Cruise control investments
October 7th, 2005 | by
mbhunter |
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The Federal Government recently introduced the L funds into their Thrift Savings Plan (TSP) program — basically the government’s version of the 401(k). Tax deferred, partially matched contributions.
The L funds — billed as putting your retirement on “cruise control” –automagically adjust the distribution of monies as you near retirement, gradually shifting from historically more aggressive investments to historically more conservative investments.
So not only does the fund diversify your investment, it reallocates it for you, too!
This will be great, if it works. If it doesn’t work, it won’t be so great.
I can see it backfiring. There are only 4 target retirement dates to choose from. This means large amounts of reallocation at the same time — think sudden buying and sudden selling. It tends to make the parts of the fund bought more expensive, and the parts of the fund sold more cheaply. Not the best way to maximize returns.
That, and it’s one more investment muscle that is encouraged to atrophy. Why take away the need for people to think about their reallocation strategy? Having automatic pre-tax payroll deductions that are matched is a smart thing to do, but you have to keep tabs on where the money is now, and what the big picture is for your time horizon. Letting someone else paint your big picture is risky — the picture might not go with your living room set. Bonds are not always a more conservative investment than stocks; if stocks are cheap and bonds are expensive (interest rates are low), then stocks are the better investment, not bonds. But if you’re nearing retirement, you can be sure that you’ll have a lot of bonds and fixed income shares in your L fund instead of stocks, unless you take the reins yourself and boldly turn away those bonds.
Cruise control can make driving easier. Just watch where you’re going when you take your foot off the accelerator, and keep your foot ready to step on the brake!
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4 Responses to “Cruise control investments”
By Sam on Oct 17, 2005 | Reply
The purpose of the L fund is for people who don’t want to be involved in deciding how to allocate to the other funds. It serves as a better “default” choice than the G fund, which is probably what most un-knowledgable people would choose to invest in. It is a better alternative than someone putting everything in the G fund and ending up with a tiny retirement.
Someone with interest and knowledge in investing would probably choose their own allocation from among the F,G,C,I and S funds, and be better off.
By mbhunter on Oct 18, 2005 | Reply
Sam, very good points — thanks for your comments.
I suppose I didn’t mention in the article that the changing allocations are not a bad idea in themselves. I’m sure also that the L funds are reallocated according to traditional, common-sense principles of risk and reward, and it may indeed be better than just sticking everything in G. My point was that you should always monitor your investments, and exercise your “veto power” over the allocations if necessary. You always have the option of having someone else handle your investments, but no one cares how they perform as much as you do.
Another note: If we voluntarily contribute 5% through TSP, we get 5% matching — 1% automatic and 4% TSP. So regardless of how well the funds do, it’s almost assured that you’ll be ahead because the government chips in the same amount that you voluntarily contribute in this case.