Is your TSP sitting in 100% C Fund? Or maybe you are feeling adventurous and decided to throw a little S Fund in there too.
There is nothing inherently wrong with the C Fund. It tracks large U.S. companies and has been an outstanding investment for a very long time. The problem is that after the strong run U.S. large-cap stocks have had over the last decade or so, it is easy to forget that the C Fund is still only one part of the global stock market. The S Fund adds smaller U.S. companies, while the I Fund gives you exposure to companies outside the United States. Those three funds don’t always perform the same way at the same time; and that is actually a good thing.
The Best-Performing Market Keeps Changing
Take a look at the chart below. It compares the performance of the international market’s vs the US markets as the baseline. It looks at the 5-year annualized average performance and is used to identify when international markets have outperformed or underperformed vs the US stocks, represented by the S&P 500.
During much of the 1980s, for example, international markets dramatically outperformed U.S. stocks. In 1985 the MSCI EAFE Index returned about 57%, followed by nearly 70% in 1986, while the S&P 500 returned roughly 31% and 18% in those same years. International stocks again had a strong run in the early and mid-2000s. From 2003 through 2007, MSCI EAFE beat the S&P 500 in each calendar year.
Then the pendulum swung hard in the other direction. U.S. stocks dominated much of the period following the Global Financial Crisis. Vanguard notes that from 2014 through 2024, U.S. stocks returned roughly 13.1% per year, outperforming international stocks by about 7.7 percentage points annually.
And recently in 2025, international stocks came roaring back, with the MSCI EAFE Index returning roughly 32%, compared with about 18% for the S&P 500.
The point isn’t that international stocks are better than U.S. stocks. They aren’t. And it isn’t that the C Fund is somehow a bad investment. It isn’t. The point is that nobody knows which market will lead next.
That’s Why Diversification Actually Matters
Diversification is sometimes described as if it is simply about reducing risk. That is only part of the story. The real benefit is owning several investments that don’t move exactly together. The C Fund may be having a great year while the S Fund is struggling. Small companies may lead after large companies have been dominant for years. International stocks may outperform while U.S. stocks are flat, or vice versa.
If every investment in your portfolio moved up and down together, diversification would not accomplish much. That difference in performance creates an opportunity for something else that is extremely valuable: rebalancing.
Imagine that you decide your stock allocation should be 60% C Fund, 20% S Fund and 20% I Fund. If the C Fund has several great years while international stocks struggle, your portfolio might eventually become 70% C, 18% S and 12% I. At that point, rebalancing means trimming some of what has done well and buying more of what has lagged. That sounds simple when you read it on paper. In real life, people are terrible at it.
Nobody wants to sell the investment that is making money and buy more of the investment everyone says is terrible. Human nature usually pushes us in exactly the opposite direction – we buy what has recently done well and abandon what has recently disappointed us. That is where TSP Lifecycle Funds become interesting.
The Real Strength of Lifecycle Funds
Lifecycle Funds, or L Funds, combine the G, F, C, S, and I Funds into one portfolio. Instead of deciding how much belongs in each fund and then remembering to rebalance it, the TSP does it for you. That has several major advantages.
First, they are extremely inexpensive. TSP fund expenses are only a few hundredths of a percent annually. At an expense ratio around 0.04%, you are paying roughly $40 per year on every $100,000 invested. That is dramatically cheaper than most managed investment accounts.
Second, the diversification is built in. You aren’t relying entirely on large U.S. companies. You own large U.S. stocks, smaller U.S. stocks, international stocks and, depending on the Lifecycle Fund, some combination of the G and F Funds.
Third, and probably most importantly, the rebalancing happens automatically. When one part of the portfolio grows faster than the others, the Lifecycle Fund brings the allocation back toward its target. You don’t have to decide whether international stocks have fallen enough to buy more. You don’t have to wonder whether the C Fund has risen too far. The fund simply follows the plan. For an investor who does not want to manage a portfolio, that is a very attractive feature.
But There Is a Catch
I love the basic concept behind Lifecycle Funds. My problem is what happens as you get closer to the target date. The fund doesn’t just rebalance among C, S and I. It also gradually moves money away from stocks and into the G and F Funds.
Take a look at the glide path below.
Far away from the target date, the portfolio is overwhelmingly invested in stocks. That makes sense. Someone with 40 or 50 years before they need the money has time to recover from major market declines.
But look at what starts happening about 30 years before the target date. The allocation begins steadily moving toward the G and F Funds. By the time you reach the target date, the portfolio is dramatically more conservative than where it began. There is nothing wrong with becoming more conservative as retirement approaches. The question is whether the Lifecycle Fund does it earlier and quicker than you need it to.
Retirement Isn’t the End of Your Investment Horizon
This is where I think target-date investing can become too simplistic. Say you retire at 60. Your investment horizon didn’t just go to zero. If you live to 90, that portfolio still needs to work for another 30 years. If you live to 95, you have a 35-year retirement. That is almost another entire working career.
You obviously don’t want the same risk level at age 65 that you had at age 25, but becoming too conservative also carries risk. Inflation continues. Your spending continues. Healthcare costs continue. And the money you will not need for another 20 or 30 years still needs an opportunity to grow.
This issue may be even more important for military retirees and federal employees because many have a pension providing dependable monthly income. Add Social Security and possibly VA benefits, and a significant portion of basic expenses may already be covered before the TSP is touched. This means your TSP funds will be used for the gravy on top. Which also means it can be variable. So, in bad years you can spend less and in good years well its time to work on that bucket list. This allows for you to be a little more aggressive than those without steady COLA adjusted pensions.
The Lifecycle Fund does not know that. It simply follows its predetermined glide path. Eventually at Retirement it is 70% fixed income assets! In many cases, the opposite 30% fixed income would be more appropriate for those with large pensions.
Asset Location Adds Another Wrinkle
There is another issue that doesn’t get talked about nearly enough: asset location. Asset allocation answers the question, “How much should I have in stocks versus bonds?”
Asset location asks a different question: “Which accounts should hold those investments?”
Suppose you have $2 million divided among a Traditional TSP, Roth IRA and taxable brokerage account, and your overall plan calls for 70% stocks and 30% conservative investments. You do not necessarily want every account to be 70/30.
In most cases, there is a good argument for holding more of your lower-growth assets, such as bonds or F and G Fund-type investments, in tax-deferred accounts, while allowing more of your Roth money to remain invested in higher-growth assets.
Why?
Because Roth growth can potentially compound tax-free for the rest of your life, and qualified Roth withdrawals are tax-free. If I have money that I expect to leave invested for decades, I generally want to think carefully before intentionally putting my lowest expected-return asset in that account.
That does not mean “never put bonds in a Roth.” Your overall risk level still comes first, and every person’s situation is different. But it does mean that once you have several types of accounts, treating every account as its own little identical portfolio may not be the most efficient strategy.
And this is where a Lifecycle Fund can become less attractive as you get within roughly 30 years of its target date.
Once the Lifecycle Fund begins adding more G and F Fund exposure, you are no longer just getting automatic diversification and rebalancing. You are also accepting the Lifecycle Fund’s decision about your asset allocation and where your bonds are located.
If part of your TSP account is Roth money, that may not be what you want.
A better approach for some investors may be to look at all of their retirement accounts as one portfolio. Perhaps more of the conservative allocation sits in the Traditional TSP, while Roth assets remain more heavily invested in equities. The exact mix depends on taxes, withdrawal plans, risk tolerance and the size of each account, but the point is that account location matters. The problem is while funds are in the TSP, you don’t get a choice to have different allocations in your Roth vs Traditional funds.
You can also skip Lifecycle Funds completely and create your own combination of C, S, I, F and G. The tradeoff is that now you have to rebalance it. That gives you more control over both your stock/bond allocation but realize if your TSP has both Traditional and Roth, it doesn’t solve the asset location problem. Funds may need to be relocated in order to accomplish this. But talk with an advisor before doing this as there are other considerations.
So, Should You Use a Lifecycle Fund?
For many younger TSP investors, I think the answer is yes. Someone sitting in 100% C Fund because “the C Fund has always done the best” may actually end up with a more disciplined and diversified portfolio by moving into an appropriate Lifecycle Fund. You gain international exposure, small- and mid-cap exposure, automatic rebalancing and extremely low expenses without having to manage it yourself. That is a pretty good deal. You can also pick the Lifecycle fund with the highest year if you just want your TSP to stay 100% Stocks.
Where I become more cautious is once the Lifecycle Fund begins moving meaningfully into bonds and the G Fund. At that point, I don’t just want to know someone’s age. I want to know what their pension looks like. How much Social Security they expect. Whether they have VA income. How much is in Roth versus Traditional accounts. Whether they need withdrawals from the portfolio immediately. And how comfortable they are watching stocks fall 30% or 40% without panicking. Those answers tell me far more about the appropriate portfolio than the year printed on a Lifecycle Fund.
So, if you are sitting in 100% C Fund, don’t assume diversification means abandoning the C Fund. It may simply mean recognizing that the C Fund does not have to do all the work. And if you already own a Lifecycle Fund, don’t assume the TSP has solved every investment decision for you.
Lifecycle Funds do a very good job of diversifying and rebalancing. Just make sure their glide path, and where they are putting your investments, still makes sense for the rest of your financial plan.
Navigating TSP decisions does not have to be DIY. If you find this overwhelming, consider reaching out to a qualified professional. A fee-only fiduciary financial planner through the Military Financial Advisors Association (MFAA) can help structure the financial transition and provide professional guidance when you need it most.