The power or dollar-cost averaging for Thrift Savings Plan investors (2024)

The year 2022 was a difficult one for TSP investors. All funds suffered double-digit declines by the end of the year, except for the stable-value G Fund, which invests in specially issued U.S. Government Securities.

The C Fund fell almost 19%, and the S Fund fell a whopping 27%! The I Fund fared the “best,” with a decline of “only” 13.34% for the year. The L Funds also all declined, with the L 2065 Fund down almost 18%.

All funds in the TSP suffered declines in 2022, save for the stable-value G Fund.

That means that TSP investors suffered similarly significant declines in their invested funds for the year, right?

Not nearly to the degree that the end-of-year numbers suggest — and investments in one fund were actually up for the year!

Most TSP investors are actively contributing to their accounts either bi-weekly or monthly from payroll deductions, with government matches added to their investments. These investors are engaging in “dollar-cost averaging,” or investing a little bit over time.

When you “dollar-cost average” into funds over time, you can actually do better than the fund declines would suggest. In fact, volatility - or the downward and upward changes in fund prices - can actually be beneficial when dollar-cost averaging, since you buy as funds decline and enjoy good returns when they finally recover.

It can take time, but dollar-cost averaging has proven its value over the very long term.

Let’s take a look at how this works in practice, using the daily prices of the TSP stock funds - the C, S, and I Funds - and the L 2065 Fund as examples.

By way of illustration, let’s say we started with $100 in each of the stock funds at the beginning of 2022. We then added $100 each biweekly pay period, for a total investment of $2,700 for the year.

If we had invested that as a lump-sum at the beginning of 2022, that $2,700 would have declined to $2,187.81 in the C Fund, $2,339.82 in the I Fund, and $1,969.38 in the S Fund as of January 3, 2023. The L Fund would have ended the year at $2,214.

But by dollar-cost averaging little amounts over time - in this case, $100 every two weeks - the amounts would be $2,539.55 in the C Fund, $2,458.25 in the S Fund, $2,711.62 in the I Fund, and $2,589.48 in the L 2065 Fund as of January 3, 2023.

So after dollar-cost averaging, two of the funds are down less than 10%, and the actual invested value of the I Fund was up slightly for the year!

You can see the results here.

And it should be noted that the funds had continued to recover, rising by between 8% and 14% by early February. Even without investing any additional funds, the year-end figures had grown to $2,749.86 for the C Fund, $2,812.48 for the S Fund, $2,925.42 for the I Fund, and $2,821.00 for the L 2065 Fund as of February 3rd - already positive despite fund prices still being down compared to January 2022. The funds would have risen even more with continued regular investments.

We can see similar results for dollar-cost averaging on a monthly basis. Let’s say we invested $250 a month, for a total of $3,000 for the year, at the beginning of each month (or the last business day of the previous month if the first day is on a weekend). Our total values are $2,803 in the C Fund, $2,700 in the S Fund, $3,012 in the I Fund, and $2,863 in the L 2065 Fund. Again, we see that three funds had declined less than 10% on an annual basis, while the I Fund is up slightly.

These figures are based on real returns, not hypothetical ones.

Granted, not every year - or even every month - will be the same. Declines might continue over multiple years. But the stock funds have never declined for more than three years in a row on an annual basis before recovering, with the recovery happening often much faster than analysts and popular media predict.

See the recovery years after bear markets in 2001-2003 and 2008-2009, and after the steep but brief declines in 1987 and 2020 as a few of many examples.

Dollar-cost averaging really only works for funds that exhibit volatility - that is, funds that go up and down (and up again) over time. With stable-value funds like the G Fund, you won’t have those opportunities to invest when the values decline (when it’s cheaper), since it doesn’t decline in value. And this means that you must stay investedand continue to invest in the funds. Moving into and out of the funds completely obliterates this time-tested strategy. Remember, you only lose money when you sell your funds!

And dollar-cost averaging is indeed time-tested: Funds can continue to go down for multiple years in a row, but they eventually go back up again, often unexpectedly and quickly. Over the very long-term, since 1900, every 30-year period investing in the broad US stock market - ie, an index fund similar to the C Fund - has always outperformed investing in a G Fund-like bond fund. Thirty-five and 40-year periods did even better.

Investing patiently over time, by dollar-cost averaging, investors can enjoy some spectacular returns.

So the lesson is, leverage the power of dollar-cost averaging into the stock funds or L funds for greater returns in the long-run.

Lee Radcliffe is a U.S. Army veteran with over 20 years of federal government and data analytics experience who writes about Investing in the Thrift Savings Plan. His most recent book is TSP Investing Strategies: Building Wealth While Working for Uncle Sam, 2nd Edition (Thrift Strategies LLC, 2020). Follow Lee online at tspstrategies.com, and @TSPstrategies on Facebook, Twitter, and Instagram.

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