Posted on Thursday, 25th January 2018 by

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The TSP Rebalancing Act

If you have been in the market these past ten years, including your TSP and other retirement accounts, your allocations are probably off considerably from where you initially set them. Many rebalance their stock and bond portfolios at least annually however it is easy to forgo this essential step with all that is going on in our lives. This is especially relevant considering that in the last year the markets are up an astonishing 30 percent or more!

Stocks have risen dramatically since the historic bear market that ran from October of 2007 through March of 2009. At the bottom of the recession the S&P hit a low of 682.55 and the Dow fell to 6,594 on March 5, 2009!   The Dow closed at 25,792 and the S&P at 2,776 on January 16, 2018, a historic uninterrupted run for 9 years now. To put this in perspective had you had $100,000 in the TSP’s C Fund, which mirrors the S&P 500 index, your TSP account would have grown 306% to just over $400,000! Actually, due to management fees it would have been short of the $400,000 but not by much. The C Funds management fees are the lowest in the industry at $0.38 per $1,000 account balance, 0.038% (3.8 basis points). Can’t get much lower than that.

The truth of the matter is that few had the guts to keep all of their savings in the C Fund all of those years. Markets rarely go up continuously like this bull has run. Most investors have a diversified conservative mix of stocks, bonds and cash especially for those close to or already retired.  A good way to check this is to review your TSP statement and look at the “Distribution of Account” column. After retirement you can’t contribute additional funds to your account and as one fund grows faster than the other that fund’s balance will show a larger percentage of your total account balance. If you set your investments initially to a conservatively balanced 50% stock and 50% bond allocation years ago, and didn’t rebalance you will be surprised to see just how over weighted you account now is in stocks. If you will need your TSP funds to provide retirement income, now is the time to review your TSP and other retirement accounts and rebalance if necessary. Now that you are older you may find it prudent to either move a portion of your account to the L Income, G Fund, or to one of the target date funds if retirement is fast approaching to preserve your nest egg.

 

What the Markets Look Like Today

Today, consumer confidence is up, unemployment is very low at 4%, tax reform passed, and overall the economy appears on solid ground. Inflows to stock mutual funds have increased dramatically recently as those who sat on the sidelines all these years don’t want to be left off the gravy train.

For me personally, I’m cautious when the majority of market analysts say the high stock market valuations aren’t a major concern and I get defensive. Nine years without a major correction and counting. Seems almost too good to be true. That being said there are many positives driving the market right now including very low interest rates. How long this can last I can only guess and I’m not a professional investor or market timer, just a cautious investor.  I do know that when a major bear shows up heavily weighted stock portfolios, especially stocks that now have excessively high valuations, can drop half or more of their value in short order. All I and anyone else can do is temper our exuberance, review our portfolios, and reduce risk by rebalancing to ensure we will have the money in our accounts when needed. The older you are, I’ll be 69 this May, the less time we have to wait for a recovery and as my former boss Dick Fisher once told me, “A bird in the hand is worth two in the bush.”

 

Rebalancing Your Investments as You Approach Retirement

Rebalancing your investments is especially important for those who must rely on those funds in their retirement years and the closer you are to retirement the more conservative you need to be. You don’t have to worry as much about this if you are in one of the target date funds such as the TSP’s lifestyle funds. They automatically adjust your account to a more conservative mix of stocks and bonds until you finally reach the target year.  My daughter invests her contributions into the L-2040 fund. She doesn’t have to adjust her balances, the fund does this every three months for her.

I retired December 31, 2004 and currently have the majority of my TSP account invested in the L Income fund which invests 74% in the G Fund, 6% F Fund, 11.2% C Fund, 2.8% S Fund and 5% in the I fund. I tilted the remainder of my account towards international and small cap awhile back. The L Income Fund is designed to keep up with inflation and has an average annual growth rate of 3.72% over the last 10 years compared to 2.63% for the more conservative G Fund. However, looking at the longer term annual growth rates from the fund’s inception dates, the G fund averaged 5.19% to the L Income Funds 3.95%. With interest rates increasing and with the anticipation of an eventual market down turn many retirees are thinking about moving a portion or the majority of their account to the G Fund. The G Fund is the only bond fund that I know of that is guaranteed by the U.S Government never to go down in value! Can’t get that anywhere else to my knowledge.

Even your best bond funds, including short term bond funds, go down at least for a short period when interest rates go up. It should be noted that during a major bear market or correction bond funds, especially, short term bond funds, are the ballast in your account and either stay the course or recover much quicker than the broader market as a whole. The downside for bonds is far less than what stocks typically experience. That’s the benefit of having a balanced portfolio that consists of debt (bond) funds and equity (stock) funds.

Unfortunately, you can’t purchase G Fund shares for any of your other retirement accounts. In those accounts many invest in bonds or raise their cash reserves, buy US Treasuries, short term bond funds, or purchase a well managed bond fund like Dodge and Cox Income Fund or Fidelity’s Total Bond Fund for example. There are many good bond funds to choose from and I use Morningstar to review and analyze all of my non-TSP investments.

I’m not a financial advisor, professional investor, or CPA, just a knowledgeable and cautious investor. Those early in their careers certainly should take more risk because over time markets have always recovered and increased in value substantially as this last nine years has proven. If you aren’t fond of Lifecycle (target date) funds but are uncertain what to do, use the Lifecycle funds as a guide and then tilt your fund mix to whatever you feel most appropriate. For example, the L – 2040 fund mix today is:

  • G Fund-20.70%
  • F Fund-6.80%
  • C Fund-38.87%
  • S Fund-11.88%
  • I Fund-21.75%

The L-2020 Lifecycle Fund currently has the following fund mix:

  • G Fund-58.50%
  • F Fund-6.50%
  • C Fund-19.40%
  • S Fund-5.10%
  • I Fund-10.50%

Notice that the 2020 Lifecycle fund has considerably more invested in bond funds for a conservative allocation. If you are invested in this fund you are only 2 years from retirement and this fund is weighted a total of 65% bonds through the G and F funds.  If you plan on retiring in the next 2 to 5 years you can use the fund mix as a guide and then tilt it to whatever you feel will be the best performers during this period. Remember that every three months the Lifecycle funds change the fund mix to a more conservative allocation so the closer you get to the target date the larger your bond holdings will be.

Currently overseas and small cap stocks are favored by many. Overseas stocks are selling at much lower multiples than American stocks and foreign economies are improving. Small cap stocks are thought to benefit from the recent tax law changes giving them more capital to grow and hire new workers.

If you are retiring in the next two to five years you could maintain the same or similar bond fund percentages as the L-2020 fund and then increase the allocations into the S and I funds taking the additional funds from the C fund, thereby tilting your investments to the favored categories. American stock valuations (C Fund stocks) are considered historically very high now. You could also move funds from the bond funds however you will increase your market risk by doing so. A truly conservative portfolio with minimal risk has up to 70 percent invested in bonds and cash.  Cash can be in CDs, savings accounts, interest bearing checking, and money market accounts to name a few.

There is a case to be more aggressive. If you will not require your TSP funds to live on and have sufficient annuity, social security, and other retirement income it sometimes makes sense to go for growth. In the scenario mentioned above, if you are in this category, you could transfer funds from the G and F funds to whatever you feel comfortable with to potentially achieve more long term portfolio growth. The other option is select one of the other funds such as the L-2030 fund to achieve your goals.

 

Valuable Resources for Smart Investing

There are many excellent magazines and online resources to help investors make sound informed decisions. I subscribe to Kiplinger’s, Money Magazine, and to Morningstar.com plus I tune in CNBC for market news.  Morningstar allows users to x-ray their portfolios to a degree that you could only get previously from professional financial advisors. I rely on them for stock, bond, mutual fund and ETF analysis and to adjust my portfolios accordingly. They offer a free online 15 day trial period and the annual premium membership costs around $100 a year. If you need information about investing these sources can help.

Take the time to review your TSP and other account asset allocations now to see where you are at and where you need to be. If you are not sure how much you will need in retirement do a cost analysis. The time invested now can save you a lot of money, regret, and worry when a market correction inevitably comes our way.

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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

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