Which L Fund?

[yakers]

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I will be 55 this year and under CSRS. I chose the L2020 TSP fund for new contributions based on hoping not to draw on it until MRD time. In my thinking, since I'm under CSRS I can be a bit for aggressive in choosing an L fund. Do others align their target fund choice to age 55, 65, 70 or when you expect to start drawing down?

 

[Birchtree]

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Yakers,

If you have the innate ability to discern the future then an L fund is a reasonable option. However at your distinguished age you really should be taking some risk and growing your account. Remember, TSP is not all that risky. You should be fairly comfortable with the ability to assume larger more concentrated positions. This way you are afforded the possibility of making some faster gains. And of course it works in reverse real well also. But if you get into a situation of side ways consolidations using your allocation contributions to dollar cost average your prices helps build more shares at important bottoms with better pricing options.

We have now been in a two year sideways consolidation - purging the first 3000 point run in the Dow. If 1995 is just around the corner - that was a great move- then the time to be on board for the next 3000 point move is now. Just MHO.

 

[Rolo]

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I agree.

 

[rokid]

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yakers wrote:

Do others align their target fund choice to age 55, 65, 70 or when you expect to start drawing down?

You choose the fund that corresponds to your draw down date, or later.It depends on whether investment volatility or inflation is the greater risk. Since I'mCSRS and my wife is younger than I am,her drawdown date is way in the future. :^

 

[rokid]

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Birchtree wrote:

Remember, TSP is not all that risky.

I wouldn't take a concentrated position in any of the equity funds. Since 2000, the F Fund has provided the best average and annualized (log) return - whoda thunk it! The C Fund has done poorly, to say the least.Although the I Fund's average return is positive, its compound, or log return, is negative.Finally, the S Fund is just barely above water for the decade. Maybe those poor smucks with 100% G Fund aren't so dumb after all.:^


Average Log Return Std Dev

G Fund 5.04 5.04 .93

F Fund 7.79 7.75 3.45

C Fund -0.75 -2.34 20.26

S Fund 3.54 1.07 26.31

I Fund 1.17 -1.40 26.32

 

[Birchtree]

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Ah yes, the disciplined approach of dollar cost averaging - it hurts so good all the way down to the bottom - one would rather not buy all the way back up - but that is what discipline does - it has been my saving grace for many years in many types of storms. Let's see what the next 2.5 months bring - if we piddle around at these levels the sacrifice is I'm getting much lower prices adding to my share base while I wait for the sun to shine again. Sometimes the longer it takes the greater the opportunity when the situations improve. There are a number of cycles putting in bottoms in 2006 that could be problematic - so patience and dollar cost averaging are the keys to a better performance going forward.

Acknowledging that losses are part of investing is one thing; taking and accepting those losses in the markets is something else entirely. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future. That's why I like to leave my dollar cost averaging up to the fate of time - it's out of my hands.

 

[vicky]

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rokid wrote:

I wouldn't take a concentrated position in any of the equity funds. Since 2000, the F Fund has provided the best average and annualized (log) return - whoda thunk it! The C Fund has done poorly, to say the least.Although the I Fund's average return is positive, its compound, or log return, is negative.Finally, the S Fund is just barely above water for the decade. Maybe those poor smucks with 100% G Fund aren't so dumb after all.:^

Average Log Return Std Dev

G Fund 5.04 5.04 .93

F Fund 7.79 7.75 3.45

C Fund -0.75 -2.34 20.26

S Fund 3.54 1.07 26.31

I Fund 1.17 -1.40 26.32

Rokid

Could you indulge this uneducated member regarding the implications of your post? I'm totally confused by the numbers you posted and what to conclude by them. For instance, I read about members having 8-10% returns on their TSP accounts. Are you saying that these 8-10% returns do not produce actual dollar increases in their accounts? If it's not too much trouble could you give me the formula for compounding?

vicky

PS

I would appreciate anyone else's explanations or inputalso.

 

[rokid]

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Vicky,

The first column is the arithmetic average for each of the funds 2000-2004, i.e. sum the returns and divide by 5. The "log return" column is the average compound return or annualized average return for the period 2000-2004.It's also known as the geometric return. I don't know why it has so many names! It's like a character in a Russian novel! :X

The annualized average returnis the actual return you receive on your investments. It is always lower than the average annual return (arithmetic average return). The more volatile the investment, the lower the annualized average return in comparison with the average annual return. For example, the G Fund average annual return and the annualized average return are almost equal (I'm assuming if you take the calculations out enough decimal places that the annualized average return will be smaller). On the other hand, the I Fund is so volatile that the annualized average return is negative even though the average annual return is positive.

The formula to calculate the annualized average return (Log Return) is:

[suB]5[/suB]
Log Ret = √(r[suB]1[/suB]+1)*(r[suB]2[/suB]+1)*(r[suB]3[/suB]+1)*(r[suB]4[/suB]+1)*(r[suB]5[/suB]+1) , i.e. add 1 to each year's average return, r[suB]n[/suB], multiply the factors together, and take the 5th root.

It's just like compound interest in reverse. Essentially, the annualized average return is the interest rate you'd have to use to generatethe same 5 year total return. The Excel function to calculate it is called Geomean.I used Geomean to compute the values. The spreadsheet is attached.

Conclusions:

1. If you held thestock funds for the entire period 2000-2004, you lost money aftertaking inflation into consideration. If you held the C and Ifunds, you lost money before taking inflation into consideration.For example, $1 invested in the C Fund in Jan 2000, returned $.89 in Dec 2004. A dollar invested in the F Fund returned $1.45.

2. Volatility matters! The greater the volatility, the greater the difference between the averageannual return and the annualized average return. The latter return is what matters. The former is what everyone quotes.

3. Stocks don't always provide the best returns. In the short term, bonds sometimes provide a better return. In the long run, stocks provide a superior return - or so I'm told.

If my attempt at an explanation isa failure, check the web andExcel for better definitions.Finally, the concepts aren't obvious. However, I believe they're important.

 

[vicky]

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rokid wrote:

If my attempt at an explanation isa failure, check the web andExcel for better definitions.Finally, the concepts aren't obvious. However, I believe they're important.

Your explanation is more than adequate. Not that I will not have to sit down and think about it for awhile. Thank you ever so much - really, really, really!

vicky

 

[cowboy]

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Hi Vicky! I wouldn't be to concerned about the statistics of the markets in the past as I would be watching my pocket book in the present. Obviously Rokid is into the statistics of the market and is an intellegent person but the market will fleece anyone as it does not care whom it devours.

 

[rokid]

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cowboy wrote:

Obviously Rokid is into the statistics of the market and is an intellegent person but the market will fleece anyone as it does not care whom it devours.

Actually, I'm interested in figuring out what works in investing, i.e. no idle interest in market statistics. Unfortunately, almost allinvestment researchinvolves mathematical andstatistical arguments - which I struggle to understand. In addition, the only solid investment data available is historical.

Since the future is unknowable, my accumulation time is limited,and I'm not a Warren Buffet or a Peter Lynch,myapproach is to invest in such a way as to optimize my probability for success and minimize my probability for disaster, i.e. play the odds.Once I retire, the challenge is to make to money last until.....I don't need it anymore!

 

[cowboy]

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rokid wrote:

cowboy wrote:

Obviously Rokid is into the statistics of the market and is an intellegent person but the market will fleece anyone as it does not care whom it devours.

Actually, I'm interested in figuring out what works in investing, i.e. no idle interest in market statistics. Unfortunately, almost allinvestment researchinvolves mathematical andstatistical arguments - which I struggle to understand. In addition, the only solid investment data available is historical.

Since the future is unknowable, my accumulation time is limited,and I'm not a Warren Buffet or a Peter Lynch,myapproach is to invest in such a way as to optimize my probability for success and minimize my probability for disaster, i.e. play the odds.Once I retire, the challenge is to make to money last until.....I don't need it anymore!

I hear ya buddy! I think everyone on this board is trying to do the same thing. If you come up with something make sure to let us know. I know where your going but I have found that statistical and mathematical figures do give us an idea what the past does, it leaves out the all important present human nature response. For example; Wilma is out there circling waiting like a vulture and I have to respond to conserve, somehow or figure out a more irrational strategy.