If you are a Thrift Savings Plan participant, do yourself a favor and ignore your personal rate of return. This nearly useless piece of information is provided by the TSP in your quarterly statements. While you might find this number interesting, it tends to draw your attention away from important information.
Your personal rate of return, or PROR, is a number that pretends to quantify the performance of your TSP account over the most recent 12 calendar months. Unfortunately, there are a number of problems with this statistic that make it useless at best and dangerous to use at worst.
The PROR uses the wrong method of calculating a rate of return. The PROR reports something called the “time-weighted rate of return” for your account over the most recently completed 12 calendar months. This calculation method effectively scrubs out the effects of any deposits to or withdrawals from your account during the period, and pretends that your account produced a return that it did not produce if you made contributions or withdrawals. Time-weighted returns are intended to be used in evaluating the performance of an investment manager in beating a particular benchmark, like a market index or average.
The data sample used to compute the PROR is too small to be meaningful. The PROR is based on only one of a massive number of possible yearlong periods that make up the TSP’s history. Assigning any significance to a single one of these data points is not unlike treating the one of many thousands of flips of a coin uniquely important. If you’re trying to judge the behavior or performance of your TSP account, or any of the funds, on a single data point, you’re making a mistake.
The PROR comes too late. The PROR is nothing more than a look in the rearview mirror; it tells you nothing about what lies ahead. Your primary concern should be with what could happen in the future, and the probabilities associated with the various possibilities.
On its own, the PROR is meaningless. The PROR definitely will not tell you anything about the future performance of a fund, or combination of funds. So do yourself a favor and ignore the PROR. Instead, focus your attention on predicting the future.
