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Sunday, March 10, 2013

Markets Break New Records: Time to Rebalance Your TSP?

If you've been following the stock market for the past two weeks you already know that we're at all time highs on the Dow Jones Industrial Average. If you've been fully invested in the C-Fund in your TSP account, you might be asking yourself if you should take some profits at this level, or as Ray Lucia would say, "Scrape off some cream."

This may very well be a "be fearful when everyone else is greedy" moment, to quote Warren Buffett,  but on the other hand, we don't really know what the future will hold.

Short term I thinks it's likely that we'll see institutional investors do some profit harvesting at these levels, and offset gains with sales of some of their dogs for tax purposes. That mean some volatility for the markets in general, usually a good thing for those who dollar cost average.

One line of thinking suggests that you set a semi-annual or annual goal for your portfolio, say 8%, and if your returns exceed this target you sell shares to the point that the stock portfolio has the target value. In years where your portfolio lags your target, you add money to it to bring it as close to the growth target as possible. This is value averaging.

Value averaging works great if you have a sufficient cash reserve to backstop the portfolio in lean times. If, for example, You started contributing to your C-Fund in the TSP in 2002 and added $5,000 per year. By March 2007 you had steady and significant growth at or above the 8% target, but in 2008 you saw a decline of 38%. You would have had to have had about as much in your G-Fund, your cash fund essentially, to bring your balance up to the 8% target. In 2009-2012 you would have sold C-fund shares each year to reduce the growth to 8%, restocking your G-Fund for future lean years.


You can remain fully invested. I think this makes a lot of sense for those of us who are more than 15 years from retirement. The reason, as Mr. Lucia states so frequently on his podcast, is that there has never been a 15-year time period where the S&P 500 has lost money.

If you are a younger military member still with years ahead of you I believe that you can assume more risk than what you'll find the Value-Averaging model. It's also more simple, a set it and forget it process. There is still room for rebalancing to prevent becoming over-weighted in any one area (your C-Fund bulges while your I-Fund deflates) but this should be done very periodically, say once per year. Let your winners run.

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