Question

[KneednDough]

I am pretty sure I know the answer already, but it has been on my mind for awhile and I need to put it to rest, so here it goes.

A few months ago a friend at work and I were discussing a buy and hold strategy versus buy low and sell high. He is under the understanding that in time you will start earning compound interest on your tsp balance and that it will in turn purchase additional shares of the fund you have your money in. Kind of like a paying dividend stock I guess.
Now I consider him an intelligent person, but I believe he may be misinformed on this one. I told him that I am 99.99% sure that is wrong.
I told him that the only time you see an increase in shares is when you purchase them on payday. I also told him who cares what price you paid for the shares at pay day. If you can sell them and buy back in at a lower price, then when the market comes back you will make money. Especially in a volatile market.

So, is there any truth to what he is saying, or has he been misinformed?

Thanks,
Nate

 

[James48843]

He is under the understanding that in time you will start earning compound interest on your tsp balance and that it will in turn purchase additional shares of the fund you have your money in. Kind of like a paying dividend stock I guess.

No. TSP stock fund shares do not pay dividends that reinvest in more shares. Any and all cash dividends of the underlying stock shares are simply added to the share price value-- priced into the price of the share itself. It doesn't do a per share payout to buy more shares.

 

[KneednDough]

Thanks James. That is what I thought, but thought I had better check with the TSP wizards in case I missed something.

 

[Sensei]

Somewhere in the newsletters or quarterly statements I've received in the past from the TSP, there used to be a statement about the power of "compounded interest", which I always thought was odd because - other than the G-Fund - there is no guarantee of returns. I just looked at the tsp.gov site and saw they now use the phrase "compounding of earnings". Maybe that's where your friend was confused.

https://www.tsp.gov/planparticipation/benefits/earningsPotential.shtml