On Monday’s Daily Debrief, hosts Christopher Dorobek and Amy Morris spoke with Tom Trabucco, Director of External Relations for the TSP, who explains why the G fund is so safe in such a volatile market.
[It], of course, never has a bad day and is backed by the full faith and credit of the government of the United States so if you absolutely, positively have to have a safe investment, the G fund is there for you. . . .The G fund comprises debt securities issued by the government . . . and they are backed by the full faith and credit of the United States, which owns the printing press, so they will continue to print money and to stand behind its debts.
In addition to this, about 40 percent of the F fund portfolio is now much safer, as well.
Because of events over the last couple of weeks in particular, when the federal government stepped in explicitly behind Fannie and Freddie and the mortgage-backed securities and bonds that they issued . . . [it] is backed with the full faith and credit of the government of the United States.
For most of the other investments, though, Trabucco says there is market and credit risk, but participants really shouldn’t worry.
If you’re in it for the long haul, generally you will be fine, as long as your investment horizon is far enough out. The key at this point is just not to focus too much on the short term. Make sure that you — looking forward — have the asset allocation that you’re comfortable with and then you ride out the ups and the downs.
Diversification is essential. Trabucco says this is the reason that, though they are a part of the F fund, Lehman’s collapse hasn’t hurt TSP participants as much as some in the private sector.
As of last week, when they were getting ready to go down, they were .27 percent of the F fund, meaning about a quarter of one percent of the F fund. That’s the benefit that you have in diversification. You have a large number of companies in each of these funds — 4,500 companies in our S fund — 500 companies, of course, in the S&P 500 — over 9,000 different bonds in the F fund — so that if one or two of them experience problems, the others are generally not.
In addition to pulling from a number of companies, Trabucco says the TSP is diverse in different sectors, as well.
Right now people are focusing on the financial sector, which would include all of these companies that have been in the news . . . they are having a very difficult time, but they make up about 17 percent of the S&P 500. The other sectors that are represented in the 500 — information technology, for instance, 16 percent — energy, which has been having a fairly good year, 17 percent — healthcare, 12 percent — the industrials, 12 percent, consumer staples, 10 percent — and so on.
Even if a company goes down or a sector begins to fail, the TSP Board Members don’t have to react. The TSP is continually vested, meaning that if a company like Lehman’s goes under, it pulls out of the market and another company takes its place.
It’s an on-going thing. We don’t halt activity. The key is to remain fully invested at all times so that we actually track that index, whatever the index is.
Despite the relative safety of such investing, Trabucco says it looks like the TSP will have a negative year, but, he notes, this is after five positive years in a row.
On average, over time you will beat the safe investments if you’re willing to accept some risk.
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