In a volatile market, many investors become increasingly fearful of not only how much they should invest, or where they should allocate regular contributions in their employer’s long-term retirement plan — but also if they should continue contributing at all until the market recovers.
During this time, it is often good to take a step back and review the basic principles of a long-term retirement plan like the Thrift Savings Plan (TSP) — specifically how shares in the plan are invested and how dollar-cost averaging can work in your benefit over the long haul.
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In a volatile market, the stock and bond markets can change quickly.
But investing for retirement is for the long term, and staying with your long-term plan with diversified investments, is more likely to bring you success than trying to time the markets.
If you react to a downturn in the market, when you return, the market may be moving in the opposite direction — meaning you miss out on potential gains (see example below).
Most often, a better course of direction is to focus on a consistent investment strategy to take advantage of compound earnings and dollar cost averaging. Thrift Savings Plan (TSP) participants who stick to their long-term goals during market downturns can end up with greater savings over time.
What is a TSP “share”?
A share is a unit of ownership in a company or fund. If you are a participant in the TSP, you own shares in the funds in which you are invested.
The balances for each fund in your account are stated in shares as well as in dollar amounts. Each TSP fund has a different share price.
How are daily TSP share prices determined?
Each TSP fund is valued at the end of each business day and, as a result, has a new daily share price. The new price reflects the change (from the previous business day) in the value of the assets held by the fund minus the fund’s share of the TSP’s daily administrative expenses. The new share price is determined by dividing the fund’s new value by the total number of outstanding shares in the fund.
Unlike the F, C, S, I, and L Funds, the G Fund is not affected by daily market volatility. Instead, it earns daily interest. A new interest rate is determined at the beginning of each month by the U.S. Treasury.
When do TSP share prices change?
TSP share prices are updated each business day at approximately 7:00 p.m., eastern time.
Does the TSP use the new share prices for my daily transactions?
Yes. Once the new daily share prices for each fund are established, they are applied to your account. Any transactions in your account on that day (that is, contributions, interfund transfers, loan disbursements and payments, withdrawals) are processed using the new share prices.
Are the earnings for the TSP funds I’m invested in used to purchase additional shares in those funds?
No. Because the increase or decrease in the value of a fund (that is, earnings) is reflected in the share price, earnings are not reported separately or used to purchase additional shares. An increase or decrease in the value of a fund does not affect the number of shares you own — just their value.
How can I track the number of shares in my account?
The number of shares in your account is shown on your quarterly and annual participant statements (and on your daily account balance on the TSP website at www.tsp.gov). It is expressed to four decimal places (for example, 131.2978), using standard rounding rules.
What is dollar-cost averaging?
Dollar-cost averaging refers to the benefits of making regular contributions of the same amount to your account regardless of whether the markets are up or down. It’s what you do automatically with your TSP contributions when they come out of your paycheck. With consistent contributions, you’re buying more units of a fund when the price of the fund is low and fewer units when the price is high. This table demonstrates how dollar-cost averaging benefits you. It shows what happens when you continue making your regular TSP contributions while the price of a fund fluctuates.
How does dollar-cost averaging benefit me?
The example below illustrates how dollar-cost averaging potentially benefits you.
In the above example, you bought 24 units, or shares, over this period. The average unit price during the period was $37.50. ($150 divided by 4 purchases) But you only paid $33.33 per unit! ($800 divided by 24 units) That’s because you bought more when the price was low and less when the price was high. For example, with your first contribution of $200, when the price was $50, you only bought 4 units. But then when the price was $20 for your third contribution, that same $200 bought 10 units.
The more volatile the share price of an investment fund, the larger the advantage generated by dollar-cost averaging. But even in times of relatively steady prices, dollar-cost averaging is a much more reliable and profitable strategy for long-term investing than trying to predict the perfect moment to buy or sell.