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Thread: Buy and Hold chat: Let's talk TSP Lifecycle Funds

  1. #1

    Default Buy and Hold chat: Let's talk TSP Lifecycle Funds

    When you look around the innerwebs for TSP info from an employee perspective, there isn't a ton out there. This forum is a good resource and the short-term folks have carved out a nice place to discuss various formulas and strategies for short-term gains. That's fine, but the overwhelming majority of TSP investors are either novice, don't understand investing, or are afraid to delve too far into the subject. I notice this place attracts a lot of guests, so I assume those are people looking for guidance but maybe just wanting to see things at a safe distance so they can get a better feel. So this is for you and for those without the time or gumption to invest a ton of effort into your retirement accounts.

    First off here is the TSP summary where you can find the basic information to get you on the right path. Secondly, know that the TSP is one of the best 401k equivalent plans in the world. The investment options aren't what private 401k plans offer, but you can't beat the fees nor the administration of the plans. And finally, for the novice investor TSP offers enough to put you on the right path towards a secure and prosperous retirement.

    So do you have 100% of you allocation in the G fund? I know a lot of employees who do and none of them are doing it because of market conditions or a short-term view. They do it because they've always done it that way. The only people that should be doing this are people that are so risk averse, that they can't stomach losing even a few dollars in your account. That's fine, but there is a better way.

    I do not personally invest in the TSP lifecycle funds but I think they absolutely work for most TSP investors. There are five funds:

    L2020
    L2030
    L2040
    L2050
    LIncome

    L Income is designed for those who have already retired, L2020 for those retiring between 2017-2014 and then the others fall into the range of projected retirement dates. All the funds are formula based that shift funds from one investment (like from I fund to G fund or whatever) the closer you get to retirement. According to TSP the objective of the lifecycle funds is: "to strike an optimal balance between the expected risk and return associated with each fund."

    If you take a look at the 2040 fund for example, you can see that right now the fund is invested in G (20%), F (6%), C (40%), S (12%), I (22%). But if you scroll through the player at the bottom of the pie chart you will see that in January of 2030, it will be G (34%), F (7%), C (31%), S (9%), I (17%). So over time the fund automatically re-balances your allocations to reflect a lower risk tolerance the closer you get to retirement. Now you are putting 26% into bond funds and 74% into equities, in 2030 it will be 41% into income producing investments and 59% into equities.

    It's not a bad formula and one that all the big mutual fund companies now do. For example...

    TSP 2030 Fund 5 year return: 7.58%
    Vanguard 2030 Fund 5 year return: 7.21%


    So not bad. Most financial advisors will say not to mix the life cycle funds with any other investment, because you defeat the strategy employed by the computers and gurus that create the formulas. I think there are exceptions, namely investing in sector funds (ie Energy, Healthcare, emerging technology) outside the TSP, and the G fund within the TSP. If you're so risk averse that you just hate looking at your portfolio in down markets, then maybe you would consider mixing in more G fund. I think because the TSP offers so few investment options that just sticking with a Lifecycle fund is best, but in the end it always boils down to individual goals and risk tolerance.

    Finally, I think the lifecycle funds are generally a little conservative, at least for me. If you have a little higher risk tolerance but don't want to mess around with re-balancing, market functions, and logging into your account more then you want to, then here is the answer. If the TSP recommends that you use the 2030 fund because you can retire in 2032, put your money in the 2040 lifecycle fund instead. For example, IMO even in retirement you should have a good deal of money in equities. The LIncome account only invest around 20% in equities, I think being closer to 50% is more appropriate, even in retirement. The L2020 fund is about 46% equities, so that is where I'd probably put my money if I were invested in Lifecycle funds. In theory you could go the other way as well, going with the 2030 instead of 2040 because your afraid the sky will fall sooner than later.

    In the end your investment choices are individual and based on several variables. To me there are only two rules that every long-term investor should follow: Contribute at least 5% to get the full match and don't be 100% in the G Fund. Other than that, it's based on you and your goals.

    I am someone who believes in buy and hold with some short-term views in down markets to buy more equities. But according to the research firm Dalbar, stock funds returned 8.3% on average in 2014 while investors got a 5.5% return. Why? Because of cost of the plan or funds which we in TSP don't have to worry about, and investors trying to time the market. The Lifecycle funds aren't going to produce the sexiest of returns but I think for most people they work great. At minimum, it's exponentially better to invest in a life cycle fund than just leaving your nest egg in the G fund. Inflation alone will eat all your returns, and in investing time is the most important variable. You want your money compounding, not lagging or barely beating inflation.

    I have several buy and hold strategies and am glad to discuss them going forward but let's see how this goes first. Good luck and happy investing!


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  3. #2

    Join Date
    Jul 2016
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    Texas
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    1,445

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    TSP on Twitter https://twitter.com/tsp4gov

    Good info Dr Detroit.

    For new employees "All contributions to your account will be invested in the Lifecycle (L) Fund targeted most closely to the year you turn 62 unless you direct the TSP to allocate your contributions differently." --Updated Form TSP-1 (9/2015)

    I also prefer the individual funds to the L Funds. If you are new, learn as much as you can on finance, investing & markets. There is a plethora of information available on the internet and elsewhere, just be careful and know what your are investing in and why--don't follow anyone blindly. Happy Investing



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  5. #3

    Join Date
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    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Positive way to bring your concerns into the forum and contribute, for those who may not be ready to handle their accounts the way most here do to varying degrees, DrD, good for you.

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  7. #4

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    So look at returns since inception for lifecycle funds:

    L2020 5.48% since 2005
    L2030 5.97% since 2005
    L2040 6.27% since 2005
    L2050 3.95% since 2011


    I think this is a good barometer for TSP investing. Do you know what your cumulative return is over the past 10 years? 15 years? Longer? The C Fund, the gold standard of TSP investing, has returned 7.36% the past 10 years, 10% since its inception in 1988. So I think those are two good starting points in determining whether your long-term goals are paying off.

    I went back and looked at every end of year statement I have since I've been in the TSP, back to 2002 when I was in the uniformed services. I looked at how much I contributed by percentage, what my contribution allocation was, and what my annual return was.

    The Good: I stayed the course in 2008. I did not change my allocation at all which at the time was 5%G/10F/40C/15S/30I. I didn't move at all and recouped my 2008 losses in 2009, and also bought low on equities. I also have contributed at least 5% since I entered federal civilian service, averaging around 9% in contributions over 11+ years. Looking back I wish I would have averaged closer to 10% but I was fully funding a Roth IRA and you know...expenses and life got in the way. I'm contributing the max now, have been for the past 18 months so I feel I'm on the right path and it's not too late

    The bad: Although I don't subscribe to market timing I do think there are obvious situations where buying in corrections is appropriate. 2008 is an anomaly, a once in a generation market so I'm fine with my approach there. I was 85% in equities, and I think that worked out fine. 2011 was a negative year however and looking back I probably missed some buying opportunities as I was 25% in G and F, when I should have been more leaning towards my averages of 20% bonds or less. Using the G Fund as a cash fund is a good idea, I bought more equities on dips in 2014 and 2015 and it worked out well. Re-balancing is key, whether it's every quarter, twice a year, or even once a year. But do it, because you can use your allocation to buy in low in down markets by weighting towards equities, but you still need to be cognizant of your overall strategy.

    The Ugly: My uniformed service account had a contribution allocation of 60% S Fund and 40% F fund from the time I left service, until I rejoined civilian service almost two years later. No idea what I was thinking, I guess I didn't care or didn't think about it. Also I had a lot of tax free earnings from deployment to OIF and OEF. You can't transfer those funds to your TSP civilian account so I took a distribution instead of leaving it in the uniformed services account. It wasn't a lot of money, but it was enough to grow over time on its own. Not the best decision I ever made.

    Learning from others mistakes can be beneficial so I post all this hoping someone won't make the same mistakes. I've beat all the lifecycle funds since 2005 but not by enough to crow about. So again, I think in general these funds are great for those not wanting to re-balance, lament, or stress.

    That's all I got for tonight, peas.

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  9. #5

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Quote Originally Posted by DrDetroit View Post
    The Ugly: My uniformed service account had a contribution allocation of 60% S Fund and 40% F fund from the time I left service, until I rejoined civilian service almost two years later. No idea what I was thinking, I guess I didn't care or didn't think about it. Also I had a lot of tax free earnings from deployment to OIF and OEF. You can't transfer those funds to your TSP civilian account so I took a distribution instead of leaving it in the uniformed services account. It wasn't a lot of money, but it was enough to grow over time on its own. Not the best decision I ever made.
    Dr D., Like you, I had some tax free earnings from deployment. WITHOUT ANY ACTION on my part, a military TSP was separately created. I now have 2 TSP accounts. One civilian and one military.
    Emotions should never play a role in one's investing strategy!
    No to Greed...No to Fear!
    Robinhood - Referral





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  11. #6

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Quote Originally Posted by Maricar19 View Post
    Dr D., Like you, I had some tax free earnings from deployment. WITHOUT ANY ACTION on my part, a military TSP was separately created. I now have 2 TSP accounts. One civilian and one military.
    Yeah you can leave your uniformed account open. I could have left all the funds I had in there, transferred the traditional contributions only to the civilian TSP and left the tax free contributions, or transferred the traditional contributions and taken a distribution on the tax free contributions. I took the third option, but wish I wouldn't have because that would have made a nice little rainy day fund.

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  13. Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Thank you all for your input. Im currently in the uniform service with a 75% 2050/25% c split with a 9% contribution just waiting for the match to drop down to 6%

    Sent from my SCV32 using Tapatalk

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  15. #8

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Quote Originally Posted by blkflm6888 View Post
    Thank you all for your input. Im currently in the uniform service with a 75% 2050/25% c split with a 9% contribution just waiting for the match to drop down to 6%

    Sent from my SCV32 using Tapatalk
    There is some theory out there that you never split a lifecycycle fund, that you should never bet beyond the market as a whole. I don't believe that at all, and think that an individual investment strategy is based on the individual. I like your risk strategy long-term, pile into US equities while maintaining some risk-aversion by using the lifecycle funds. All the market timers probably dumped on election night, or the day after. They were 100% in cash/G while the market responded differently than anyone would have expected.

    My approach is that I'll be heavily invested in US equities beyond death, let my heirs figure out what to do afterwards. As a uniform contributor you are spot on, keep thinking towards 2050 and avoid the static saying when you should cash out or re-invest. Over 30 years the average stock fund returned 11%, investors returned 4% because they moved money at the wrong time.

    Stay the course bromigo, invest and prosper like no one you know.

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  17. #9

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    2016 L Fund returns

    LIncome: 3.58%
    L2020: 5.47%
    L2030: 7.07%
    L2040: 7.9%
    L2050: 8.65%


    So the way I look at it is that if you current allocation didn't achieve that percentage based on your retirement target date, you might want to consider looking at a Lifecycle fund. I looked back ten years to see what I did vs my target fund which would be L2030 and I beat or got within half a percentage point in eight of the ten years. I did 10.34% for 2016 which is very good IMO, I am more heavily weighted in the S in particular though so that made the difference in beating the lifecycle funds. Again, I don't think these funds are a bad idea for novice investors or for those who simply don't want to deal with re-balancing several times a year.


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  19. #10

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    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Lifecycle Funds are DEFINITELY better than just leaving everything in G!! G will lose out to inflation over time.

    2 suggestions though....

    1) Push out your L fund 20 years PAST your retirement. You will want to be still in SOME equities when you retire because you may be in retirement for 25 years or more. Again, the inflation concern.

    2) Takes more involvement, but you can mimic the L fund but weight it more towards S. Then rebalance once a year or so to keep the %'s up to date. This is if you are willing to take on some additional risk, for the anticipated better return over the long run.

    Just my own 2 cents.....
    There are 10 types of people in the world. Those who know binary, and those that don't!!
    Target Retire date: December 2018.

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  21. #11

    Default Re: Buy and Hold chat: Let's talk TSP Lifecycle Funds

    Quote Originally Posted by uscfanhawaii View Post
    Lifecycle Funds are DEFINITELY better than just leaving everything in G!! G will lose out to inflation over time.

    2 suggestions though....

    1) Push out your L fund 20 years PAST your retirement. You will want to be still in SOME equities when you retire because you may be in retirement for 25 years or more. Again, the inflation concern.

    2) Takes more involvement, but you can mimic the L fund but weight it more towards S. Then rebalance once a year or so to keep the %'s up to date. This is if you are willing to take on some additional risk, for the anticipated better return over the long run.

    Just my own 2 cents.....
    Good advice here

    Like I said,

    If the TSP recommends that you use the 2030 fund because you can retire in 2032, put your money in the 2040 lifecycle fund instead. For example, IMO even in retirement you should have a good deal of money in equities. The LIncome account only invest around 20% in equities, I think being closer to 50% is more appropriate, even in retirement. The L2020 fund is about 46% equities, so that is where I'd probably put my money if I were invested in Lifecycle funds. In theory you could go the other way as well, going with the 2030 instead of 2040 because your afraid the sky will fall sooner than later.
    I think even the most conservative investor should consider going 10 years beyond their target date, for me...20 years is more appropriate. But that said these L funds were really designed with the risk-averse investor in mind. So in general if losing 10% would make you puke, stick with your target date fund. It's ok, I won't judge you.

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