The S Fund: Secret Growth Engine or Volatility Trap?

Most people can explain what the C Fund does in a sentence.

Ask about the S Fund, and the answers get a lot fuzzier.

That’s a problem, because this one line on your TSP screen can give your long-term returns a powerful boost…

But it can also introduce enough volatility to keep you up at night.

This edition of FWR is about getting clear on what the S Fund really is, how it behaves, and how much of it realistically belongs in your retirement portfolio.

What’s Actually Inside the S Fund?

Let’s start by demystifying the label.

The S Fund tracks an index with a long name: the Dow Jones U.S. Completion Total Stock Market Index.

And it owns almost every U.S. stock that is not in the S&P 500.

So, in your TSP:

• C Fund = the big, headline-name U.S. companies (S&P 500)

• S Fund = small and mid-size U.S. companies, niche players, “up-and-coming” businesses

If you combine them, C + S ≈ the total U.S. stock market

Why the S Fund Feels Different Than the C Fund

Same country, same overall economy… so why does the S Fund act so differently?

It comes down to company size and stability.

Smaller and mid-size companies often have:

• Less predictable earnings

• Less access to cheap borrowing

• Business models that haven’t fully “matured” yet

That doesn’t make them bad investments.

But it does make their stock prices more sensitive to good and bad news.

You tend to see:

• Bigger swings (up and down) in the S Fund

• Smoother, but still volatile, moves in the C Fund

Over some long stretches, smaller companies have delivered higher returns.

But investors have to live with rougher rides along the way.

In a Bull Market: S Fund Turned Up to 11

Picture a strong bull market.

The headlines are positive. Investors are willing to take more risk. Confidence is high.

In that kind of environment, money often chases faster-growing, smaller companies.

So, the S Fund can outrun the C Fund because these smaller firms can grow earnings and share prices from a smaller base.

That looks like larger gains in good years but bigger month-to-month jumps (both up and down)

For someone in early or mid-career who contributes steadily every pay period…

You’re buying through the dips and giving that extra growth time to compound.

In a Bear Market: S Fund on the Downside

Now flip the script.

In a sharp downturn investors get nervous.

They often rush toward what feels safest: cash, Treasuries, and giant, well-known companies.

So when the C Fund is down sharply, the S Fund is often down even more.

That’s where the “volatility trap” shows up.

And if you’re not psychologically prepared for that extra downside, it becomes much easier to panic and sell low.

For someone already retired and withdrawing from TSP, deeper drops can matter even more, because you’re pulling money out while prices are down.

So Where Does the S Fund Belong? Core vs. Accent

In practice, that often means:

• C Fund (and G/F) = main building blocks

• S Fund = smaller slice added for extra growth potential

Here are ballpark ranges that many investors use as a starting point:

Early Career (20s–30s)

Goals: maximize long-term growth, stomach some volatility, decades to go before withdrawals.

A possible mindset:

• Stocks can reasonably be the majority of your TSP

• Within that, S Fund as maybe 15–30% of your total TSP isn’t unusual for someone who is comfortable with ups and downs

Example allocation:

• 45% C Fund

• 20% S Fund

• 10% I Fund

• 25% split between G and F

Here, S is a meaningful growth driver, but not your entire stock position.

Mid-Career (40s–50s)

Goals: keep growing, but start respecting the calendar and your retirement date.

Here you might see:

• C Fund as the main stock anchor

• S Fund trimmed back into the 10–20% of TSP range

• A growing role for G and F as you get closer to retirement

Example (again, just an illustration):

• 40% C Fund

• 15% S Fund

• 10% I Fund

• 35% G/F Funds

The S Fund is clearly supporting cast, not the star.

Near or In Retirement

Goals: protect the ability to fund spending, sleep at night during bad markets.

Many retirees who still want some extra growth:

• Shrink S Fund to single-digit or low-teens percentages

• Skip it entirely and keep stock exposure to C (and maybe I), with a larger G/F cushion.

Whether you’re comfortable with 5%, 10%, or 0% in S depends on:

• How strong your pension + Social Security floor is

• Other savings (IRAs, spouse’s accounts)

• Your true tolerance for seeing your balance swing during retirement

The Takeaway for Federal Employees and Retirees

The S Fund is neither a hidden gem everyone else is missing nor a booby trap to avoid at all costs.

It’s:

• A broadly diversified slice of small and mid-size U.S. companies

• A natural complement to the C Fund

• A tool that works best as a modest, intentional part of your overall TSP strategy

Use it thoughtfully, keep it in proportion to your risk tolerance and time horizon, and the S Fund can help your TSP do what it’s meant to do…

Support a stable, confident retirement built on your years of federal service.

Best,
—FWR