New Stock Funds: Risks and Rewards

The two new funds scheduled to be added to the Thrift Savings Plan historically have been more volatile than even the most widely fluctuating of the three current funds, the common stock (C) fund, but the two funds could increase earnings for TSP account holders willing to accept risk.

The new funds, which will be added when a TSP computer upgrade is completed early in 2000, will track the Morgan Stanley EAFE fund of stocks in 20 countries in Europe, Australasia and the Far East, and the Wilshire 4500, which despite its name covers about 6,500 stocks of smaller U.S. companies. The new funds will be called the I and S funds, respectively.

An analysis done by the TSP governing board when the funds were under consideration found that a hypothetical TSP investor with money evenly split among the three current funds over 1985 to 1994, assuming the TSP had been in existence that entire time, would have seen a compound annual return of 11.2 percent. Dividing the money equally among all five funds would have netted a 13 percent compound annual return.

But the new funds bring increased risk as well. The three-fund TSP portfolio would have seen an average 7 percent fluctuation from its average performance during that period, but the fluctuation around the average would have risen to 10 percent if the new funds had been included. The same pattern holds true over longer periods as well, according to the board's analysis.

For investors concentrating their money in the C fund, though, the EAFE fund might be a counter-balance, actually decreasing volatility. Over the last 20 years, the EAFE has outperformed what would have been the C fund returns in each of the U.S. stock market's five weakest periods. However, the EAFE outperformed the C fund in only one of the five strongest periods for U.S. stocks.

The Wilshire 4500 could increase fluctuations for the C fund-oriented investor, since it tends to move in the same direction but farther. The Wilshire lost more than did the C fund during four of the five weakest periods for U.S. stocks over the 20 years, but outgained the C fund in three of the five strongest periods.

Here are the funds' returns since 1988, when the TSP's C and F funds started operating. The figures for C, F and G funds reflect reductions for administrative costs, while the returns for the other two do not.