TSP

fedweek.com - tsp investment report

Lyn Alden

The TSP had a relatively flat month in March, full of ups and downs.

The G Fund rose by a fraction of a percent, and the F Fund rose a little over half a percent. The C Fund fell about 2.5%, the S Fund rose about 0.7%, and the I Fund fell by about 0.7%.

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But it wasn’t a smooth ride. Here’s how the S&P 500 (and the C Fund that follows it) has performed recently:

S&P 500 One-Month Performance:

S&P 500 One-Year Performance:

Chart Source: Google Finance

Ever since the 10% correction that the S&P 500 experienced in the beginning of the year, market volatility has remained at moderately above-average levels.

Volatility Index Chart:

Source: CBOE, presented by the Federal Reserve Bank of St. Louis (click for a bigger view)

The reason why the C Fund diverged from and underperformed the S Fund and I Fund this month, is that the C Fund is increasingly concentrated into a few large tech stocks and they were big under-performers in March.

Although the C Fund consists of 500+ large companies, Apple, Amazon, Facebook, Microsoft, and Alphabet alone account for a full 14% of the index. The index is weighted by market capitalization, so the bigger the company, the bigger its position it has in the fund. And these five are all among the largest companies in the world.

Facebook’s stock price fell over 13% in March due to global privacy concerns about its data collection practices and the subsequent #deletefacebook movement. Microsoft, Apple, Amazon, and Alphabet all experienced 5-10% stock price declines during the period as well.

Most of these large tech companies trade at high stock valuations, so they can experience significant price declines or volatility when negative news hits them, or even just when investors get jittery in general. And since they are such a large part of the S&P 500 and C Fund, they can pull the rest of the index down with them.

The I Fund and S Fund have much less exposure to technology companies, and not any exposure to these five big ones, so they were not hit as hard by this technology sell-off. But this all works in reverse as well; any big positive movements by these few big tech names in a given month can give the C Fund an outsized boost compared to the other equity funds.

Lifecycle Funds Can Smooth this Volatility

Although all five lifecycle funds were negative in March due to the significant exposure most of them have to the C Fund, their performance was smoother this month than the various equity funds.

The most aggressive 2050 fund, for example, only lost about 1.1% of its value. The rise of the G, F, and S funds helped to offset declines in the C and I funds.

The lifecycle funds give investors a balanced and hands-off approach for broad diversification, and potentially help them sleep at night.

Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.