Don't overlook investing in small-company funds
- By Milt x_Zall
- Mar 02, 2000
If you tend to pass over small-company stock in favor of the large, better-known
companies in the Standard & Poor's 500 index, now is the time to change
your attitude about investing.
During most of last year, the stocks of
large, well-established companies rose in value. That was good news for
federal employees who had placed some or all of their Thrift Savings Plan
(TSP) dollars in the common stock, or C fund. The C fund is an index fund
that replicates the performance of the S&P 500, which is composed of
the 500 largest companies in the countr
However, beginning late last
year, the S&P 500 started moving sideways, and so far this year it has
dropped a few percentage points. Meanwhile, the stock value of smaller companies
has been going through the roof.
This development is not surprising because
historically, small-company stock tends to outperform large-company stock.
It is virtually impossible for large companies to grow as rapidly as smaller
Admittedly, large companies run into fewer setbacks because they are
well-established in the market and have loyal customers. Small companies
must compete aggressively to achieve the reputation that companies in the
S&P 500 have attained. Successful small companies often appreciate significantly
in value, while those that fail are either bought out by competitors or
go out of business.
Although small-company earnings tend to be more volatile
then their larger cousins, their stocks outperform large-company stocks.
For that reason, TSP investors should invest in small and large companies.
This poses a problem for federal employees, however. They will not be
able to invest in small-company stocks until the TSP launches its new system
in October. The system will enable federal employees to invest in a small-cap
stock fund and an international stock fund. In the meantime, feds are losing
money waiting for the new system.
The Thrift Savings Board could have and should have worked out an
arrangement to let feds invest some TSP dollars in small-company funds while
the board redesigned the system. But you are paying the price for the board
wanting to make changes its own way. Asking feds to wait this long does
irreparable harm to their retirement fund balances.
In the interim, consider investing in small-company mutual funds either
through an IRA, if you have one, or through individual accounts. Of course,
because workers who are in the Federal Employees Retirement System receive
matching government contributions, it's best to make the maximum contribution
to TSP that the government will match. However, once you have passed the
government match ceiling, investing in a small-company fund through a tax-deductible
IRA ensures that your retirement dollars will be diversified and earn respectable
If your income exceeds the tax-deductible ceiling, you're probably better
off investing as much as you can in the TSP, even if that means you can't
invest in a small-company fund right now. That's because whatever you invest
in the TSP is tax-deductible.
It's a shame however, that federal employees are forced to choose such
options when the Thrift Savings Board has the ability to offer small-company
funds to feds today.
If you want the names of some small-cap funds that I like, send me an
Zall is a free-lance writer based in Silver Spring, Md., who specializes
in taxes, investing and business issues. He is a certified internal auditor
and a registered investment adviser. He can be reached via e-mail at email@example.com.
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