TSP 2040 L Fund

The mix is very aggressively slanted to the TSP stock funds and closely matches the more typical "85/15" mix lifestyle portfolios available for investors in other 401k plans. Offering a very aggressive mix of stock and bond funds, the 2040 L Fund might appeal to those investors who are very optimistic about the long term future of the stock market and willing to accept a very aggressive level of market risk in TSP stock funds to reach retirement goals.

The problem with a "buy-and-hold" posture in these more aggressive L Funds is that substantial market losses are likely to be suffered sometime before the final time horizon of the account. Time horizon should not be the ONLY determinant of market risk exposure. An investor in these more aggressive funds are likely to see their patience, persistence and compliance severely challenged at some point or points before reaching the end horizon dates.

Similar portfolios would have fallen by nearly 50% in value over a 2-4 year period during several historical past bear market cycles. While the long time horizons of these funds may allow for recoveries, an investor would need to double the value of their TSP accounts just to break even from the market losses suffered!

Our TSP Pilot posture on these more aggressive "Lifecycle Funds" is that suffering such severe losses in a stubborn "buy-and-hold" posture in these funds is not only unnecessary but actually counter-productive to the intent of the portfolio.

TABLE XXI

As you can see from the numbers, the 2040 L Fund is TSP's most aggressive and risky portfolio. Intended for those far from retirement, the assumption is that you can afford to accept periodic declines of maybe 50% or more in the value of your account, along with very high day-to-day volatility in account values, because you have many years remaining to make up the damage.

Completely unconsidered is the high likelihood that you would pull completely out of this Fund when the markets got really rough for an extended period of time--and usually at the wrong time. In theory, if you stayed with this plan for the years through 2040, you account would span a number of long term market cycles enabling you to reap considerable rewards.

However, it is far more likely that you would pull out of these very aggressive L Funds prematurely when your account started turning sharply south. To make these more aggresive L Funds work for you would require almost consummate patience and fortitude on your part. Otherwise the often costly time spent in these aggressive L Funds may well be wasted and loss producing.

The extremely high volatility of the stock-heavy 2040 L Fund can readily be seen in the numbers. You would have been required to patiently sit through a decline in your account value of nearly one-third over three years. Not very likely when it's your hard earned contributions going down the tube. In fact the ultimate measure of risk and reward, the Ulcer Performance Index (UPI of 0.5) was actually the lowest (along with the aggressive 2030 L Fund) of all the TSP Lifecycle funds.

The TSP Pilot Standard Portfolio, over the same period, provided double the return with less than half the draw-down risk (Mdd) of the conservative 2010 L Fund!

Our basic timed 2040 L Fund alternative again improved the return while cutting the risk in half. In fact the long term timed 2040 L Fund risk adjusted performance, as measured by the UPI, was more than three times the performance of the standard 2040 L Fund! Again, professionally timed funds always reduce risk exposure and usually improve return as well--you get more "bang-for-the-buck."

Again, the central idea is to maximize the annual return and UPI of your TSP fund investments while minimizing the market risk of loss (Mdd and UI). The bottom line is that the marginally greater performance of these more aggressive, untimed and static L Funds simply was not worth the risk of loss required to remain invested in them.

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