Yes, thank you Tom, compounding happens! Daily in TSP accounts because the shares are settle each evening. Which is why a fund, say the S fund, that recently has rather consistently logs higher
percentage gains day after day, especially on a higher share price is a better bet. Of course the inverse is true on the way down.
Compounded gains are seen in the multi-day returns (i.e. weekly, monthly, yearly). The S fund was, any way you slice it, much better for your portfolio over the past 12 months.
Back to the previous conversation:
See the following current year returns:12.3% for the S vs 7.58% for the C. Meaning that investing 100k exactly one year ago in the C fund would net you $7,580 gains and 100k in the S fund would net you $12,300 gains...REGARDLESS of how many shares comprise the initial $100k value. Two $50,000 shares or 10,000 $10 shares...it doesn't matter. The annual gains for a $100k investment would be the same.
Those percentages are the same regardless of whether you had 10k, 100k or 1mil in your account. Of course, the larger account would have "made more money"
Now, back to square 1:
If you had 100k to invest and you chose the C fund because it was cheaper and you could acquire MORE shares for you initial 100K investment you would get more profit IF the C and S both made the same gains in real $$s (i.e. each made $0.20/day for 5, 10, 20, 50 etc. etc. etc. days). Would be nice eh! BUT that would be clearly evident in the % gains as the "cheaper" C shares having a greater % gain because that $0.20/day would be a greater proportion of the previous days share price.
The reason it doesn't come out that way is because of the compounding. You can't add and subtract returns from each other to get a total.
Some extreme examples to show what I mean:
It you were up 100% and then lost 100%, you are down 100% (lost it all), not at 0%.
If you were down 50% going into a day that gave you a 100% gain, you wouldn't be up 50% (-50% + 100%), you would be at 0% (lost half, then doubled that).
If you are up 50%, and then gain 50% that day, you are not up 100%. You're up 125%. Here's the math...
Start w/ $1000.
Up 50% = $1500.
Gain another 50% = + $750.
New total = $2250.
That's + $1250 or +125% of original $1000)
The actual formula I use for spreadsheets, which come up with the same numbers as the autotracker, is:
return =(100*(1+starting return) * (1+ new day's return)-100)/100
I hope that makes sense, and helps. Rest assured that it is correct. The TSP.gov website posts the same gains and losses for it's funds as we figure on the AutoTracker.
