(L)'s NOT DESIGNED FOR DIVERSIFICATION

[SkyPilot]

Good explanation Burro! I always wondered what would happen if TSP participants decided to make a show of strength and IFT en masse out of the G fund in unison during a period when the fund was being used as a slushy piggy bank for the USGOV?

 

[burrocrat]

Does it not cost TSP/Blackrock/us, etc. administrative fees to rebalance the L funds on a daily basis? Could we do away with them and use that money to buy us a few extra IFTs?

(for the record, I'm sure the answer is No :embarrest

in theory, it only takes 3 people on any given day exercising one of their two ift's to cause the whole tsp portfolio to rebalance. say james goes from 100I to 100F, and burro goes from 100S to 100C, and birchtree moves a little into G. yeah right, like that would ever happen, but you get the picture. every night the tsp must trade a certain percentage in and out of each fund to match the net total holdings of each member. so it doesn't really matter how much any one of us trades or doesn't, every close the funds make one giant trade to rebalance and reflect the aggregate total.

you know why we can't trade every day right? because neither does the tsp. they don't have to. they just need to keep track of your total on a spreadsheet and have enough liquidity to pay out the redemption calls on any given day. do you really think there is a physical stack of shares somewhere with your name on it?

if there was then turbo timmy would have to call you personally and ask your permission to borrow your G fund shares to float the government when it occasionally can't pay its bills. with the promise to pay you back later with any 'gains.' but he never calls.

same with blackrock. they don't really buy or sell anything on our behalf that i can tell. they just maintain a ledger of ficticious ones and zeros that 'approximate' the index funds they purport to follow, and they get to do it after the fact (you trade at noon, they update the spreadsheet at 4:30). now unless they are complete morons how could they not at least break even and likely profit on that size of money and time gap between order and settlement?

not neccesarily a problem, that's how fiat money works. as long as any one can cash out it's ok. but if every one wants all theirs at the same time then it's a huge problem. see ponzi, madoff, social security, et al.

if you think your G fund dollars are yours, or safe, wait until we slip the fiscal cliff and the treasury borrows it to cover the snap and extended unemployment payments in a few weeks. and if the treasury can do it, why not blackrock?

there's not really any money there, just faith and credit, and we've got to believe we'll get our due. that's why we only get two trades per month.

burro econ 401.

 

[Sensei]

Does it not cost TSP/Blackrock/us, etc. administrative fees to rebalance the L funds on a daily basis? Could we do away with them and use that money to buy us a few extra IFTs?

(for the record, I'm sure the answer is No :embarrest

 

[Boghie]

To Be Clear...

If you use any of the 'L Funds' you should be 100% in a specific (one) 'L Fund'. Do not mix that L Fund with any other L Funds or with any of the individual funds. Otherwise, your allocation changes to the point that you really don't know what you have. And, it keeps changing...

 

[Frixxxx]

I think you may have further confused any "young pups" out there, no offense. It isn't clear to me exactly why you say the L funds shouldn't be used for diversification purposes. The L funds are diversified by design. All the funds (C,S,I,F,G) are in each L fund in varying amounts depending on your time line and the closer you are to retirement the amount allocated in the lower risk G fund increases.



Each L fund essentially started at the L 2040 fund, but over time on a quarterly basis changes to the L income fund.

L funds are designed as SkyPilot mentioned....heavy risk up front and reducing risk over the time of the fund. The point SB (2 years ago) was making, if you are going to diversify, don't use the funds that are already diversified....set your specific diversification using the same funds the L Funds use.

The L funds should not be used for diversification as you cannot easily know how it is diversified (constant re-balancing, etc.) The Thrift Board promotes it as a "set and forget" tool, not a diversification tool. While it is diversified, it is not diverse for the sake of diversity, but rather designed for long term risk exposure management. The confusion is for those who wish to diversify in the traditional sense with a common understanding will not accomplish this goal by using an L fund strategy. To maintain a specific balance in TSP, you must do so manually, and often.

Great post SkyPilot! The thing people tend to forget is the risk near the end of the fund is mostly securities and bonds. And many I know wonder why they miss all the moves.

 

[SkyPilot]

The L funds should not be used for diversification as you cannot easily know how it is diversified (constant re-balancing, etc.) The Thrift Board promotes it as a "set and forget" tool, not a diversification tool. While it is diversified, it is not diverse for the sake of diversity, but rather designed for long term risk exposure management. The confusion is for those who wish to diversify in the traditional sense with a common understanding will not accomplish this goal by using an L fund strategy. To maintain a specific balance in TSP, you must do so manually, and often.

I think you may have further confused any "young pups" out there, no offense. It isn't clear to me exactly why you say the L funds shouldn't be used for diversification purposes. The L funds are diversified by design. All the funds (C,S,I,F,G) are in each L fund in varying amounts depending on your time line and the closer you are to retirement the amount allocated in the lower risk G fund increases.



Each L fund essentially started at the L 2040 fund, but over time on a quarterly basis changes to the L income fund.

 

[Globalpack]

I think you may have further confused any "young pups" out there, no offense. It isn't clear to me exactly why you say the L funds shouldn't be used for diversification purposes. The L funds are diversified by design. All the funds (C,S,I,F,G) are in each L fund in varying amounts depending on your time line and the closer you are to retirement the amount allocated in the lower risk G fund increases.

To make this even more complicated, the (L)
Funds are rebalanced on a daily basis AND their Allocations will be
changed on a Quarterly basis.

Each L fund essentially started at the L 2040 fund, but over time on a quarterly basis changes to the L income fund.

 

[Guest2]

The (L) FUNDS should not be treated as if they are similar to the
(C)-(S)-(F) or (I) Funds. In order to give a good demonstration
of what the (L) Fund does, here's a sample;

If you had $1000 in your account and put 10% in all
the (L) Funds you would have allocated the following
dollar amounts into the (G) Fund come APRIL 2009;

(L)Income=74.0%--->$74.00 to (G)--->$26.00 to Risk Funds= $100
(L)2010=66.25%---->$66.25 to (G)--->$33.75 to Risk Funds= $100
(L)2020=33.00%---->$33.00 to (G)--->$67.00 to Risk Funds= $100
(L)2030=20.12%---->$20.12 to (G)--->$79.88 to Risk Funds= $100
(L)2040=09.12%---->$09.12 to (G)--->$90.88 to Risk Funds= $100

Total Dollars in the (G) Fund would equal = $202.49 or 20.249%
This (G) Allocation could be accomplished by selecting the (L)2030
at 100%. In fact, all the Risk Funds are distributed in the same way
in each of the (L) Funds, but at different percentages. I can't see
how anyone can use the (L)'s for diversification purposes, when its
so difficult to know what's allocated in the (G) Fund, let alone how
much money is at risk. To me, the philosophy goes directly against
the (L) Funds design. To make this even more complicated, the (L)
Funds are rebalanced on a daily basis AND their Allocations will be
changed on a Quarterly basis. I wrote this in order to help others
understand what the (L) Fund should or shouldn't be used for.
(especially the young pups out there, just learning).