The L Funds: Why They Don’t Work

The “Lifecycle Funds” (L Funds) are one of the investment options available to you as a Thrift Savings Plan (TSP) account holders. The funds are based on the time frame in which you are planning to retire. There are currently 5 L fund options available including L-2050, L-2040, L-2030, L-2020, and L-Income. For example, if you’re planning to retire in 2031, you would select the L-2030 fund to invest your TSP dollars.

The TSP L Fund Information Sheet can be found here.


The L funds are based on the idea that the stock funds (C,S, and I) are inherently risky, while the G fund by law cannot have a negative quarter, so has no downside market risk. The theory goes, when you are just starting out in your career, you should be primarily invested in the stock funds since you need to start growing your account and have plenty of time to make up for market corrections along the way. As you progress in your career, the L fund that you select will automatically rebalance each quarter to decrease your exposure to the stock funds and increase your exposure to the G fund. Each quarter your market risk decreases, until your retirement year when the vast majority of your TSP dollars will be in the G fund. See the pictorial of this in the Fund Information Sheet.

The Problem

 The L funds are based on 2 primary concepts. First, the stock funds are inherently risky so, as you progress closer to retirement, you should decrease your exposure to the stock funds.

Second, your personal circumstances (age, years until retirement, financial goals…) should define your level of risk tolerance. Unfortunately, both of these concepts are inherently flawed.

From my perspective there are 2 kinds of risk, Market Risk and Opportunity Cost. When stock prices are at historically overvalued levels the Market Risk is high and Opportunity Cost is low. When stock prices are at historically undervalued levels, Market Risk is low and Opportunity Cost is high. The idea of Market Risk is laid out pretty clearly in the chart below. Over the past 20 years, the S&P500 (C Fund) has been at very elevated risk levels 4 times based on the Relative Strength Index (RSI). It has been at very low risk levels 2 times. The RSI is a Leading Indicator. It gives us a heads up that the market is getting ready to turn. It’s not an exact science but, as you can see below, it’s a very useful indicator.

Market Risk is the risk of losing money. Opportunity Cost is the risk of not making money. Market Risk is very important. It is critical not to take big losses in your TSP account. Equally, and possibly more important, is the need to make the most you can when the market risk is low. The Opportunity Cost in 2003 and 2009 was very high. If you were in the G fund from 2003 to 2007, you gave up the opportunity to double your TSP account. If you’ve been in the G fund from 2009 to present, you gave up the opportunity to almost QUADRUPLE your TSP account.

The stock funds are the vehicle you will use to grow your TSP account. The G fund is an excellent place to hold your TSP dollars when the stock funds are trending down but, the G fund will not increase the value of your TSP account in a meaningful way. The more dollars you have allocated to the G fund over time, the less your overall TSP account will grow.

The stock funds are not inherently risky. The market operates in cycles including times of high risk and times of low risk. Clearly, this risk has nothing to do with your personal circumstances, goals, feelings, or belief systems… The L funds will not help you maximize your TSP account.

A Better Way

Regardless of your age, financial goals, or other circumstances, the way to have the most possible money in your TSP account at retirement is to be fully invested in the stock funds when the market trend is up and fully in the G fund when the market trend is down. This starts with knowing where we are in the market cycle and weighing the market risk to the opportunity cost over time. We use price charts, trend line analysis, Elliot Wave counts, and various technical indicators to help dial in the market tops and bottoms. These tools help but, a fundamental understanding of “risk” is where it all begins.

The greatest “risk” is having too little money in your retirement account (TSP, Annuity, and Social Security) to last thru your retirement years.


– Jerry


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