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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.
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 Web site 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 is a system of purchasing shares at regular intervals with a fixed dollar amount. The number of shares may change with each purchase, based on the share price at the time of purchase. The fixed dollar amount buys more shares when the share price is low and fewer shares when the share price is high. If you are investing regularly in the TSP funds through payroll deductions, you are already dollar-cost averaging.
How does dollar-cost averaging benefit me?
The example below illustrates how dollar-cost averaging potentially benefits you.
In the above example, you made regular contributions of $200. Since there was a different share price each time you made a contribution, you received a different number of shares for each $200 contribution you made. With your four contributions, you invested a total of $800 and purchased a total of 24 shares. Your average share price (that is, the sum of the four share prices divided by the number of contributions, or $150 ÷ 4) was $37.50. However, because of dollar-cost averaging, your cost per share was only $33.33 — the sum of your contributions divided by the number of shares you purchased ($800 ÷ 24).