Compound interest

[misfit]

A question I’ve had for awhile.

Does the Tsp earn compound interest and how so? If so, Does it get affected if interfund transfers are done frequently?

Thanks everyone

[12squared]

Only in the G fund.

[mjedlin66]

No, there's no compound interest.

Unlike a bank account or a loan, where there is a defined interest rate, there is no such thing in the stock market. Instead, there is just a share price, and price movements. If you hold 100 shares, they are worth whatever the share price x 100 is at any given time.

Say the share price is $10 per share. It goes up 8% in one year. So now the share price is $10.80 per share. Then it goes up another 8% the second year. $10.80 * 1.08 = $11.66, not $11.60

So in that sense, the 8% gain over one time period compounds with the 8% gain over another time period. The total gain is 16.6%. But it's not interest, and at any given time the share price reflects the true value.

That said, there are two things that move TSP share prices:
1) Underlying index gains/losses
2) Dividends

Dividends are paid by some companies but not all companies. When you invest in a mutual fund, that mutual fund is then invested in hundreds of different companies. So some of those companies pay dividends to the mutual fund. People who hold shares of that mutual fund then get paid dividends.

Most 401k plans or taxable brokerage accounts give users the option of either re-investing the dividends (by automatically buying more shares of the mutual fund), or taking it as cash which just sits in your account.

The TSP just has to be different, so they take dividends and re-invest it not by purchasing more C/S shares for you, but by increasing the C/S share price and you keep the same number of shares.

I have tried to study and find when these dividend share prices occur, but I have not been successful. I was looking for specific days or patterns where divergences between the C fund price gain and the SPX price gain. I couldn't find them. But if you look at the gains over one year, they are there:

According to the TSP website, the C fund return for 2022 was:
-18.13%

According to yahoo finance, SPY also appears to auto-reinvest dividends, since 2022 was:
-18.14%

Yet for 2022, the index itself, SPX:
-19.64%

[misfit]

I appreciate the replies 12squared and Matt. Thank you!

[Bubba]

No, there's no compound interest.

Unlike a bank account or a loan, where there is a defined interest rate, there is no such thing in the stock market. Instead, there is just a share price, and price movements. If you hold 100 shares, they are worth whatever the share price x 100 is at any given time.

Say the share price is $10 per share. It goes up 8% in one year. So now the share price is $10.80 per share. Then it goes up another 8% the second year. $10.80 * 1.08 = $11.66, not $11.60

So in that sense, the 8% gain over one time period compounds with the 8% gain over another time period. The total gain is 16.6%. But it's not interest, and at any given time the share price reflects the true value.

That said, there are two things that move TSP share prices:
1) Underlying index gains/losses
2) Dividends

Dividends are paid by some companies but not all companies. When you invest in a mutual fund, that mutual fund is then invested in hundreds of different companies. So some of those companies pay dividends to the mutual fund. People who hold shares of that mutual fund then get paid dividends.

Most 401k plans or taxable brokerage accounts give users the option of either re-investing the dividends (by automatically buying more shares of the mutual fund), or taking it as cash which just sits in your account.

The TSP just has to be different, so they take dividends and re-invest it not by purchasing more C/S shares for you, but by increasing the C/S share price and you keep the same number of shares.

I have tried to study and find when these dividend share prices occur, but I have not been successful. I was looking for specific days or patterns where divergences between the C fund price gain and the SPX price gain. I couldn't find them. But if you look at the gains over one year, they are there:

According to the TSP website, the C fund return for 2022 was:
-18.13%

According to yahoo finance, SPY also appears to auto-reinvest dividends, since 2022 was:
-18.14%

Yet for 2022, the index itself, SPX:
-19.64%

A number of years ago I tried to study the dividend question as well. I even wrote them. Here are my observations/findings:

1. Their reply was that "companies pay dividends and those are included in the share price." Obviously that didn't answer anything...Sherlock.
2. I did notice one curious thing. On days that the SP500 index would lose, many times, the C Fund would lose a slight less amount. So for example, on days that the index would lose -1.2 the C Fund would lose -1.18 or something of that nature. What I took from there was that they "inserted" dividends to lessen the losses at times (not always, of course!). I could be wrong...this was only intuition.
3. They are also doing interesting things with the funds. If you read the FRTIB notes, they state that they're also doing "securities lending" within the funds. So, many times they outperform their benchmarks. I know that doesn't impact dividends, but this does impact the share price.

Good luck all!

Bubba

[mjedlin66]

Well hot damn. Explaining it to you and realize that the C fund follows SPY pretty much exactly, and that SPY also does the same share-price inflation with their dividents, look at what I found:

https://stockanalysis.com/etf/spy/dividend/

SPY has a dividend yield of 1.62% and paid $6.32 per share in the past year. The dividend is paid every three months and the last ex-dividend date was Dec 16, 2022.