L Funds Beat Market Timers

[rokid]

Recently, there has been a lot of discussion concerning the unfairness of the proposed IFT restrictions.

Assuming that the TSP Board has the best interests of TSP investors at heart, as well as a fudiciary responsibility, they probably feel that the L Funds best serve the average TSP investor. Perhaps, if they could be convinced that market timing serves the average TSP investor, they would lift the proposed IFT restriction.

Unfortunately, the following analysis of TSPTalk returns supports the TSP Board's proposed IFT restriction and the continued promotion of the TSP L Funds. As a group, TSPTalk market timers have underperformed the L Fund average return every year since 2005.

It would be interesting to see how the average return of the 3,000 most active TSP investors compares to the L Fund average return. The TSP Board has, or could easily get, that information.-----Jim

This Year Comparison

Average Timer - 6.32%
Average L Fund - 5.93%
L Fund Advantage - 0.39%

Two Year Comparison

Average Timer - 1.43%
Average L Fund - 0.32%
L Fund Advantage - 1.75%

Three Year Comparison

Average Timer - 10.41%
Average L Fund - 12.95%
L Fund Advantage - 2.54%

Four Year Comparison

Average Timer - 17.12%
Average L Fund - 20.20%
L Fund Advantage - 3.08%

 

[EW_ret]

The issue with restricting IFTs is it limits our freedom of choice. Those who want daily IFTs must learn to live with the new restrictions. This socialist mentality of implementing rules for the "good for all" can be dangerous. It implies capitalism is bad and socialism is good because the average investor needs to be protected. This intervention is not good for the minority who can successfully manage their TSP accounts. I do see the benefits of fixed asset allocation approach for most investors. It frees up time for those who want to spend time on other things. But, we should have the freedom of choice, not be forced into submission for the “good of all”.

 

[rokid]

EW_Ret,

I was merely trying to suggest a different angle of attack that could align the TSP traders interests' with the interests of the TSP Board. However, I now see this is a fight over principle.-----Jim

 

[tsptalk]

I do like the L-fund as they will give you a piece of the best performing fund(s) during up years and give you a piece of the safe funds during down years. And it's tough to argue with your stats, but we can play with the numbers to come up with several conclusions.

Here are the fund returns for the last 7+ years - from 2000 through today (3/14/08). I'm not sure we want to crown the F and G funds as the best investments.

G = +48.12%
F = +68.90%
C = +0.45%
S = +25.25%
S = +32.65%
I = +35.07%

I don't think it is useful to use an average of all the L-funds is since that is not a practical allocation. This year the L-40 is down 9.4% (#88 on the list) while the L-INC is down just 1.7% (#24) . That's quite a spread.

But thanks for the data!

 

[rokid]

Tom,

Thanks for the data. Since I began investing in 2003 (or having a clue), the stock funds have dominated fixed income. However, it's clear from your data that fixed income has dominated equities since 2000. Perhaps, I should reduce my equities allocation. :embarrest:

RE: the usefulness of averaging the L Funds to look at performance. It's clear to me that the TSP Board wants participants to use the L Funds. Consequently, it would be interesting to determine, from the data, whether or not the L Funds are actually the best approach for the average participant.

TSP has all of the data, sliced and diced by demographic. They should do an analysis, or provide the data to someone else to analyze, to determine whether or not trading results in higher, or lower, average returns for the active 3,000. If higher, then they should consider leaving the unlimited IFTs in place. If lower, then they could be confident that they were doing the average TSP participant a favor in restricting IFTs.

-----Jim

 

[James48843]

Rokid:

They have no interest in slicing and dicing the data. You can make data support whatever theory you want it to support. Just adjust what time frames you include, and you can make it say whatever you want it to say.

Here is something for you to consider-

Over the last 100 years, equities have far outperformed fixed income investments. Over ANY 10 year period, equities have far outperformed fixed income investments.

Right now, we're about 20% off our peak last October. So any comparison of today to any other period isn't a good comparison. Most people will say that at some point in time (six months, two years, ten years, who knows?) that equities will again resume their upward mobility. We just went through a stretch unprecidented in upward movement (2002 to 2008, six years is a LONG time for no major pullback).

Do the L funds perform better than a straight stock investment? No, not over the long haul. Yes, across some shorter period of time, when you are 20 % off the peak for stocks, you'll be able to find many periods when L's beat stocks, because L's contain a portion of G and F.

Do the L funds perform better than fixed income (G and F?) ?

Yes, absolutely. Because they contain a portion in equities.

So, the long and short of it is this- L funds are great investment tools for those who don't want to make their own decisions. L funds can and do perform better than "G" over the long term. That is the key word here- the long term.

But do L's perform better than those who can control their own decision making?

Again, I'll point to Tom's answer. 67% of TSPTALKERS are doing better in this downturn than the L2040.

I strongly support investing the L funds for new employees, especially those who don't know much about investing, or who want a real decent return over the long term and can't or won't take the time to educate themselves. In my OWN investing, over the last five years, I've found it a challange to try and outpace the L2040. I've done it, but it has taken a LOT of work. And there have been times where I have seriously considered just throwing my hands up and moving everything into one of the L's.

But in the end, until now, that has been MY decision, not someone else's decision.

And THAT, I think, is the most important point of all.

Who's decision should it be?

 

[rokid]

But do L's perform better than those who can control their own decision making?

Again, I'll point to Tom's answer. 67% of TSPTALKERS are doing better in this downturn than the L2040.

You're right, you can definitely "cherry pick" the data to make your point. It will be interesting to see if 67% of the TSPTalkers can re-enter the market at just the right time to beat the L 2040 over the long term.

RE: your decision making point. If the 3,000 traders are, in aggregate, adding to the sum total of TSP retirement wealth, then I think the TSP Board should reconsider the IFT restriction. If the traders are, in fact, reducing the sum total of TSP retirement wealth through increased costs and/or bad moves, then I support the TSP Board's position.

-----Jim

 

[rokid]

Recently, there has been a lot of discussion concerning the unfairness of the proposed IFT restrictions.

Assuming that the TSP Board has the best interests of TSP investors at heart, as well as a fudiciary responsibility, they probably feel that the L Funds best serve the average TSP investor. Perhaps, if they could be convinced that market timing serves the average TSP investor, they would lift the proposed IFT restriction.

Unfortunately, the following analysis of TSPTalk returns supports the TSP Board's proposed IFT restriction and the continued promotion of the TSP L Funds. As a group, TSPTalk market timers have underperformed the L Fund average return every year since 2005.

It would be interesting to see how the average return of the 3,000 most active TSP investors compares to the L Fund average return. The TSP Board has, or could easily get, that information.-----Jim

This Year Comparison

Average Timer - 6.32%
Average L Fund - 5.93%
L Fund Advantage - 0.39%

Two Year Comparison

Average Timer - 1.43%
Average L Fund - 0.32%
L Fund Advantage - 1.75%

Three Year Comparison

Average Timer - 10.41%
Average L Fund - 12.95%
L Fund Advantage - 2.54%

Four Year Comparison

Average Timer - 17.12%
Average L Fund - 20.20%
L Fund Advantage - 3.08%

The above should have read. Sorry about that!:embarrest:

This Year Comparison

Average Timer: -6.32%
Average L Fund: -5.93%
L Fund Advantage: 0.39%

Two Year Comparison

Average Timer: -1.43%
Average L Fund: 0.32%
L Fund Advantage: 1.75%

Three Year Comparison

Average Timer: 10.41%
Average L Fund: 12.95%
L Fund Advantage: 2.54%

Four Year Comparison

Average Timer: 17.12%
Average L Fund: 20.20%
L Fund Advantage: 3.08%


Note the L Fund Advantage has increased over time.-----Jim

 

[Silverbird]

It's not day trading, we can't trade during the day, like a lot of these pre-noon timers are doing.
http://www.tsp.gov/rates/factsheet.pdf is the latest fact sheet. The question is, how are the traders doing against the different funds, not the averages because we don't have an equal number of people in each of the funds.

This Year Comparison

Average Timer: -6.32%
Average L Fund: -5.93%
L Fund Advantage: 0.39%
Note the L Fund Advantage has increased over time.-----Jim

 

[rokid]

It's not day trading, we can't trade during the day, like a lot of these pre-noon timers are doing.
http://www.tsp.gov/rates/factsheet.pdf is the latest fact sheet. The question is, how are the traders doing against the different funds, not the averages because we don't have an equal number of people in each of the funds.

Silverbird,

My point was to compare the recommended TSP Board approach, i.e. one of the L Funds, against the actual results of the TSPTalk market timers. The TSP Board would not recommend just holding one fund, e.g. the I Fund.

Obviously, I don't have enough data to draw any statistically valid conclusions. However, the results do suggest, that on average, the L Funds may out perform the average TSPTalker over time.

I took an L Fund average because it represents a spectrum of risk - conservative to almost 100% equities. The TSPTalkers also represent a spectrum of risk skewed toward high risk - not too many are conservative investors.

Below are the returns of the riskiest L Fund, the L 2040, compared to the TSPTalk market timer returns. Based on this year's and last year's results, the L 2040 is, not surprisingly, being out performed by the average TSPTalker. The L 2040 is being hammered by the downside of risk. However, over the last four years, the L 2040 has out performed the average TSPTalker.

If the market continues to drop, the L 2040 will continue to sink. However, if the market rebounds, the L 2040 may start to out perform once again. It depends on how long the down turn lasts and whether or not the average market timer can re-enter the market at just the right point. Only time will tell. I'll be interested in the results.-----Jim

This Year Comparison

Average Timer: -6.32%
L 2040: -9.38%
Timer Advantage: 3.06%

Two Year Comparison

Average Timer: -1.43%
L2040: -2.71%
Timer Advantage: 1.28%

Three Year Comparison

Average Timer: 10.41%
L2040: 13.27%
L Fund Advantage: 2.86%

Four Year Comparison

Average Timer: 17.12%
L 2040: 22.23%
L Fund Advantage: 5.11%

 

[VirginiaBob]

Another thing to consider is when this comparison is being made. Picking the point at the bottom of a bear market versus picking a point at the top of a bull market will change these results drastically.

 

[rokid]

Agreed. The long run return is what's important to your retirement.---Jim

 

[Silverbird]

Though I missed most of the I fund rise last year, a number people rode that one and made a profit through more than 1 trades a week and are the ones I heard called the "day traders". These multiple trades into and out of I were supposedly the big problem last year. However, if "dayly trading" on the charts led to losses where did the I traders, who are supposedly the same people as "daily traders" lose their advantage over L? From what I understood their profits were beyond the norm. So how did they do so badly over a two year period?

With L, supposedly you park in a fund based on your time of expected retirement. I started this year with 97% in L income, 3% in L 2030 since L2030 fits my retirement age but I really didn't like the looks of the market. Ended up -0.67% for the first half of January. Still getting myself out of the negative this year; if I had gone for 100% 2030 instead, as my retirement age would indicate I would be even farther in the hole than I am. I have been moving around into G and F this year and have cut my losses to -0.29%, much better than any of the L-Funds, and if I had moved more than 2X a month I would be in even better shape. Frequent IFTers, those of us who like to IFT more than 2x a month, most of us seem to be in G and F right now, which are doing a lot better than sitting in any of the L's, and one would assume with the day traders they are there too, on the whole, since people who are watching the market can see its tanking. So the chart for this year confuses me too.

 

[Silverbird]

By the way, I was in TSP during the 1999-2002 downturn; if I had been in the equivalent of retiring in 2030 - which would be close to the current 2040 - mix of funds, my losses would have been substantial. Since the L funds were created in reaction to the losses from that downturn, I think I should be able to question their validity. The people with a lot of investment in stocks took a bath; some are still making up their losses now.

 

[rokid]

The Long-Term Tallies for 21 March 2008.------Jim

 

[Bullitt]

Look at more than just the date when choosing your L-Fund.

We've consistently tried to warn investors that it's very important for them to ignore the date in the fund's name. They first need to determine their desired asset allocation prior to choosing the appropriate target-date fund to flesh out that asset allocation. Fund selection should be based on the fund's asset allocation and glide path, rather than the date in the fund's name.

One of the big problems with target-date funds is that they're now the default selection in many company retirement plans, with the target-date fund that most closely matches an investor's age being the one selected for them. However, that may not be the best fit for some investors, and it's definitely not the best fit for all investors.

http://news.morningstar.com/articlenet/article.aspx?postId=2686718