The TSP S Fund is an index fund, which strives to mimic the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index. Instead of an allocation in mainly large capitalization stocks like the S&P 500 (otherwise known as the C Fund to TSP members), the equities in this index are small to medium-sized U.S. companies. As of late 2014, this index is composed of approximately 3,250 stocks.
The chart above is the perfect reference for the S Fund because it is the chart of the Dow Jones U.S. Completion Total Stock Market Index. Now while the S Fund strives to mimic the Dow Jones U.S. Completion Total Stock Market Index that does not mean it will. As you can see the S Fund has generally increased over the previous five years with a couple instances of severe corrections. This is due in part to the recent stock market crash we had in 2007 – 2008, the massive amount of quantitative easing the U.S. Government has implemented, and the boom and bust nature of small cap stocks.
However, one should not always expect the S Fund to generally increase over the course of time. In fact you should expect quite the opposite. Small cap stocks are companies that are significantly smaller than the companies you would find in the S&P 500 (otherwise known as the C Fund for TSP members). This means that they have a harder time establishing a competitive edge, economic moat, etc. In short consider small cap stocks your “mom and pop” stocks and S&P 500 stocks as your “corporations” (Walmart). There will always be bull market cycles and bear market cycles. However, the potential for capital gains in the S Fund small cap stocks are far higher than the C Fund during bull markets.
Risks and Potential Rewards of Investing in the S Fund
Every investment you make regarding stocks will be risky and the S Fund is no exception. The S fund generally has more volality than the C Fund (otherwise known as the S&P 500). This is due to the very nature of small cap stocks as I previously explained.
However, historically small cap stocks have outperformed large cap stocks despite their volatile nature. Remember, it is far easier for a smaller company to double in size than it is for a larger company. That is why the potential in small cap stocks is so great but as I said before there is also a chance for larger losses as well. With the S Fund you won’t run the risk of your money being eroded by inflation the only considerable risk you are taking is having your money invested during bear market cycles. So if you feel you can control your emotions and keep your eye on the prize, then this fund just might be for you.
How Do I Use The S Fund In My TSP Account?
General and conventional stock market rhetoric tells you that stocks outpace the majority of other investment opportunities. Therefore you should construct a portfolio that will ensure the growth of your investment capital. The allocation for this portfolio would consist of positions in the C Fund, S Fund, and I Fund which would give you plenty diversification and room to grow. There is some validity to this theory but our TSP Newsletter has done much better with TSP allocation.
The S Fund is typically used as a smaller percentage of a TSP Portfolio because it is deemed moderately high risk. This is true as a stand a lone statement, however when you can identify bull markets and bear markets consistently the amount of risk drops significantly. There will always be risk in regards to stock investing, the key to successful investing lies in minimizing risk and maximizing your potential gains.
In our TSP Newsletter, we use the TSP S Fund as an aggressive strategy to capture large gains in the stock market during bull market cycles. Additionally we use the TSP G Fund as a risk-free investment vehicle, allocating all of the portfolio to it when stock market conditions start to deteriorate and point towards a long term bear market. Taking such actions allows us to lock in our substantial investment returns that we received in the S Fund while the investment model waits for bullish market conditions to return. Our newsletter utilizes a proven strategy for identifying bullish and bearish markets. We have tailored this strategy towards the Thrift Savings Plan in order to help you increase your TSP portfolio returns significantly over time.