Thread: Understanding Compounding

AF Vet wrote:

I am missing somethingin regard to understanding where the growth of investments in the TSP comes from. My formula thus far as I understand it would be:

My contributions + Agency contributions =Investment dollars divided by price per share = shares owned. Shares owned X price per share=Account balance.

While I understand that the price per share fluctuates with the market depending on the fund, it seems that I am missing the compounding.

The compounding is still there. If you make 10% 2 years in a row and your account started out a $1000, the first year you made 10% on %1000 (or $100). The second year you make 10% on the$1100 ($1000+$100)

Does moving from one account to another miss out on the opportunity for compounding of returns?

No, you don't miss. When you move funds, as I mentioned above, it's your new balance that makes the % gain.

I saw where Tom was in the F fund and anticipated a .01 cent dividend however; I am uncertain how he knew the dividend was coming or who would get it? Would everyone in the fund be entitled regardless of whether they were in the fund all month or just one day?

Actually I think it was the G fund which is increased every 5 to 8 days lately. Anyone who has money in the G fund on that day makes the gain. At least I believe that is how that works. I don't believe there are fractional gains daily.

Does one bad year wipe out the compounding of returns put together over several years when no additional money is contributed to take advantage of the reduced cost of shares? That is, if you ride out the storm and never move to a safe haven like the G fund when the market is on a downhill slope will your account erode until the market returns to where it was when you last contributed?

Yes, that is true.

If so, at that point would you have exactly what you had before the share prices dropped or will you have accumulated additional shares (despite having not invested any "new" money) and actually be better off when the market recovers?

You'd be even. No gain.

I'm just trying to understand. Go ahead and pummel me!

pummel, pummel

Hope that helps!

tsptalk wrote:

AF Vet wrote:

I am missing somethingin regard to understanding where the growth of investments in the TSP comes from. My formula thus far as I understand it would be:

My contributions + Agency contributions =Investment dollars divided by price per share = shares owned. Shares owned X price per share=Account balance.

While I understand that the price per share fluctuates with the market depending on the fund, it seems that I am missing the compounding.

The compounding is still there. If you make 10% 2 years in a row and your account started out a $1000, the first year you made 10% on %1000 (or $100). The second year you make 10% on the$1100 ($1000+$100)

Er...yes and no. Compounding in the sense of, like, a savings account, which pays interest at regular intervals: no. Compounding in the sense that the share prices increase the same way a savings account balance would increase: yes.

The difference is that the "compounding" is reflected in the share price rather than overall account balance.

Balance is not quite the term for equity accounts, but rather value is. Balance = hard cash, value = something you hold that is traded for cash. You do not really have a balance (cash) until you sell your equities (at whatever value) and keep the cash.

Using Tom's example and your formula: You made 10% two years in a row. Say your share price started at $10.00 with 100 shares for a value ("balance") of $1000. The first year, your share price increased to $11.00, so you have a value of $1100. The second year, the share price increased 10% again for a value of $12.10 for a total value of $1210. So, yes, total "balance" (value) is always Share-Price * Quantity-of-Shares.

It may seem like only semantics, but knowing the vernacular helps me to understand the intricacies much better and more easily.

Does one bad year wipe out the compounding of returns put together over several years when no additional money is contributed to take advantage of the reduced cost of shares? That is, if you ride out the storm and never move to a safe haven like the G fund when the market is on a downhill slope will your account erode until the market returns to where it was when you last contributed?

Yes, that is true.

If so, at that point would you have exactly what you had before the share prices dropped or will you have accumulated additional shares (despite having not invested any "new" money) and actually be better off when the market recovers?

You'd be even. No gain.

Not quite.... When you say bad year, i'm assuming you're mainly referring to the stock funds.

Stocks can make money in two ways: 1. They appreciate in value (reflecting in rising share price) 2. They can pay dividends (thought not all stocks do this).

All of our stock funds will have some portion of earnings made via dividends (moreso with the C and I fund). When that happens, the money made from these dividends are used to purchase additional shares of the respective fund they are in. So in the scenario you described above, after the crash back to the original share price, at that point, you will like have more shares of a given fund because the dividend earnings from the past were used to purchase additional shares. Thus the share price may be the same as it was 2 years ago, but your TSP balance will be higher due to the dividends you earned over those 2 years.

Let me see if I understand this correctly now....

Assume: I buy 100 shares of C Fund at $10.00 for a value of $1,000

2 years go by, the market goes up and down, and I don't buy any new shares during this time....

Now the C Fund just happens to be selling at $10 again, I should (hopefully) now have 100+Y shares of C Fund with a value of $1,000+(Y*$10). The "Y" being the shares of C Fund bought by TSP (for me) from the dividends earned from the C Fund. Correct?? :%

Any idea of how often or when those dividends are applied to our accounts?

Its easy to see that the G Fund makes money (it constantly goes up), but with the ebb and flow of the other 4 Funds, it is sometimes harder for me see the actual gains unless I sell them high and buy them back again when they're lower again.

[i.e. Buy at $10, sell at $10.20, buy back again at $10 = $.20 netted profit]

You got it Zarth. You will see those distributions if you look at your TSP statement that you get Semiannually (if you have elected to receive it).

I wouldn't put too much emphasis on that though. If I was guessing, the collective dividend rate/year on the C fund probably isnt more than 2%, and would be even less for the S fund (smaller companies tend to retain more of their profits to help further growth in the early stages). The majority of money made on all 3 stock funds will be via increase in value/share.

You mean dividends are distributed rather than just abosorbed by the fund and reflected in the share price?

i.e. Share price = $10. Fund's equitiesgo up, then back down to $10/share value. Dividends are made butnot distributed; dividends earned were 10%.Share price is now $11 ($10 equity value + $1 dividends earned).

This is how I feel if I am winning in the game of TSP trading.

Keep a record of your share increases or decreases in each fund. If you move out of the S fund (or which ever you favorite fund is to work out of) and move it to thethe otherfunds and then 2 weeks later you move it back to the S fund, did you increase your shares or decrease. In this market the share prices are going back and for in the same range, if you can hit the highs and lows as best as possible, you would increase your shares of the funds so your cash increases, even though the market share prices hasn't increased.

Started Dec 31 the S share was 12.48up to 13.28 on 1/26 down to 12.69 on 2/04 up to 13.27 on 2/11 down to 12.86 on 2/23 up to 13.43 on 3/05 down to12.60 on 3/24 up to13.51 on 4/05 down to 12.96 on 4/20 up to 13.27 on4/22 down to 12.16 on 5/17 on our way up to today at 12.79 and increasiing.

The S fund is up .31 since Dec 31. but if you can time the market and increase your shares ( I am up 612 shares of S Stock for the year so far) you will increase your dollar value as well. (612 shares of S fund times 12.79 = an increase of $7829)

FrizzB.

So are the dividends distributed or not!? hehehe

Frizz B., you make my head hurt. It seems so unnatural, but I am all for challenging convention. I am following along, even updating your spreadsheet when I update my Quicken, waiting for an epiphany. I agree with you...I just...don't...know....why.

Very simple, the more shares you own the more money you can make. When the share prices goes up you now have the extra 612 shares that makes you the extra money. It seems that people only look at the dollar value. If you make the change from the S to the G and the S shares go way down like they did most of last month and then you get back into the S fund, your Dollar value did not go up much, but when you went back to the S fund, your shares probably increased quite abit. Then when the S fund gained back the price that it has your dollar value went up significantly. This is why I look at the shares of the stock that I own almost as much as the Dollar value that I have.

Frizz B.

It's all the same Frizz. We just talk about it differently.

You look at price of shares and number ofnumber of shares. I look at price of shares and percentage gain and loss. I don't think I've ever known how many shares I have. At the end of the year, all that matters is your percentage gain or loss.

You don't see any ads for mutual telling you how many shares they picked up. They tell you what their past performance gains and losses were in percentages.

It'sequivalent.Like A + B = C is the same asC - B = A. The numbers are the same.

But I do enjoy the numbersfrom your view as well. :!

You mean dividends are distributed rather than just abosorbed by the fund and reflected in the share price?

I was thinking they were distribued, and that there was a line for that on the statement when that happened, but i may be wrong. I'm too lazy to go downstairs and pull the file to see which it is.