We’ve talked about steps 1-5 to crush the Thrift Savings Plan (TSP). Now we move on to the final step (unless I think of more), step 6 – rebalance annually.
What is Rebalancing?
Let’s say that your desired TSP asset allocation is 70% stocks and 30% bonds. After the last year, though, stocks earned more than bonds and now you’re sitting at 85% stocks and 15% bonds. In order to rebalance back to your desired asset allocation, you’d sell approximately 15% of your stocks and buy bonds, restoring your desired asset allocation. It’s that simple.
Why Should You Rebalance?
If you don’t, you may be assuming more or less risk than you desire.
Also, by rebalancing you force yourself to sell what has overperformed and buy what has underperformed. Although this seems counter-intuitive because you are selling what has given you the largest return, by doing this you are systematically selling high and buying low. When left to themselves, investors typically buy high and sell low, the opposite of what you want to do. Rebalancing forces you to do it right.
How Often Should You Rebalance?
Vanguard has researched this, and you can read their full report here:
Their conclusion is:
We conclude that for most broadly diversified stock and bond fund portfolios (assuming reasonable expectations regarding return patterns, average returns, and risk), annual or semiannual monitoring, with rebalancing at 5% thresholds, is likely to produce a reasonable balance between risk control and cost minimization for most investors.
In other words, you rebalance annually or semiannually (twice per year) whenever your current asset allocations are off by 5% or more from your desired allocations. If the current and desired allocations are within 5% of each other, you do nothing.
How Do You Rebalance in the TSP?
You just log on and do what they call an “interfund transfer” or IFT. You can read all about it on this page from the TSP website.
Because you are doing it in a tax-advantaged retirement account, there are no expenses, fees, or taxes associated with rebalancing (unlike if you were rebalancing a taxable account).
You can only do it twice per month without restrictions, but since you are smart you are only doing it once per year anyway.
Do You Need to Rebalance With Lifecycle Funds?
No, you don’t. This is one of the major advantages of the L funds. If you are hitting the easy button on your TSP and just using a Lifecycle fund, you don’t need to rebalance…EVER!
That’s It. Crush the TSP!
That’s the final step to crush it in your TSP account. Read the whole series, maximize your TSP contributions, and get rich in the military.