July 21

Coffee with Mike- FERS Breakdown Series Part 3

FERS

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Federal employees generally are mystified by what they're actually doing with TSP. In this short segment, what I'm going to try to do is keep some simple concepts in front of you. I'm hoping that you can forget all the rest and just focus on these things: 

  • In TSP, you're making investments. What making an investment actually means is, you're spending your money. You spend your money to buy shares of a fund. In return for your money, you're receiving back a form of property. That form of property is called a fund share. The idea is for you to accumulate as many fund shares as you possibly can. Keep that in mind. 
  • If I'm trying to accumulate as many fund shares as I can, what do I want the share price to actually be? Do I want to keep getting higher and higher and higher, or do I want to go lower and lower, and therefore I can buy more shares with the same contribution every two weeks? Well, of course as a buyer you want the price to be lower and you want to be able to buy more shares. As a buyer, as an employee, as someone making contributions and also receiving HC contributions, you want the effect of the fund price/share price to go down. Think about that, remember that. In exchange for your money, you're getting back a piece of property that's called a fund share. Again, the idea is: how can I accumulate as many shares as possible during my career?
  • In order for me to accumulate as many fund shares as possible, I need the share price lower. If I need the share price lower than all the shares I already own multiplied by that low share price means that my balance is going to be lower, and it means that every time the share price goes down, it means my balance is going to go down. Understanding that what's happening is, I'm getting a lower price on the shares I'm trying to buy this pay period. That cannot also mean for me that, 'Oh no, my balance is down! What's wrong!" Nothing's wrong, the market fluctuates, share prices fluctuate, balances fluctuate. So, you need to keep in mind that fluctuation is just part of it; don't worry about it. The point is that, because you're a buyer, you want the share price to be low; and because you're buying with the share price low, you're getting more shares. Again, the name of the game is to accumulate as many shares as you possibly can.

"In exchange for your money, you're getting back a piece of property that's called a fund share. Again, the idea is: how can I accumulate as many shares as possible during my career?"

  •  Now if you retired, that's a different game, and of course we want to be aware of/more sensitive to share price, but not as a buyer, not as of employee. We don't care about that as an employee. Don't worry about a low balance, you're not losing any money. It's just the value of your property has changed. If the value of property is changed and you're not selling, it doesn't matter what anyone else thinks about what they want to pay for your property. Remember, the balance you see on your statement is actually an offer. It's an offer of the other participants to buy all your shares at that very moment. You're not going to do that as an employee. You're not selling your fund shares, you're accumulating fund shares. 

Keep all that in mind and I think you'll have a lot more peace of mind as an investor, and you'll be a little bit more aware of what you're actually doing every time you make a contribution, therefore you'll keep your eye on the ball. The eye on the ball is not looking at the balance, the eye on the ball is looking at the number of shares you've actually accumulated each and every time you look at your statement. I hope that helps you feel good, and I hope it makes you contribute, keep contributing more, and leave your portfolio alone.

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