Financial & Estate Planning

One reason the Thrift Savings Plan’s lifecycle L funds have grown in popularity is that they provide a mechanism to automatically adjust those accounts to keep the ratios of different types of investments steady even as gains or losses occur that otherwise would throw those ratios out of whack.

But the TSP is limited in its investment offerings and many of those who separate from the government for retirement or other reasons choose to transfer their accounts to IRA providers which offer more choices (and also in many cases more flexible withdrawal options even though the TSP improved those options several years ago).

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If you’re one of them—or if you’re simply otherwise managing investments inside and outside of tax-favored vehicles such as IRAs—you can self-adjust.

One strategy is to set a basic asset allocation, then sell the asset classes if they climb by a certain percentage above your target allotment and using the proceeds to buy asset classes that are below target.

For example, say your plan calls for 10 percent of your portfolio to be invested in small-company stocks, probably through mutual funds that invest in small companies. You could have a mental band of 8-12 percent, two points above or below your 10 percent goal.

Thus, you’d sell some of your small-cap fund shares when the total allocation to small companies tops 12 percent of your portfolio. When the allocation goes below 8 percent, you’d buy enough to get back to the 10 percent mark.

Over time, you’ll be buying low and selling high for all of your asset classes, which is a formula for investment success.

When you sell shares, try to trim within a tax-deferred account such as an IRA to avoid capital gains tax. If you must sell shares held in a taxable account, specify the ones with the highest cost in order to minimize the tax bill.

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