"Isn't the I Fund a Risky Investment for a Conservative Investor?"   By Ralph Smith 11/06/2007 Click here for more articles by Ralph Smith

When many people think of foreign stocks, they think of small companies in countries like India, China or other faraway countries that often seem exotic and perhaps a little too "foreign" for our taste. The financial headlines have been full of headlines about the great returns that small company stocks in foreign markets have been providing to investors.

The small stocks in these countries are often referred to as "emerging markets." The term "emerging market" is usually referring to investments in a country that is moving from a developing nation (think of Mexico, Brazil, Chile or the emerging markets from newly independent countries that were part of the former Soviet Union) into an industrialized nation like the United States, Germany or Great Britain.

Anyone who has put money into the emerging markets has probably done very well. Here is a summary from Forbes magazine: "The MSCI Emerging Markets Index has outperformed the S&P 500 by an astonishing 134.46% over the past three years." In other words, the emerging markets index has beaten the pants off of the C fund. Emerging markets can bring astonishing returns. They can also have a very high risk factor for political, economic or business reasons.

But, contrary to the suspicions of some readers, the I fund is not a fund filled with stocks in emerging markets. The I fund is based on the EAFE index which stands for Europe, Australia, and the Far East. Here is a list of some of the most commonly held stocks in this index and, therefore, in the I fund:

• BP
• Toyota Motor Corporation
• GlaxoSmithKline
• Vodafone Group
• Nestlé
• Novartis
• Royal Dutch Petroleum Company

These are not small companies. In fact, many readers probably think of some of these companies as being American companies because we often see their names, their advertisements and buy their products. The stocks from Great Britain and Japan are the most common stocks in the I fund. Other companies well-represented in the index are France, Germany, the Netherlands, Switzerland and Australia.

As noted in last week's article, the I fund has been a high performing fund, even though it is a long way from being among the most popular of the TSP funds. Part of the reason for the high return is the performance of the companies in the index and their success in a more global economy. Part of the reason for the performance of this fund is the falling value of the American dollar. In other words, the value of these companies went up because the currencies of the country in which these companies are based became more valuable.

The I fund is not designed as a high risk investment. Putting some of your investment funds into the emerging markets may be a good idea. But you do not have that option through the Thrift Savings Plan and many conservative investors would not be comfortable with the high risk/high reward potential of emerging markets.

Another reader wanted to know why he does not receive dividends from his I fund investment as he does with mutual funds that he owns outside of the TSP.

The reality is that dividends are paid by the companies and TSP investors get the benefit of this extra money. However, the dividend is not treated the same by the TSP or similarly situated investments such as 401(k) retirement plans.

This is is not a conspiracy by the TSP or the other retirement plans. The Internal Revenue Service views the dividends differently in a retirement plan because investments are made with tax deferred money. The management company credits dividend income each business day. The value of the dividend is then reflected in the value of the I fund share price. The result is that TSP investors do not get a statement showing a separate amount of dividends or interest that may have been credited during the year.

So, is the I fund a good choice for your retirement investments? And, as one reader asked: "Isn't the I Fund a Risky Investment for a Conservative Investor?"

There is always risk in financial investments as there are no guarantees of future performance. The I fund is probably a good investment for at least some of your retirement money. No one can tell you how much this fund will go up or down in the future but spreading the risk inherent in investing for the future is likely to give you a better overall return. Financial markets outside of the United States are growing and globalization is a reality. Ignoring this fact in your investments is also "risky" in that you may miss out on the growth opportunities of foreign companies that sometimes grow as fast or faster than those in this country.