The Thrift Savings Plan Web site, www.tsp.gov, offers a number of ways to track the performance of your investments, including daily share prices for each of its funds and rates of returns tracked monthly and yearly back to 1988. Federal Times this week begins publishing the latest TSP share prices at press time along with rates of return. It might be worth reviewing just what these values represent and how they might be useful.
TSP reports the value of its five basic funds — the C, S, I, F and G funds — and the five L funds as share prices expressed in dollars. The share prices, or values, are calculated at the end of each day. When you direct that a certain percentage of your account balance be invested in any of the funds, the dollar amount to be invested is calculated then divided by the fund’s share price at the time of the purchase to determine the number of whole, and possibly fractional, shares that will be purchased. Once the number of shares is purchased, the value of investment in the shares is the number of shares times the current share price.
TSP fund shares pay no dividends or distributed capital gains. These, and any payments or costs, are internalized and reflected in the share price. All distributions are reported as ordinary income for tax purposes, regardless of the source of the funds. This is one of the potential sacrifices you make in exchange for the TSP’s tax-deferral benefits — all of your investment growth will ultimately be taxed at your marginal tax rate, rather than the prevailing capital gains or qualified dividends rates.
The rates of return for all of the funds are reflections of the performance of the underlying assets less the costs of administering the funds and the TSP itself. These investment asset types are represented by selected indices, or collections of individual securities. You can learn more about each fund and the index which it is designed to track by reviewing the fund fact sheets available online.
Since TSP will do the math necessary to convert dollars and percentages into shares either purchased or sold, you don’t need share values for that. The only other reason to track share prices or return percentages is to use the information to trade your account, frequently leading to counterproductive behaviors.
Assuming your objective in tracking returns is to capitalize on profit opportunity or avoid a loss in account value, you’d want to sell a fund when the price is about to move lower or buy a fund when the price is about to move higher. The problem is not only will you fail to do it consistently, but you’ll often do the opposite.
Further, the risk of being out of an investment market is usually higher than the risk of being in it. That is because, overall, investments have an upward bias — prices are expected to move up more than down — and the risk of missing price gains is higher than of suffering price losses over any future period. Moving out of, or delaying the purchase of a TSP fund in anticipation of a downward price swing is more likely to hurt your investment performance than to help it.
Since trying to avoid the risk inherent in the investment markets only adds to the risk you bear, the smart approach is to accept the inherent risk, account for it and design your investment strategy to withstand it. The only thing you’re likely to gain from close attention to historical investment performance is added stress.
Written by Mike Miles
For the Federal Times
Publication September 17, 2007