"I would bet you that if a newspaper printed a headline "Interest rates fall!", more than 50% of readers would conclude that bond prices had fallen and that any bond part of their 401K had gone down in value."
While that may be true, again it would have been due to their
own negligence. They would not have read the following, which
is included with the information on the F Fund (or bond fund).
And it also establishes that EVERYONE must sign a statement
that they understand the risks in the F Fund before they can
invest in it.
Each participant is given more than adequate info, in
layman's terms, about the risks & how each fund should
perform in up & down markets & up or down interest rate
environments, etc.,etc.....
What are the risks of investing in the F Fund?
The risks associated with the F Fund are credit risk, market risk, and prepayment risk. Credit risk is the risk that an issuer of a fixed-income security will fail to pay interest or principal. There is no credit risk for the Treasury securities in the underlying index fund. Credit risk is of concern primarily with the corporate bond holdings of the underlying index fund and, to some degree, with certain mortgage-backed securities and Government-sponsored enterprise securities. However, credit risk in the F Fund is reduced because the holdings from any individual corporate issuer make up only a small part of the underlying index fund, and because all corporate securities are investment-grade securities. There are no high-risk "junk bonds" in the LBA index.
The F Fund also carries market risk, the risk that the market value of the investment may fluctuate as interest rates fluctuate. This risk is reduced by holding securities with shorter maturities, rather than holding only longer-term bonds. Nevertheless, market risk is a major influence on the returns of the F Fund because the average maturity of securities in the LBA bond index is approximately 6.8 years, as of December 31, 2002. If you compare the past performance table for the G Fund (which is representative of general interest rate trends in the economy) with the LBA bond index, you can see that the index has generally benefited from declining interest rates in the economy in several recent years. The interest rate increases of 1994 and 1999, however, resulted in negative returns for the LBA index.
There is prepayment risk for mortgage-backed securities and for certain corporate bonds that may be "called," i.e., prepaid, by the issuers. For mortgage-backed securities, prepayment risk is the risk that during periods of declining interest rates, homeowners may refinance their high-rate mortgages and prepay the principal. Such prepayments generally have a negative effect on mortgage-backed securities, because cash from the prepayments must be reinvested in securities with lower yields. The result is that prices on mortgage-backed securities may not increase as much as the prices on other fixed-income securities. To compensate for prepayment risk, mortgage-backed securities generally have higher yields than securities of similar credit quality and maturity. Similar considerations apply to callable corporate bonds.
Thus, there is the potential for higher earnings with the F Fund than with the G Fund, but there is also a greater risk of loss. There is no assurance that past rates of return of the F Fund will be replicated in the future. You must decide what investment mix is appropriate for your situation and the level of risk you are willing to tolerate. If you choose to invest in the F Fund, you must formally acknowledge that you understand and accept the risks involved. Only you can decide whether your TSP account should include an F Fund investment. For more detailed information about the F Fund, read the Guide to TSP Investments.
tsp.gov
Guide to TSP Investments
Your Time Horizon and Risk Tolerance
....In general, the greater the potential for large returns, the higher the
risk of large losses, because the financial markets tend to reward with
higher returns those investors who are willing to accept greater risk of
losses.....
Diversification and Risk
....While diversification does not insulate you from losses on particular
investments, it can reduce the risk of incurring large losses on your entire
portfolio....
F Fund
....The F Fund returns will move up and down with the returns in the bond
market. As interest rates rise, bond prices, and thus the returns of the
LBA index and the F Fund, will fall. This is because the coupon rate (rate
at which interest is paid) on new securities is higher than the coupon
rate on older securities that were issued when interest rates were lower.
The price investors are willing to pay for older securities must decline
to make the yields equal to those available on new securities. Thus, during
periods of rising interest rates, the bonds in the LBA index can be expected
to experience losses. Conversely, during periods of falling interest
rates, bond prices and the LBA index will experience gains.....
tsp.gov |
