Harvesting TSP Gains

"Harvesting" TSP Gains..... Evolution of the Idea

In the past years of working with Federal Employees, I have noticed that there are (3) usual TSP investment strategies that the investor utilizes, and neither of these strategies is incorrect if the participant is investing based upon their own comfort level:

1.  A "Fire & Forget" strategy of their contributions and balances.

2.  A "Day Trading" strategy based upon advice from a broker, colleague, Family member, or      
     print/television/radio media.  Advice from these sources is based upon   future assumptions related to any number of "current events" or "indicators".

3.  Since the introduction of the Lifecycle Funds, many have chosen to "Let TSP Manage The Money"
     by participating in these funds.

The mistake that is easy to make is that we most commonly look at CURRENT BALANCE of money.  This figure is nothing more than a "Financial Translation" of PRICE PER SHARE X NUMBER OF SHARES.  How much of an increased balance is your monies + matching funds?  You can actually have NEGATIVE EARNINGS and show a LARGER ENDING BALANCE.

TSP like any investment that is a notable component of a retirement is in fact a long-term investment.  Our approach has always been a strategy with (2) components:

1. Showing the employee how to increase TSP contributions with little or no reduction in net pay.  This translates  into "contributing free money" while immediately reducing "taxable income".  Therefore, there is an immediate short-term and a long-term benefit for the participant.

2.  CONSIDER HARVESTING quarterly gains to protect monies made, and always play the new       money.  In other words, a smart farmer will always harvest a good crop and keep planting.  You       should CONSIDER not leaving a bountiful crop exposed to the "weather".  The crop is placed in the       "G" Fund as this is the only TSP fund that by design and definition can never be in a NEGATIVE       earnings posture.

      EXAMPLE

                      Beginning of Quarter you buy (1) share of X Fund for         $10.00

                      At the end of the Quarter that share is worth                       $12.00

                      Your earnings                                                                             $2.00

     Always Look At Percentages.... Not Balances
 

What you should consider IS NOT the fact you earned $2.00.  You made 20%.  What if you had 1,000 - 5,000 shares making 20% in that quarter?  Keep in mind that it takes 20% more cash to purchase the same fund shares, which offsets gains in the future.  That means the share price of this fund must have even greater future value to enjoy monetary gains on a fund where the share price has increased 20%.

Consider the fact that you did not "Harvest" in this scenario and the fund share price was reduced to $6.00!  You are diminished by 40%.

In summary, if you look at the average value of a share in any fund, recognize that the more it costs to buy a share of a fund above it's average value, the greater the risk of realizing a profit.