Investment performance of TSP during market volatility, and the strategies adopted by investors regarding their funds
In the first half of 2025, TSP investors have witnessed a rollercoaster ride in the market, with some funds performing exceptionally well while others underperforming. Certified Financial Planner, Art Stein, from Arthur Stein Financial, advises investors to consider rebalancing their allocations to maintain a balanced risk-return profile.
The C Fund, an S&P 500 index fund, and the S Fund, which represents small and mid-cap stocks, had a strong rebound in the second quarter, with returns of 11% and 12% respectively. However, these funds may now constitute a larger-than-intended portion of an investor’s portfolio due to above-average market gains earlier in the year. This causes a drift that results in increased risk if not corrected.
On the other hand, the least popular funds, the F Fund and the I Fund, outperformed their counterparts during the first six months of 2025. The F Fund, which invests in intermediate term bonds that mature in a 5-10 year period and is based on the Bloomberg Aggregate Bond Index, saw a return of 4%. The I Fund, which invests in international developed markets, had a return of 18.7%. Art Stein, in November and December 2024, advised that the I Fund, which is up 19%, was a good investment choice.
Stein warns that in 2022, there were historic declines in bond values due to the Fed raising interest rates, causing some people to think that bonds are no longer a good investment option. However, he emphasizes that the F Fund, a bond fund, is riskier than the G Fund, which is a short-term bond fund constructed to function as a savings account with a high interest rate.
Rebalancing by increasing the F Fund allocation can add portfolio stability and income, especially when interest rates stabilize or decline. The I Fund, which trades at more attractive price-to-earnings ratios, suggests potential for long-term growth and improved diversification benefits from increasing exposure to the I Fund after a period of underperformance.
Stein also expresses uncertainty about the future of federal employment and benefits due to recent changes and instability in the federal government. However, he emphasizes that even though the federal government may be facing challenges, a strong economy and stock market are still possible.
Manual rebalancing after withdrawals may be necessary to maintain strategic allocations within the TSP, especially since withdrawals are taken proportionally across funds. A proactive rebalancing strategy in 2025 is essential due to market volatility, rising rates, and changing economic forecasts, avoiding overexposure to riskier stocks and maintaining appropriate growth potential through bonds and international equities.
In summary, after mid-2025's market moves, TSP investors should reduce allocations in the C and S Funds if these have become overweight and increase holdings in the F and I Funds to restore balance, reduce overall portfolio risk, and capitalize on international opportunities. This approach aligns with guidance for personalized adjustments based on evolving market conditions and risk tolerance.
In light of the market's volatility in the first half of 2025, federal workforce employees should reconsider their investments and possibly rebalance their TSP portfolios to minimize risk. Art Stein, a Certified Financial Planner, suggests investing in the F Fund, which offers stability and income, and the I Fund, which offers potential for long-term growth and improved diversification benefits due to its strong performance.
