Rebalancing and the TSP

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Rebalancing and the TSP

Post by kevin.m »

Hey all,

I currently invest just enough to max out my retirement accounts each year (5000 in a vanguard Roth IRA, 17,000 in TSP). I have done some reading on the boards about rebalancing, and have a question that I think might be unique to members with access to the TSP. It seems that the general consensus, at least from my understanding, is that calendar rebalancing is more hands-off, less stressful, but also less effective than band rebalancing. Arguments against rebalancing often usually revolve around the fact that you get taxed when buying/selling to rebalance. This is not the case with TSP; I could rebalance every day for free if I wanted to (and wit wouldn't take more than 2 minutes a day to do it). For now, I was planning on rebalancing once per month, but that got me around to thinking about a hypothetical situation. Say you have 25% invested in bonds, 75% in equity. If the stock markets were to suddenly take a turn for the worst, and you're constantly rebalancing, wouldn't you effectively be funneling all of your money from the bonds into equities, destroying the "safety net" that bonds are supposed to provide relative to equities? Is there a point where you can rebalance too often? I know I should stay the course.. but I'm not even sure which one is considered staying the course.. is it staying hands off, or making sure that your portfolio maintains the proper ratios?


Thanks,
Kevin

Cliff's notes: TSP users can rebalance at their discretion without worrying about taxes. Taking this into consideration, is it a bad idea to rebalance very often? (ex: 1% band, 1 calendar month, or less?)
samF
Posts: 10
Joined: Fri Apr 02, 2010 12:08 am

Re: Rebalancing and the TSP

Post by samF »

Kevin -
Others may be able to chime in on the frequency of rebalancing question. However, as a long time TSP contributor, I've been able to maintain my desired allocations within pre-defined bands simply by directing more of my contributions to the most deficient asset(s) when one asset strays more than 5% from its target value. I'll do a "hard rebalance" if the asset gets more than 25% astray from its target value. Though, I don't recall ever doing this. Simply tweaking the new contribution proportions allows me better sleep knowing the changes are happening gradually.

best,
SamF
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Re: Rebalancing and the TSP

Post by kevin.m »

Sam,

This is what I was planning on doing originally with the first paycheck of every month.. giving me a monthly rebalance. Isn't this a relatively high-frequency rebalance? Could this be detrimental like in the scenario I mention above?

If I have the means to rebalance even more often(between paychecks where you can't do a "soft rebalance), should I do it?

Kevin
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing and the TSP

Post by rkhusky »

You can only rebalance twice per month in the TSP.

If you buy an L Fund, they rebalance for you every day.

You don't pay taxes when rebalancing in your IRA either.
User avatar
Groundhog
Posts: 264
Joined: Mon Oct 24, 2011 7:10 pm

Re: Rebalancing and the TSP

Post by Groundhog »

kevin.m wrote: I could rebalance every day for free if I wanted to
There are limits on interfund transfers, per the TSP:
Interfund Transfer Limits


You can make an IFT at any time, but there are some important limitations:

The first two IFTs of any calendar month may redistribute money in your account among any or all of the TSP funds, including moving your entire balance into the Government Securities Investment (G) Fund.
Subsequent IFTs in the same calendar month can only move money into the Government Securities Investment (G) Fund.

If you have both a civilian and a uniformed services account, these rules apply to each account separately.
Your IFT counts in the calendar month we process it, not in the month you submit it.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing and the TSP

Post by rkhusky »

In terms of frequency of rebalancing, that is a user preference. If you like to keep close track of your investments, you may enjoy rebalancing more often. While there have been studies trying to figure out the optimal rebalancing bands, they are all based on past performance and one would need to assume that future stock market returns will be very similar to past stock market returns for those choices to be valid. 5% bands are common and you don't have to rebalance very often.

If you don't like keeping track of your investments, than rebalancing once a year on a given day is probably adequate. Or putting your investments in the TSP L Funds or the Vanguard Target Retirement funds is any even easier way to go.

There are those who only rebalance out of stocks, not into stocks, because of fears that we may encounter a situation like Japan in the recent past, where the market slowly slides down and never recovers. It is hard to predict the future though and those folks may miss out on some big gains. Or they may look like geniuses.
supersharpie
Posts: 838
Joined: Wed Dec 22, 2010 12:28 pm

Re: Rebalancing and the TSP

Post by supersharpie »

kevin.m wrote:Hey all,

I currently invest just enough to max out my retirement accounts each year (5000 in a vanguard Roth IRA, 17,000 in TSP).
Note that these limits have been increased in 2013. Now you can contribute $5500 to your Roth IRA and $17,500 to your TSP.
User avatar
Don Christy
Posts: 391
Joined: Sun Oct 11, 2009 10:33 pm

Re: Rebalancing and the TSP

Post by Don Christy »

There are numerous threads discussing effectiveness of various rebalancing strategies.

Going from memory here, and not going to look it up this morning, IIRC due to momentum the most effective strategies don't rebalance too frequently. So if using bands, broader bands; if using calendar, once a year?

Do a search and you'll find much to read.

Good luck!
Don
“Speak only if it improves upon the silence." Mahatma Gandhi
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Rebalancing and the TSP

Post by pkcrafter »

According to a TRP study, rebalancing annually appears to be slightly more efficient than no rebalancing or monthly rebalancing.


Image

http://individual.troweprice.com/retail ... -page2.jsp



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Gauntlet
Posts: 199
Joined: Wed Nov 30, 2011 9:06 am

Re: Rebalancing and the TSP

Post by Gauntlet »

Kevin.m, I think you might be over thinking it. A couple thoughts. 1) Consider looking at your IRA, TSP, and other investments together as one portfolio, if you are not already. This might change how frequently you need to rebalance your TSP. 2) In my opinion, if you still want to rebalance your TSP more than once or twice a year than you should choose an L Fund.

I personally rebalance once a year.

P.S. Just saw the above chart. Looking at that is the best advice:)
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing and the TSP

Post by rkhusky »

pkcrafter wrote:According to a TRP study, rebalancing annually appears to be slightly more efficient than no rebalancing or monthly rebalancing.


Image

http://individual.troweprice.com/retail ... -page2.jsp



Paul
I am generally suspicious of results based on a single time period.
FinancialDave
Posts: 1819
Joined: Thu May 26, 2011 9:36 pm

Re: Rebalancing and the TSP

Post by FinancialDave »

If your goal to rebalancing is only to adjust your allocation, once a year is fine (IMO).

IF your goal to rebalance is to improve your actual total return -- their is NO definitive study that says rebalancing will do so.

fd
I love simulated data. It turns the impossible into the possible!
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Re: Rebalancing and the TSP

Post by kevin.m »

Thanks for the answers guys. I'm all for doing less work, and if less work could produce better returns, that's all the better.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Rebalancing and the TSP

Post by YDNAL »

kevin.m wrote:It seems that the general consensus, at least from my understanding, is that calendar rebalancing is more hands-off, less stressful, but also less effective than band rebalancing. Arguments against rebalancing often usually revolve around the fact that you get taxed when buying/selling to rebalance. This is not the case with TSP; I could rebalance every day for free if I wanted to (and wit wouldn't take more than 2 minutes a day to do it). For now, I was planning on rebalancing once per month, but that got me around to thinking about a hypothetical situation. Say you have 25% invested in bonds, 75% in equity. If the stock markets were to suddenly take a turn for the worst, and you're constantly rebalancing, wouldn't you effectively be funneling all of your money from the bonds into equities, destroying the "safety net" that bonds are supposed to provide relative to equities? Is there a point where you can rebalance too often? I know I should stay the course.. but I'm not even sure which one is considered staying the course.. is it staying hands off, or making sure that your portfolio maintains the proper ratios?
A few things, kevin.m,
  1. Use of the word "concensus" is misguided.
  2. Rebalancing should first/foremost is to keep the risk attributes in your portfolio - the calendar has nothing to do with that (other than by chance).
  3. If you accumulate in TSP (and other accounts), NEW contributions should be used to rebalance, for the most part, and it doesn't take much "hands-on" or "stress."
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Dr_McGarvey
Posts: 64
Joined: Tue Feb 23, 2010 6:31 pm

Re: Rebalancing and the TSP

Post by Dr_McGarvey »

I'm re-posting this link for those who might have missed it: [OT link removed by admin LadyGeek]

I'm of the "once-a-year-rebalance" sect, and I argue for a 20% portion to each of the "major" five TSP Funds (unless taking into account non-TSP accounts). The L-Funds do save some work, but thus far their long-term relative performance suffers as compared to a "do-it-yourself" approach.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing and the TSP

Post by rkhusky »

Dr_McGarvey wrote:I'm re-posting this link for those who might have missed it: [OT link removed by admin LadyGeek]

I'm of the "once-a-year-rebalance" sect, and I argue for a 20% portion to each of the "major" five TSP Funds (unless taking into account non-TSP accounts). The L-Funds do save some work, but thus far their long-term relative performance suffers as compared to a "do-it-yourself" approach.
Performance slightly lower, but volatility substantially reduced?
Dr_McGarvey
Posts: 64
Joined: Tue Feb 23, 2010 6:31 pm

Re: Rebalancing and the TSP

Post by Dr_McGarvey »

rkhusky wrote:
Dr_McGarvey wrote:I'm re-posting this link for those who might have missed it: [OT link removed by admin LadyGeek]

I'm of the "once-a-year-rebalance" sect, and I argue for a 20% portion to each of the "major" five TSP Funds (unless taking into account non-TSP accounts). The L-Funds do save some work, but thus far their long-term relative performance suffers as compared to a "do-it-yourself" approach.
Performance slightly lower, but volatility substantially reduced?
Indeed, the relative volatility of some of the TSP L Funds' NAV's may be somewhat reduced, but here are the median month-to-month percentage changes for some seven years (I ignore the L 2050 here):

Median Monthly Percent Change
G-Fund 0.30%
F-Fund 0.49%
L Income 0.54%
L 2010 0.78%
L 2020 1.08%
L 2030 1.17%
C-Fund 1.27%
I-Fund 1.31%
L 2040 1.32%
S-Fund 1.85%
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Re: Rebalancing and the TSP

Post by kevin.m »

I'm not so sure if I understand now..
If my goal is to rebalance annually, should I be trying to adjust my ratios with every contribution(every paycheck)? Or should I contributing my money at a constant ratio throughout the year (25% of new money goes to bonds, 75% stocks) and fix the percentages when my year is up?
Basically I'm confused about whether that "soft" rebalance (via contribution) is considered to be a rebalance at all (as opposed to going in and actually transferring money from one fund to another).


Right now the plan is just to leave my future contributions at 25% bonds and 75% stocks, and to just adjust my percentages at the end of the year if they're out of whack.


edit- I probably should have put this in the help section, my apologies.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing and the TSP

Post by rkhusky »

kevin.m wrote:I'm not so sure if I understand now..
If my goal is to rebalance annually, should I be trying to adjust my ratios with every contribution(every paycheck)? Or should I contributing my money at a constant ratio throughout the year (25% of new money goes to bonds, 75% stocks) and fix the percentages when my year is up?
Basically I'm confused about whether that "soft" rebalance (via contribution) is considered to be a rebalance at all (as opposed to going in and actually transferring money from one fund to another).


Right now the plan is just to leave my future contributions at 25% bonds and 75% stocks, and to just adjust my percentages at the end of the year if they're out of whack.


edit- I probably should have put this in the help section, my apologies.
It all depends on how often you want to calculate your current asset allocation (AA) values. Do you want to compute them every paycheck to see if you are getting out of whack? Do you want to compute them once a year and readjust then, if necessary?

I don't change my future contributions anymore (evenly divided amongst the 5 individual funds), because it is just easier to transfer the money and immediately get my AA back to what I like, rather than wait 3 or 4 months. Plus, the "soft" rebalance method really has no added benefit, except in a taxable account.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Rebalancing and the TSP

Post by YDNAL »

kevin.m wrote:I'm not so sure if I understand now..
If my goal is to rebalance annually, should I be trying to adjust my ratios with every contribution(every paycheck)? Or should I contributing my money at a constant ratio throughout the year (25% of new money goes to bonds, 75% stocks) and fix the percentages when my year is up?
Basically I'm confused about whether that "soft" rebalance (via contribution) is considered to be a rebalance at all (as opposed to going in and actually transferring money from one fund to another).


Right now the plan is just to leave my future contributions at 25% bonds and 75% stocks, and to just adjust my percentages at the end of the year if they're out of whack.


edit- I probably should have put this in the help section, my apologies.
Kevin,

Initially, smaller portfolios are HIGHLY impacted by new contributions. So if you have $10,000 in TSP and contribute $17,500 this year, those new contributions are significant to maintain your desired AA.
  • If you use rebalancing bands, it takes quite large(r) Market movements to require rebalancing.
  • For instance, a 50/50 Stock/Bond AA needs a -25% drop in Stocks to move it to 43/57 falling outside a 5% Band.
  • Do NOT worry about "rebalancing" with every paycheck - you must use common sense.
Later, with larger portfolio the new contributions are much less impactful but should continue helping in the process to maintain your risk profile. Generally, that should be the main task at hand (maintaing desired risk profile).
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
User avatar
Sbashore
Posts: 952
Joined: Wed Feb 20, 2008 9:38 pm
Location: USA

Re: Rebalancing and the TSP

Post by Sbashore »

Gauntlet wrote:Kevin.m, I think you might be over thinking it. A couple thoughts. 1) Consider looking at your IRA, TSP, and other investments together as one portfolio, if you are not already. This might change how frequently you need to rebalance your TSP. 2) In my opinion, if you still want to rebalance your TSP more than once or twice a year than you should choose an L Fund.

I personally rebalance once a year.

P.S. Just saw the above chart. Looking at that is the best advice:)
Kevin.m, I'm in the situation where the TSP makes up a portion of my whole portfolio. I use an excel spreadsheet and look at all my accounts as one portfolio. I rebalance according to a combination of frequency and tolerance bands ( go out of tolerance, rebalance at the end of the month). I rarely have to rebalance the TSP holdings. I apply the same rebalance rules to the TSP as I do any other account in my portfolio. I agree the above chart is good advice.
Steve | Semper Fi
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Re: Rebalancing and the TSP

Post by kevin.m »

Sbashore wrote:
Gauntlet wrote:Kevin.m, I think you might be over thinking it. A couple thoughts. 1) Consider looking at your IRA, TSP, and other investments together as one portfolio, if you are not already. This might change how frequently you need to rebalance your TSP. 2) In my opinion, if you still want to rebalance your TSP more than once or twice a year than you should choose an L Fund.

I personally rebalance once a year.

P.S. Just saw the above chart. Looking at that is the best advice:)
Kevin.m, I'm in the situation where the TSP makes up a portion of my whole portfolio. I use an excel spreadsheet and look at all my accounts as one portfolio. I rebalance according to a combination of frequency and tolerance bands ( go out of tolerance, rebalance at the end of the month). I rarely have to rebalance the TSP holdings. I apply the same rebalance rules to the TSP as I do any other account in my portfolio. I agree the above chart is good advice.

I use a similar google docs spreadsheet where I can plug in my current values and easily edit my contribution percentages right before I get my paycheck so that I get a "soft rebalance". The question that I'm getting at is should I be doing that every month? Would that be counted as me rebalancing every month? Or should I just leave my contribution percentages at a constant value and not touch anything except for once a year.

Let's see if I can further distill this question...

If, according to the chart above, rebalancing once a year is slightly more effective than no rebalancing or monthly rebalancing, my question is this: For that "rebalance once a year guy", what is he doing with his contributions throughout the year? Does that rebalance once per year include or exclude "soft" rebalances(via tailoring your contributions).

Get what I'm asking?
stan1
Posts: 14246
Joined: Mon Oct 08, 2007 4:35 pm

Re: Rebalancing and the TSP

Post by stan1 »

I use new contributions to rebalance over the course of the year.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
User avatar
Sbashore
Posts: 952
Joined: Wed Feb 20, 2008 9:38 pm
Location: USA

Re: Rebalancing and the TSP

Post by Sbashore »

kevin.m wrote:
Sbashore wrote:
Gauntlet wrote:Kevin.m, I think you might be over thinking it. A couple thoughts. 1) Consider looking at your IRA, TSP, and other investments together as one portfolio, if you are not already. This might change how frequently you need to rebalance your TSP. 2) In my opinion, if you still want to rebalance your TSP more than once or twice a year than you should choose an L Fund.

I personally rebalance once a year.

P.S. Just saw the above chart. Looking at that is the best advice:)
Kevin.m, I'm in the situation where the TSP makes up a portion of my whole portfolio. I use an excel spreadsheet and look at all my accounts as one portfolio. I rebalance according to a combination of frequency and tolerance bands ( go out of tolerance, rebalance at the end of the month). I rarely have to rebalance the TSP holdings. I apply the same rebalance rules to the TSP as I do any other account in my portfolio. I agree the above chart is good advice.

I use a similar google docs spreadsheet where I can plug in my current values and easily edit my contribution percentages right before I get my paycheck so that I get a "soft rebalance". The question that I'm getting at is should I be doing that every month? Would that be counted as me rebalancing every month? Or should I just leave my contribution percentages at a constant value and not touch anything except for once a year.

Let's see if I can further distill this question...

If, according to the chart above, rebalancing once a year is slightly more effective than no rebalancing or monthly rebalancing, my question is this: For that "rebalance once a year guy", what is he doing with his contributions throughout the year? Does that rebalance once per year include or exclude "soft" rebalances(via tailoring your contributions).

Get what I'm asking?
I get what you're asking. I'm not in the accumulation mode anymore but when I was, I let contributions flow into G and then just rebalanced as normal. However, I was never a "once a year" guy, so I was going by band rebalancing. I'm not sure it makes much of a difference if you're talking about the difference between a once a year rebalance and a more often times a year rebalance for new contributions.
Steve | Semper Fi
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Rebalancing and the TSP

Post by rkhusky »

kevin.m wrote:
If, according to the chart above, rebalancing once a year is slightly more effective than no rebalancing or monthly rebalancing, my question is this: For that "rebalance once a year guy", what is he doing with his contributions throughout the year? Does that rebalance once per year include or exclude "soft" rebalances(via tailoring your contributions).

Get what I'm asking?
I would not put too much weight into that chart. It is a single data point. I can probably find periods where it was slightly better to do monthly rebalancing versus yearly.

Here is a more thorough paper that showed it is probably better to use rebalancing bands rather than calendar rebalancing: http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf.

Soft rebalancing is rebalancing. It requires effort on your part to determine how to adjust your contributions and then to do the adjustment.

Here is an example of what you could do. You want 75 stock/25 bond, so a possible breakout could be 40% C, 25% I, 10% S, 10% F, 15% G. Put your contributions in at this amount also and don't change it. Check your percentages every paycheck. When one of the funds differs by 5%, rebalance. If you pay any attention to the financial news you will find that you don't really need to check that often and will only need to adjust when the Dow drops/gains a couple thousand points.
User avatar
Sbashore
Posts: 952
Joined: Wed Feb 20, 2008 9:38 pm
Location: USA

Re: Rebalancing and the TSP

Post by Sbashore »

rkhusky wrote:
kevin.m wrote:
If, according to the chart above, rebalancing once a year is slightly more effective than no rebalancing or monthly rebalancing, my question is this: For that "rebalance once a year guy", what is he doing with his contributions throughout the year? Does that rebalance once per year include or exclude "soft" rebalances(via tailoring your contributions).

Get what I'm asking?
I would not put too much weight into that chart. It is a single data point. I can probably find periods where it was slightly better to do monthly rebalancing versus yearly.

Here is a more thorough paper that showed it is probably better to use rebalancing bands rather than calendar rebalancing: http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf.

Soft rebalancing is rebalancing. It requires effort on your part to determine how to adjust your contributions and then to do the adjustment.

Here is an example of what you could do. You want 75 stock/25 bond, so a possible breakout could be 40% C, 25% I, 10% S, 10% F, 15% G. Put your contributions in at this amount also and don't change it. Check your percentages every paycheck. When one of the funds differs by 5%, rebalance. If you pay any attention to the financial news you will find that you don't really need to check that often and will only need to adjust when the Dow drops/gains a couple thousand points.
Thanks for the link. Don't know if it helped the OP but it helped me. I've been debating band tolerances for quite a while. This helped. :happy
Steve | Semper Fi
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Rebalancing and the TSP

Post by nedsaid »

I do think a good asset allocation is a vital part of investing.

For some reason, I just don't get too excited about rebalancing quarterly, twice a year, or once a year. I pretty much let things ride and rebalance only if my asset allocations get seriously out of whack. I have rebalanced maybe three or four times since January of 2000. I will also rebalance to take advantage of opportunities provided by the market.

I know the theory of rebalancing. It makes great sense. I wonder if it is a bit overhyped.
A fool and his money are good for business.
User avatar
papito23
Posts: 449
Joined: Fri Jan 06, 2012 5:54 am

Re: Rebalancing and the TSP

Post by papito23 »

pkcrafter wrote:According to a TRP study, rebalancing annually appears to be slightly more efficient than no rebalancing or monthly rebalancing.
Image
http://individual.troweprice.com/retail ... -page2.jsp
Paul
OP: have you ever seen error bars? Look at the difference in the graph. I don't see a lifestyle change or even a major life decision made on the basis of those returns. (EDIT: did not mean this in anyway trying to talk down or be critical... reading again it sounds a little curt - it was not intended to be so at all)

Many of us, certainly myself, would love to have "things to do" that could improve our returns, even just 0.5%/year. But that's difficult, and when possible it is often just plain luck. BH investing is boring. I rebalance in order to deceive myself into thinking I'm being helpful, to scratch that tinkering itch.

Set it. Forget it.
Last edited by papito23 on Sun Jan 13, 2013 2:41 pm, edited 1 time in total.
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Rebalancing and the TSP

Post by YDNAL »

papito23 wrote:Many of us, certainly myself, would love to have "things to do" that could improve our returns, even just 0.5%/year. But that's difficult, and when possible it is often just plain luck. BH investing is boring. I rebalance in order to deceive myself into thinking I'm being helpful, to scratch that tinkering itch.
Fair enough!
  1. You are perhaps a younger BH. Many of us older BH, though, don't rebalance to increase returns or to think we are being helpful; we rebalance to maintain risk based on ability and need for risk.
  2. Personally, I have "a floor" in fixed income investments and (a) if the Stock Market kicks-ass, I have options to do with this extra money as I see fit; but (b) when/if the Stock Market goes in the toilet, it doesn't affect my near-term (3-5 year) objectives nor will the floor ever be intentionally compromised.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
wander
Posts: 4424
Joined: Sat Oct 04, 2008 9:10 am

Re: Rebalancing and the TSP

Post by wander »

YDNAL wrote:we rebalance to maintain risk based on ability and need for risk
+1.
User avatar
Sbashore
Posts: 952
Joined: Wed Feb 20, 2008 9:38 pm
Location: USA

Re: Rebalancing and the TSP

Post by Sbashore »

wander wrote:
YDNAL wrote:we rebalance to maintain risk based on ability and need for risk
+1.
+2 My attitude is to maintain the risk and accept the return(loss) associated with that risk. I love it when I do well, and get uncomfortable when I don't, but I unfailingly stick to my A/A. That's another way of saying 'stay the course' because for me, it's all I can do in a positive way to achieve my investment goals.
Steve | Semper Fi
Sec3inMD
Posts: 21
Joined: Mon Nov 23, 2009 12:08 pm

Re: Rebalancing and the TSP

Post by Sec3inMD »

Asset allocation is critical and rebalancing is important to maintain the proper AA. At 60 years old and a $2.5 million well-diversified investment portfolio (sans some investment real estate) for my wife and myself, including $1 million in TSP, I watch our accounts constantly but take few actions. We keep a 60/40 portfolio or less with almost all bonds in TSP or other tax-favored funds. With retirement looming, we rebalance once or twice a year within TSP to maintain this 60/40 AA. During the year new tax-favored money generally goes to bonds while taxed monies go to stock funds. This generally minimizes the size of any periodic rebalance. When we retire, we might go to a 50/50 portfolio to reduce principal risk but keep some growth so as to pass something on to our children. I guess my point is rebalancing is more important to maintain AA than improving performance. I think you can can improve performance slightly by selling high and buying low once or twice a year, but rebalancing too often and you miss the equity runs that generate much of the investment returns in more patient portfolios.
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Re: Rebalancing and the TSP

Post by kevin.m »

Thanks for all the replies. I think I had the wrong idea about rebalancing, as I viewed it as a tool to improve performance, not control risk. I'm just going to set my future contributions to match my desired AA and sit back and wait. I'll step in if any funds get off by more than 5%.
BrainDoc
Posts: 1
Joined: Sat Feb 02, 2013 9:25 pm

Re: Rebalancing and the TSP

Post by BrainDoc »

Kevin,

I hear you about daily rebalancing (i.e. TSP L funds) theoretically siphoning one's money.

I am definitely not a fan of the L funds due to this fact.

Theoretically, if the market tanked 90% or so (i.e. 1929) over several months, a poor retiree sitting in the L income fund (only 20% stocks) would be left with only 15-20% of their total balance remaining due to daily rebalancing. Some protection the 80% bond allocation offered (false sense of security really)!

I'm much more in favor of manually setting the allocations and manual rebalancing. Most of the studies out there seem to support annual rebalancing (or possibly even less frequently) as being optimal to both mitigate risk and potentially increase returns.

It is interesting that the 5%/25% band rule for rebalancing is commonly touted. This is really just a poor man's momentum strategy being used for rebalancing.

Good luck!

Jason
User avatar
Topic Author
kevin.m
Posts: 26
Joined: Wed Apr 04, 2012 3:20 pm

Re: Rebalancing and the TSP

Post by kevin.m »

Jason,

That's exactly what I meant in my original post about potentially mitigating one's risk aversion by rebalancing too often.

As to rebalancing by band.. I don't really see what that has to do with the momentum strategy.. if anything I would think they're opposites.
User avatar
tadamsmar
Posts: 9972
Joined: Mon May 07, 2007 12:33 pm

Re: Rebalancing and the TSP

Post by tadamsmar »

I rebalance once per year if necessary and I tend to direct my contributions toward rebalancing. The contributions don't impact the principle so I don't worry about any momentum effect there. I don't rebalance more often because I have read that there might a small momentum effect (as you described in the OP).

I wonder if the big drop in 2008-2009 impacted life-cycle funds? If they rebalanced daily then they were pouring more money into equities during the drop. On the other hand, some of that rebalancing would have been very near the bottom, and that would be better than yearly rebalancing on average, like for instance rebalancing in 6/2008 and 6/2009.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Rebalancing and the TSP

Post by YDNAL »

BrainDoc wrote:I'm much more in favor of manually setting the allocations and manual rebalancing. Most of the studies out there seem to support annual rebalancing (or possibly even less frequently) as being optimal to both mitigate risk and potentially increase returns.
How do you control risk if you rebalance, say, in December? As the S&P 500 drops 20% from December 2008 to March 2009's low to increase by near 40% from there by the end of December, how is this controlling risk and increasing returns?
It is interesting that the 5%/25% band rule for rebalancing is commonly touted. This is really just a poor man's momentum strategy being used for rebalancing.
Actually, the "poor man" who rebalanced with bands to control risk (risk cuts both ways), is much less poor than others who used the calendar.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
trrb
Posts: 4
Joined: Fri Nov 29, 2013 6:09 pm

Re: Rebalancing and the TSP

Post by trrb »

Good discussion. For a good while the use of directed contributions slowly tweaked the desired allocation direction. The elevated equities market has pumped the allocation percentages making it a little more likely to use small Interfund transfers to move for example some equity dollars to the G Fund. The problem is the tweaks on Interfund transfer is a guess for the moment. With that in mind, small tweaks seem better considering market volatility.
rj49
Posts: 630
Joined: Tue Feb 22, 2011 11:22 pm

Re: Rebalancing and the TSP

Post by rj49 »

One of the differences with the TSP over regular mutual funds is the non-volatility of the G fund. So you might get less rebalancing benefit, since you're not buying bonds on sale, as you might with a bond fund with negative returns, or take profits as you would, say, in 2008/2009 with a Treasury fund, to rebalance into declining stocks. Then I've always been confused about the compounding effect of the G fund--since it doesn't pay dividends, just steadily adjust the price of the fund upwards, I don't see how you can get a compounding effect if you're not buying more shares, as you would in a tax-advantaged bond or stock account. Two ways to solve the rebalancing angst would be to either just put everything in an appropriate L fund and forget about it, or maximize the free lunch of the G fund in the TSP and then put stocks in a Roth and/or taxable account.
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: Rebalancing and the TSP

Post by placeholder »

rj49 wrote:Then I've always been confused about the compounding effect of the G fund--since it doesn't pay dividends, just steadily adjust the price of the fund upwards, I don't see how you can get a compounding effect if you're not buying more shares, as you would in a tax-advantaged bond or stock account.
The 2% or whatever is on the total value of the current holdings so it doesn't matter whether you have more shares or more valuable shares works the same way so try some examples for yourself with made up numbers.
Post Reply