TSP Fund Benefits and Disadvantages
Many investment advisors recommend that for long-term retirement savings, you buy and hold a low-cost, broadly diversified portfolio of domestic and international stock and bond index funds. The available TSP investment funds get this job done. By investing in all five individual TSP funds, or in one of the Lifecycle Funds, you'll have a good portfolio, with an ownership share in thousands of U.S. and international stocks and U.S. bonds. And the TSP funds have very low annual expense ratios, many times lower than comparable private sector index funds, keeping more of your money working for you.
So what's lacking in the list of currently available TSP investment choices? Some investors would like to own Emerging Markets stocks (in addition to the Developed Markets international stocks offered by the TSP I Fund). Or an allocation to real estate (REITs), or inflation-protected securities (like TIPS). Others would even like access to more esoteric investments like international bonds, high-yield bonds, and other inflation hedges (commodities and precious metals like gold and silver). Professional advisors would differ on how suitable these investments are. Most would agree that TIPS are a good idea, and for more risk-tolerant investors, perhaps a small allocation to REITs and Emerging Markets stocks.
One great benefit of investing in an L Fund is simplicity: it's a "set it and forget it" investment plan. You choose an L Fund, determine your monthly contributions, and the fund administrators handle the rest: regular portfolio rebalancing, and gradually shifting the asset allocation as you approach retirement. But there are also a few downsides. First, the L Funds with the longer time horizons are very risky allocations (for example, currently 90% stocks and 10% bonds for the L 2050 fund), and you should carefully evaluate whether you can stomach the inevitable volatility as a result of owning a portfolio dominated by stocks. If you have owned stocks for the past ten years then you already know this: it can be quite a roller coaster. Also, some investors want more control over their exact asset allocation, when to rebalance, and how soon to start shifting the allocation to a more conservative asset mix as they approach their planned retirement date. Some investors also prefer a tactical asset allocation, shifting their mix according to asset class trends, economic circumstances or other criteria. Owning a portfolio of the individual TSP funds will work better for these investors.
So what's lacking in the list of currently available TSP investment choices? Some investors would like to own Emerging Markets stocks (in addition to the Developed Markets international stocks offered by the TSP I Fund). Or an allocation to real estate (REITs), or inflation-protected securities (like TIPS). Others would even like access to more esoteric investments like international bonds, high-yield bonds, and other inflation hedges (commodities and precious metals like gold and silver). Professional advisors would differ on how suitable these investments are. Most would agree that TIPS are a good idea, and for more risk-tolerant investors, perhaps a small allocation to REITs and Emerging Markets stocks.
One great benefit of investing in an L Fund is simplicity: it's a "set it and forget it" investment plan. You choose an L Fund, determine your monthly contributions, and the fund administrators handle the rest: regular portfolio rebalancing, and gradually shifting the asset allocation as you approach retirement. But there are also a few downsides. First, the L Funds with the longer time horizons are very risky allocations (for example, currently 90% stocks and 10% bonds for the L 2050 fund), and you should carefully evaluate whether you can stomach the inevitable volatility as a result of owning a portfolio dominated by stocks. If you have owned stocks for the past ten years then you already know this: it can be quite a roller coaster. Also, some investors want more control over their exact asset allocation, when to rebalance, and how soon to start shifting the allocation to a more conservative asset mix as they approach their planned retirement date. Some investors also prefer a tactical asset allocation, shifting their mix according to asset class trends, economic circumstances or other criteria. Owning a portfolio of the individual TSP funds will work better for these investors.