Rebalancing Your TSP

I hope you have an investment plan. And just so we are still clear, “Making as much money as I can in the market” does not constitute a plan. That’s a wish. A plan consists of actionable steps based on your current stage of life, your goals, level of risk tolerance, etc. I’ll paraphrase the great Peter Lynch when he says something to the effect of “You need to be able to explain why you invest the way you do, and I just know this sucker is going up is not good enough.”

Part of an investment plan includes rebalancing the investments from time to time. I get a lot of questions on rebalancing, so let’s take some of the mystery out of it.

Rebalancing. Sounds complicated. It’s not. Well, I guess it could be. We could dive deep into all kinds of math and formulas, but there is no need to do that for the TSP. Like most other things with the TSP, this is fairly straightforward.

What is it?

Regardless of what percentage you have in the different funds of the TSP, those percentages will change through no fault of your own.

Example #1. Let’s say you want to be 70% C and 30% G, so you make that election in the interfund transfer page. But over time, those percentages change as the different funds grow at different rates. For example, if you made this switch in the beginning of 2019, you would have a very different balance at the end of 2019 after the C Fund went up 31% and the G Fund only went up 2%.

If you wanted to keep 30% in the G Fund, you would have to rebalance the funds to get them back in line. By December 2019, the account would be something like 75% C, 25% G, depending on if you were making contributions and where they went to. If you had elected 100% of your new contributions to go into the C Fund, then you’d be even more off of your target of 70/30.

Example #2. Another example would be someone in retirement who would like to keep say, no more than $500,000 in the market, out of their $700,000 overall balance. Assume the market does very well and the total is now $900,000 with $700,000 in the market. That person may want to move some from the market funds (C/S/I) to the bond funds (G, F) to restore, or rebalance, the account to their original goal of only keeping $500,000 invested in stocks.

Example #3. One last example. A retiree never read my barbell paper and doesn’t split their TSP so that some goes into a private IRA. But this retiree still wants to only pull from the G Fund during down years and the C Fund during the up years. TSP won’t be that cooperative. Currently, TSP won’t give you the choice to tell them where to pull your withdrawals from. If you are 60% C and 40% G, and want to withdraw $10,000, the TSP will take it proportionately across your accounts. In other words, they’ll pull $6,000 from your C Fund and $4,000 from your G Fund. You may not like this. This may be March of 2020 and you aren’t thrilled about selling those C Fund shares at a multi-year low. You would rather pull from the G. TSP would rather you didn’t. And hey—guess who gets their wish?

This retiree may want to rebalance those shares after the withdrawal is completed so that the $6,000 he pulled from the C Fund gets replaced by $6,000 from the G Fund. That has the effect of essentially pulling $10,000 from the G Fund. Once the withdrawal is done, that retiree goes back into the TSP and rebalances by reducing his G Fund balance by $6,000 and increasing his C Fund balance by $6,000. He replaced the C Fund shares that he sold low. And he prays they didn’t go back up before he repurchased them.

Anyway, that is rebalancing. Moving your TSP funds around to get back to your target ratio when the amounts get out of whack.

How often do you do this?

This is totally up to you. Understand that you can drive yourself crazy with this. Literally every single day, your TSP becomes “unbalanced”, or off of your target goal. As I write this today, the C Fund is down almost 3%. That’s $15,000 on a $500,000 balance. I don’t suggest you worry about day to day swings. If you did, 2020 would drive you insane. Also, remember you’re only allowed 2 interfund transfers a month anyway (more if you are moving money INTO the G). So you couldn’t rebalance daily even if you wanted to.

Let’s talk about some very basic strategies for the DIY-er. We’ll go from the most obsessively involved to the most time-friendly methods.

Monthly

This is for the very involved. I’ll just say right off the bat, I don’t recommend this. Keeping an eye on the TSP and the markets is one thing, but constant tinkering with it can often lead to underperforming. The one time I would say this might be for you would be if you are retired, receiving monthly payments, and are trying to simulate pulling money from just one fund. You would be Example #3 above and would have to constantly put back money from the fund you didn’t want to pull from. This is quickly going to become a pain.

I would prefer you research the Barbell Strategy rather than constantly have to adjust your TSP monthly, but to each their own.

Quarterly

This is more common. Once a quarter take a look at your TSP and see how it performed, and if it is over a certain threshold out of whack (say 5%), then maybe rebalance it. Four times a year is not too time-consuming, and you keep an eye on things. If you really like tracking that TSP balance and knowing exactly what’s in there, this might be for you. This is the approach the TSP L Funds take—they rebalance every quarter.

Semi-annually

Some financial planners will recommend you look at your investments in January and July and rebalance accordingly. Or June and December. The months are up to you.

Annually

This is probably the most common, if we were to poll a bunch of advisors. But I don’t really have any kind of hard numbers so maybe I’m wrong. This is not very time consuming, and it helps you not to get too involved in the swings throughout the year, but it still keeps you from getting too far off your goal. It also gives you a chance to re-evaluate your goals. After all, you are one year closer to retirement if you’re still working, and maybe you want to start gradually becoming more conservative with your percentages.

The other advantage to this if you are retired and making withdrawals is that you can move your money into the account you will draw from for the upcoming year. Let me walk you through that:

You’re retired. You’re 57 years old. And you’ve got your barbell set up: 30% in TSP G and 70% in a private IRA SP 500 fund (basically the C Fund in the private sector). Let’s say it’s January 2020. Last year, the private IRA portion earned a 31% return. So we already know we aren’t pulling from the G Fund in 2020. No reason to! Let’s take our 2020 withdrawals from the SP 500 profits. Maybe we need $24k for all of our 2020 withdrawals ($2k a month). Well, we’ll rebalance, by moving at least $24k from the IRA back into the TSP G Fund. We’ve protected, or locked in, an entire year’s worth of withdrawals, and we’ll just pull right from the TSP at $2k a month.

None of us would have known it at the time, but that would have been the absolute PERFECT thing to do for 2020 since the market crashed shortly thereafter. (Even now, as we sit in September, it’s still like one of those rickety Carowinds roller coasters of my youth—bouncing us all around and giving us headaches and queasy stomachs.) You would have protected all of your monthly withdrawals for 2020, and could just sit back during quarantine and let the market do whatever it wanted to do while everyone else lost their minds.

Those are rebalancing strategies based on time. There is also a strategy based on amounts.

This theory says you rebalance every time the proportions get really off, regardless of where we are in the year. For example, March 2020 happens and you lose 10% in a week. If you had set 10% as your threshold, you’d rebalance immediately, and not wait for the end of the month, quarter, or year. Then if it went up 15% in the next few weeks, you’d rebalance again. Down 10%, rebalance. And so on.

Nothing wrong with this strategy—again, it’s your money. But in a year like 2020, you may be driving yourself nuts trying to stay on your goal percentage. There have been some HUGE swings in very short periods of time.

This strategy could also apply to dollar amounts, not percentages. For example, you want to keep at least $300k in the market. If you lose a self-determined amount (say $50k), you’d immediately rebalance to buy another $50k in the C/S/I to keep your target $300k in stocks.

How do you do it?

This is probably the easiest part. You log into your TSP and under “Online Transactions” on the left, you will see the option “Interfund Transfers”. Click on “Request Interfund Transfer” and you will be taken to a page where you enter the percentages you wish to allocate to the different funds. TSP works on percentages, not amounts. In other words, you HAVE to enter a percentage, and those percentages have to total 100. So if you want to allocate a certain dollar amount, you’ll have to figure out what that will be in a percentage and then enter that percentage. A little inconvenient but you can get there if you want.

If you request an interfund transfer prior to noon Eastern time, that will be processed at the end of that same day (assuming the market is open). If you wait until after noon, your transfer will based on the following day’s closing prices. Please realize that TSP does not trade during the day. All transactions are based on the closing prices for the market for that day. So, if the market’s really high around noon, you can’t enter a trade then and catch that higher price. Your “trades” will either be based on today’s closing prices, or the next day’s closing prices.

Also remember that making the interfund transfer does NOT change your allocation percentages. You have two things you can control in your TSP: where the money already in the account goes, and where the money that will go into the account in the future goes. Those are two separate elections and one does not affect the other. If you want to move the money around that is already in the account, you request an interfund transfer. If you want to change where future contributions go, you click on “Contribution Allocations”. That gets confused sometimes by TSP users and I get questions on it.

What if I never want to fool with any of this?

Well, as I see it you have two options: 1.) Let the account grow however it grows, or 2.) Invest in the L Funds. The L Funds do the rebalancing for you. They change every quarter, both to keep their desired ratio, but also to get a bit more conservative each quarter as you age toward the target date. There is a lot to be said for the L Funds. If it weren’t for the fact that they all contain at least a bit of the I Fund, I’d be much more of a supporter. They are the ultimate “set it and forget it” investment, and for some of you, that may be exactly what you are looking for. I’m anxiously awaiting the new I Fund to see how that will fit into the lineup.

Advantages/Disadvantages

Let’s close with some pro’s and con’s of rebalancing.

Pro’s

• Greater control and knowledge of where your account is

• Helps you develop a real financial plan

• A chance to re-evaluate goals, objectives, and risk tolerance periodically

• Helps to instill discipline and not rely on “feelings” about the market

Con’s

• Can be time-consuming if you’re rebalancing too often

• Can lead to too much involvement or stress about how the account is performing

Summary

Rebalancing is not that hard. Hopefully this has helped you understand what it is and why someone would do it. This is not market timing per se. We are reacting to the market swings, true, but not because we are trying to predict what the market is going to do. We are simply adjusting our investments to keep them in line with our goals, despite what the market has done. I hope everyone understands that distinction.

If you choose to rebalance, there are different strategies you could adopt. I’ve presented a number of them. There is no right answer, however. It is what works best for your situation. If you’d like my opinion, I prefer the once a year rebalancing. However, I haven’t had to actually do this yet, since I was 100% C until late last year. Once 2020 is finally in the books (can I get an amen?!), I’ll take a look and rebalance back to my personal target goal of 70% C, 30% G.

If you want to avoid all of this, pick an L Fund and go with it. Or let the account grow however it grows.

Finally, I’ll end how I started: Have an investment plan, people!

Disclaimer: You can lose a lot of money in the investment arena. And cause yourself some serious tax problems. Please seek professional help for your investment decisions and plans. And just so we’re clear: this paper is not professional help. It’s just providing you a basis of knowledge to discuss this with the professional of your choice. Nothing in here is investment advice, just education. Personal finance is very personal and you should discuss your specific situation with someone who can help guide you to what is best for you.