How do the L2040 funds make money?

[bonehollow]

Ill admit I am not financially savvy when it comes to investing and that’s why I throw all my money into the 2040 fund. However I am confused on how it makes money? I mean if I have 700 shares of that fund, am I hoping on it being worth 40$ in 20 years instead of its 17.39?? Thanks for any help, I really don’t even know how to particularly ask the question, so thank you.

 

[SkyPilot]

The L funds are not really funds at all, but blends of the other 5 funds based on risk tolerance related time horizons. In other words, L2040 has a higher percentage of stocks than the others, as it mixed for those needing the funds in the year 2040. The L income fund is for those who have very low risk tolerance and need the money today, so most of it will be made up of the G fund.

The L funds are balanced on a daily basis, and are incrementaly adjusted to become more consevative with the passage of time.

The L "funds" accrue earnings or losses based upon the sum of the returns or losses of each of the five funds, according to the percentage mix of the "fund" each day...

Simply put, they earn the same way you would if you diversified your allocation across the five funds and adjusted your allocation each day, which is what they do.

However, when the TSP does it, it is okay. When we do it, it is called "Frequent Trading"...

This is probably more confusing than helpful,

Sorry...

 

[Silverbird]

The L funds are supposed to be where you park until you retire. It used to be people parked in G fund if they didn't want to do anything with their retirement, due to the guarantee that G fund cannot have negative returns. The problem is as a risk-free investment, G has really low returns, over time, less than inflation.

The theory with the L funds is their risk is based on your retirement year, because over time, stocks (C,S,I) do better than bonds (G,F) but in the short terms stocks can have substantial losses. Over time, stocks have a much better average growth rate than bonds, so the L funds have you buy more stocks early in your career, and as time goes on, the L Funds re-adjust to more and more bonds, until the L fund in question reaches its terminus year (I think 2035 or so for L2040) when the fund becomes = the Lincome fund.

If you want to be more in charge of what's going on with your investment, and parking is not what you want to do, L funds aren't what you are looking for. L funds aren't moneymakers this year, but given that we've had downturns every 7 years or so and the last one was around 2001, and indications are we will be still falling for a bit, an upturn would be expected in the next few years. But over time, the theory is, you'll have a nice mix of investments for a profitable retirement fund, with your risk reducing as you get closer to retirement.

This is the first time the L funds are going through a downturn as they are relatively new, they were developed after the 1999-2001 meltdown where a lot of TSPers lost their shirts riding the stock market and others found out at retirement that G didn't cut it. From what I've seen, they should work, but having gone through the last downturn this birdeen isn't willing to ride the L train stocks down to go back up later, and although it would be tempting to ride G train like I did in the last downturn, it's not going to keep up with inflation. So that's why even this little scaredy bird switches her investments around on her own, L train would give me a coronary this year on L2030 (which would be the one for someone my age) and I know I would panic instead of staying on for the eventual ride back up.