Young investor with stable job can withstand more risk in Thrift Savings Plan
Q. My son has just accepted a position at a federal agency. He is in the process of establishing his Thrift Savings Plan. There are five funds within the Thrift Savings Plan in which to invest: (1) a government securities fund; (2) a fixed-income fund that duplicates Lehman Bros. Bond Index fund; (3) a common stock index fund that duplicates the S&P 500 index; (4) a small-cap index fund that duplicates the Dow Jones Wilshire 4500; and (5) an international stock index fund that is compiled of stocks of 21 countries. What distribution among these investment opportunities would you recommend?
W.B., by e-mail
A. Recommendations for the current economic environment must also be conditioned by the age of the investor and the employment stability of the investor.
A young government employee can generally assume a long period of saving, income stability, and a defined-benefit pension and Social Security in addition to retirement savings.
That employee can take a good deal more risk than a person of the same age who works for a private company without a defined-benefit pension plan.
In the proud tradition of Couch Potato investing, your son could divide his contributions equally between the Lehman Bond index fund for fixed-income, the S&P 500 index fund for large-cap domestic stocks, the small cap index fund for small-cap domestic stocks and the international stock index for international stocks. This would make his portfolio 75 percent equities, 25 percent fixed-income.
It would also give him a hefty slug of small-cap risk since the S&P 500 index accounts for about 75 percent of all domestic equity value.
In his portfolio, large cap would be only half of domestic equities and small-cap would, in effect, be overweighted.
The biggest shortcoming of this portfolio is that it is underweighted in international equities since the entire US market is roughly equal in value to the total value of all international and emerging market stocks.
It shares this shortcoming with the complete portfolios, known as “L’’ funds, which are also available through the Thrift Savings Plan - all contain more than $2 of domestic equities for each $1 of international equities.
Your son could correct this by building a slightly more complicated portfolio that was composed of four parts international, three parts US large-cap, one part US small-cap, and 2 parts Lehman Bond index.
This portfolio would be 80 percent equities, and 20 percent fixed-income with equal weights for US and international equities.
Would either allocation be ideal or prescient? Sorry, no. We don’t know the future.
But both portfolios would be diversified and allocated at a risk level appropriate to a young man with stable employment and good benefits.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
