the controversy? You can read about it below, but to give you a preview it is because of two things.
First, investment experts disagree on how much of your investments should go into international stocks, which is what the I Fund is composed of.
Second, the I Fund misses out on a key portion of a comprehensive international stock portfolio, emerging markets.
Inception Date
1 MAY 2001
Fund Management
The Federal Retirement Thrift Investment Board currently contracts BlackRock Institutional Trust Company, N.A. (BlackRock) to manage the I Fund assets. The I Fund remains invested regardless of the performance of the securities markets or the overall economy.
Investment Strategy
The I Fund is invested in a stock index fund that invests in international stocks of more than 20 developed countries. The I Fund’s objective is to match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index. Also, some of the money in the I Fund is temporarily invested in the G Fund and earns the G Fund return.
The I Fund is a passively managed fund that remains invested according to its indexed investment strategy regardless of stock market movements or general economic conditions.
What is the Risk?
Your investment in the I Fund is subject to market risk because the prices of the stocks it invests in rise and fall. You are also exposed to inflation risk, meaning your I Fund investment may not grow enough to offset inflation. Unlike the C or S Funds, you are also exposed to currency risk. What’s that? The TSP defines it as:
The risk that the value of a currency will rise or fall relative to the value of other currencies. Currency risk could affect investments in the I Fund because of fluctuations in the value of the U.S. dollar in relation to the currencies of the 22 countries in the EAFE index.
Because of its exposure to currency risk, the I Fund returns will rise or 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.
What is the Benefit?
Historically, this increased risk has been rewarded with an increased return. It offers the opportunity to experience gains from equity ownership of international stocks of more than 20 developed countries. Here is all the performance data as of 7 NOV 2020:
Types of Earnings
The I Fund changes in value as the market price of its stocks change. In addition, the I Fund makes money for its investors when those stocks pay dividends. Unlike a traditional mutual fund, though, income from dividends is included in the share price calculation. It is not paid directly to participants’ accounts. Finally, the I fund will change in value due to currency risk, as described above.
It also makes some money on interest on short-term investments and securities lending income.
BlackRock credits interest and dividend income each business day. This income is then reflected in the TSP share prices.
Share Price Calculations
The value of your account is determined each business day based on the daily share price and the number of shares you hold. At the end of each business day, after the stock and bond markets have closed, the total value of the funds’ holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day. The daily change in TSP share prices reflects all investment income (interest on short-term investments, dividends, capital gains or losses, and securities lending income) net of TSP administrative expenses.
Expenses
The net expenses paid by investors is 0.042% or 4.2 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It cost $0.42 for each $1,000 invested.
How Should I Use the I Fund in my TSP Account?
The I Fund can be useful in a portfolio that also contains stock funds that track other indices, such as the C Fund (which tracks an index of large U.S. company stocks) and the S Fund (which tracks an index of small-medium U.S. company stocks). The C, S, and I Funds track different segments of the global stock market without overlapping. This is important because the prices of stocks in each market segment don’t always move in the same direction or by the same amount at the same time. By investing in all segments of the stock market (as opposed to just one), you reduce your exposure to market risk.
The controversy among investment experts, though, is how much of your stock portfolio should be invested internationally. You’ll find respected investment experts who recommend anywhere from 0% of your stocks being invested in international markets (like John Bogle, the founder of Vanguard) to about 50%. An extensive discussion on this can be found in Step 4 of our Crush the TSP Series – Invest. What’s the bottom line? Here is what I think…
A 40% international allocation is between the 0% Bogle viewpoint and the 50% global weighting viewpoint, so it seems fine to me and that is what I do. Ultimately, you can pick anywhere from 0% to 50% and find someone really smart who agrees with you. I’d encourage you to have some exposure to international, so I’d say you should pick at least 20%, but it really is up to you.
The I Fund can also be useful in a portfolio that contains bonds. Again, it is because the prices of stocks and bonds don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains a bond fund like the F Fund, along with other stock funds, like the C and S Funds, will tend to be less volatile than one that contains stock funds alone.
Advice from My Favorite Short Investing Book
Here is what my favorite investing book, The Elements of Investing: Easy Lessons for Every Investor, says about international stock funds like the I Fund:
We do believe that investors should combine one of the total U.S. stock market index funds with a total international stock market index fund.
How do you do this with the TSP? Well…you can’t, and that is why the I Fund is controversial.
If you want to invest in the total US stock market, you just combine the C Fund with the S Fund in a 3:1 ratio. To see how I use the S Fund, read the Crush the TSP series.
But you cannot invest in a total international stock market index fund in the TSP because the I Fund is its only international stock option and it does not invest in emerging markets. Emerging markets include some of the largest economies in the world, like China and India. You can read more about emerging markets here.
At one point, the TSP was going to have the I Fund switch its index to include emerging markets. They were going to be switching to the MSCI All Country World Index Ex-U.S. index, which is broader and includes both developed and emerging markets. These efforts were halted, however, due to controversy about investing in China.
Until this change occurs, you won’t be able to use the TSP to invest in a total international stock market index fund because that is what the I Fund will be. That’s why all my international stock exposure is through my investments at Vanguard.
Lessons to Learn from the 2020 Stock Market Decline
In 2020, the US stock market took about a 30% dive in 22 days, followed by a rapid recovery. What lessons can we all learn from the 30% decline?
1. The stock market is volatile.
Since 2009, the stock market has quadrupled in value. This has given many investors the impression that the stock market does nothing but go up. Those of us with more grey hair (or less hair, in my case) have invested during market declines and know that what goes up can also come down.
Here is a telling chart that shows you the volatility of a portfolio constructed of various portions of stocks and bonds (Source: Vanguard.com):
| Stock/Bond Ratio | Maximum 1 Year Decline | Maximum 1 Year Increase |
| 100% Bonds | -8% | +32% |
| 80% Bonds/20% Stocks | -10% | +30% |
| 50% Stocks/50% Bonds | -23% | +32% |
| 80% Stocks/20% Bonds | -35% | +45% |
| 100% Stocks | -43% | +54% |
All investors need to take a hard look at this. Notice that a 100% stock portfolio has dropped as much as 43% in a year. In other words, the 30% drop wasn’t as bad as it could have been.
2. Everyone needs a plan they can stick to during market declines.
One of the biggest mistakes investors can make is to sell low. For this reason, you need a financial plan that you can stick to during market declines.
For example, my current overall target asset allocation is 80% stocks and 20% bonds. This is based on my own risk tolerance and retirement time-frame, and I know I can stick to it.
What did I do during the stock market decline? I purchased more stocks. Why? It had nothing to do with the decline, and everything to do with my plan.
When it was time to invest, I took a look at my desired asset allocation of 80/20. I saw that I had less than 80% in stocks, so I purchased more. It was that simple.
Everyone needs a written personal financial plan so that when the seas get rough, you don’t bail out. You stick to your plan. My plan was 80% stocks and 20% bonds, and I stuck to it.
What is your plan?
3. Regularly re-assess your own personal risk tolerance.
We’ve established that a 30% stock market decline is something that we should expect. In fact, it could be much worse.
It is time for some serious introspection. How did a 30% decline make you feel? Did you sell stocks low? Did you seriously contemplate it?
Me? As I already discussed, I just marched on with my plan, which is what I’d encourage you to do, but everyone is different.
If the decline spooked you, you need to reassess your personal risk tolerance. My favorite way is to take the Vanguard survey. There are other ways, though. It could be a conversation with your financial planner. It could be sitting down with your significant other and carefully examining the chart above and talking about it. It could be by getting a second opinion on your plan.
Whatever it is, you need to do it. For me, it is something I do on an annual basis.
The Bottom Line
Here are the three lessons we all need to learn from the 2020 30% market decline:
- The stock market is volatile.
- Everyone needs a plan they can stick to during market declines.
- Regularly re-assess your own personal risk tolerance.
Updated Deadline for Walter Reed Director Positions and Addition of Ft. Belvoir Positions
The deadline was updated to NLT 29 NOV 2020 for the Walter Reed positions. In addition, here are some at Ft. Belvoir, also due by 29 NOV:
Anyone applying needs to have PERS/Detailer clearance to do so.
2 Military.com Articles About Changes to the Military Due to the Recent Election
Here are 2 articles:
Cap Alternative Investments
Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:
“CAP ALTERNATIVE INVESTMENTS. How much do you have in alternative investments—everything from gold to commodities to hedge funds? As a rule, keep your allocation to 10% or less of your total portfolio’s value, and favor simpler, less expensive options, such as funds that focus on gold stocks and on real estate investment trusts.”
As you may or may not know, you cannot invest in any alternative investments in the Thrift Savings Plan (TSP). When it comes to using alternative investments in other portions of your investing portfolio outside of the TSP, there are really two separate questions…
Do You NEED to Invest in Alternatives?
BLUF – No
I get this answer from my favorite investment company outside the TSP…Vanguard. In this article about alternatives, they say:
For most investors, a portfolio of stocks and bonds provides plenty of diversification. Only the most sophisticated investors should consider alternative options.
The answer to this question is no. You do not NEED to invest in alternatives. Globally diversified stocks and bonds are enough, and that is what I do because I prefer a simple life. I do not invest in alternatives.
SHOULD You Invest in Alternatives?
BLUF – The answer to this question is very individual. It really is up to you.
While I don’t invest in alternatives, I’ve certainly thought about it a lot. Although at times I’ve been tempted to do it, I’ve avoided the temptation thus far. Some additional sources to consider when trying to answer this question include:
White Coat Investor Alternative Investments Podcast
Humble Dollar Guide – Alternative Investments
This message string on the Bogleheads Forum
A great book on alternative investments – The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly (Bloomberg) – which happens to be on my bookshelf.
Military Times – Yoga pants are now allowed at the commissary, and there was much rejoicing
Here’s a link to the article about a recent SECDEF memo authorizing PT gear at exchanges and commissaries:
Yoga pants are now allowed at the commissary, and there was much rejoicing
Finance Friday Articles
Here are this week’s articles:
Throwback Thursday Classic Post – Electronic Submission of Letters to the Board Now Available
From Navy Personnel Command Public Affairs
MILLINGTON, Tenn. (NNS) — The Navy has announced a new online capability that allows board-eligible Sailors to submit letters to the board (LTBs) electronically, Sept. 27.
Announced in NAVADMIN 220/19, the Electronic Submission of Selection Board Documents (ESSBD), is a MyNavy HR transformation and Sailor 2025 initiative designed to improve personnel programs and give Sailors more control and ownership over their careers. ESSBD improves the speed, transparency and confidence of receipt over current submission methods.
The application allows board candidates the ability to submit pre-formatted LTBs, with or without attachments. Additionally, board candidates are able to view the exact product that will be delivered to the board. Previous submission methods (U.S. Postal Service, e-mail, etc.) will remain, but ESSBD will become the preferred LTB submission method.
ESSBD will be available for limited use by administrative boards through the remainder of calendar year 2019. For a list of eligible boards (none of which appear to be medical to me – JMS) and their convening dates, consult NAVADMIN 220/19. Beginning Jan. 1, 2020, ESSBD will be available for all promotion, advancement and selection boards.
ESSBD is currently available for submissions of LTBs only. Submissions to application-driven boards and programs, such as Limited Duty Officer/Chief Warrant Officer (LDO/CWO), Lateral Transfer, educational programs, etc. will not be submitted via ESSBD. Sailors should continue to use the submission guidance contained in the specific NAVADMINs for these programs.
To use ESSBD, candidates must access document services through MNP at https://www.mnp.navy.mil/group/my-record. Submitters should have all information, with attachments (if applicable), prior to beginning this process, as there is currently no “save-and-return” function between BOL sessions. Submitters will receive an email confirmation of receipt. Submission and subsequent receipt acknowledgement for letters submitted via ESSBD, or other means, does not constitute confirmation of board eligibility.
For more information or questions related to ESSBD and ESSBD submissions, consult NAVADMIN 220/19 or contact the MyNavy Career Center (MNCC) by calling (833)-330-6622, or via DSN at 882-6622.
Joel Schofer's Career Planning Blog 