You've heard it before: Don't put all your eggs in one basket. By diversifying (spreading your money among different investments), you reduce the likelihood that your entire account will be severely affected by dramatic fluctuations in any single asset or fund.
- Each of the TSP funds is diversified within its particular market segment. This reduces risk within each fund. For example, the C Fund is invested in an index fund that represents all of the stocks in the Standard & Poor's 500 (S&P 500) Index.
- Each of the TSP funds tracks a different segment of the overall financial market without overlapping. For example, the C Fund tracks the performance of the largest U.S. companies and industries while the I Fund tracks the performance of major companies in the European, Australian, and Asian stock markets.
Diversification is important because, at any given time, prices can move in different directions and by different amounts. By investing in all segments of the market (such as Treasury securities, bonds, and stocks), as opposed to just one segment, you'll reduce the amount of volatility (risk) in your retirement account.
Although diversification does not insulate you from losses on particular investments, it can reduce the risk of incurring large losses on your entire portfolio.