Expert: Paul Henneman - 12/25/2003

Question
Hello Paul,

First of all I would like to start by thanking you and all Experts on this web site for taking the time to help people with their questions.

Here is my question. I am 29 years old in the military, and currently married. I want to start investing into the thrift savings plan that the military is now offering us. Basically I want security for myself and new wife for when I retire. I am currently having 8% of my monthly pay (approximately $178) toward it. I think I can increase it to 14% within the next year but right now with just being married it just isn't doable. I have about 10 years left in the service to contribute.
I would like an expert's opinion on which plan/plans would best suite my goals.

Most Info on the funds can be found

TSP Fix Income Funds - http://www.tsp.gov/uniserv/features/chapter08.html

TSP Stock Index Funds - http://www.tsp.gov/uniserv/features/chapter09.html

Thanks In advanced
Chuck Staley


Answer
Chuck,
  Thank you for your question!
  Unfortunately I am not familiar at all with investment plans organized by the government for the military. I have reviewed the two websites you provided in your email and will give you my advice based on those, but please keep in mind that I do not know what else is available.

TSP Fix Income Funds:
  You appear to have two choices here, the 'G Fund' and the 'F Fund'. Lets keep things simple: The G fund offers consistent, stable returns at around 6.5%. Very little fluctuation each year.  The F fund is much more volatile, with many substantially negative years, and other very positive years. If you average this out, it adds about 1 percent to the returns, or about 7.5% on average.  The answer on which one is better would be based on what type of investor you are and how long your time horizon is. If you plan on exiting the military in 10 years, you may not want the added volatility of the F fund. A few bad years, and your portfolio could suffer. As it only adds one percent, I don't think the added return possibility in light of the risk is worth it for you.

TSP stock index funds:
  These allow you to invest across a diverse array of actual stocks. The benefit is higher possible return. The downside is that you could lose money during down cycles in the economy. Over time, the risk becomes less and this option offers perhaps the best overall return prospects.  The 'C Fund' is based on the S&P500, and index of stocks that generally parallel overall market performance. If you look at the returns, you will see that over time the average annual performance is almost 10%. This is a substantial difference from the above options, but more than 3%. The way interest compounds over time, this is good. But do note that there are bad years of performance within that, and good years to make up for it.
   As for the S Fund option within this category, it is based on small cap publicly traded companies. These types of companies can at times do well, and at times do terribly. stay away from it. Very risky! The returns do not warrant the risk.
   The same goes for the I Fund that is based on international stocks. Also very risky, and the returns do not warrant the risk.

To sum up:
I think your real options are the G fund that offers very stable returns of around 6.5%. If you are not a risk taker, and will constantly monitor and worry about any loss to your portfolio.
The other good option is the C Fund. This is the way to go if you are willing to take some more risk, and are content to have your salary invested and do not plan to check your investments regularly. Just invest, and in 10 years take a look at what you have. Based on historical performance, you should see about 10% annual return.
The decision should be based upon what you are comfortable with. My preference would be for the C Fund, the additional returns are well worth the risk in my mind. Individual years, or even a run of a few years, of bad performance will be offset with good years. Over time, you should end up with a signficantly larger portfolio.

I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com