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Managing 401k Investments
I received a question from one of the readers this week – “How can I get an 8% return per year on my 401k?” that’s a great question.
First of all, I will admit that I do not claim to be an expert and that I have made my share of mistakes as an investor and have learned well from them.
One of those lessons is trying to actively manage my 401k investments.
I know this is an extremely sensitive subject and there is always a heated debate between active and passive portfolio management.
As an ordinary man, if you received $5,000 today and had to beat the S&P return in any given year, would you be able to beat the market? Now it’s even worse when you have $50,000 or more in your 401k. Would you be able to manage your account actively and beat the market?
It’s a great self-imposed challenge. According to CNN money, 86% of active fund managers sucked in 2014. Now try to beat the S&P year after year.
According to CNN Money, “Nearly 89% of these fund managers have underperformed their benchmarks over the past five years and 82% have done so over the past decade.”
Here is a link to Money Chimp’s S&P performance tool – you can see the CAGR of the S&P 500 over a 100 year period. You can see that an average return of 8% per year over a long period is certainly achievable. For example, The CAGR (compound annual growth rate) of the S&P 500 from 1950 to 2014 was 11.42%
I’m a fan of Warren Buffet and appreciate his opinions. According to CNN Money, here’s what Warren says – “2. Buffett recommends the passive: Even legendary stock picker Warren Buffett likes this approach. In his annual letter to shareholders last year, he wrote that he had advised the trustee of his estate to place 90% of his assets for his wife in a “very low cost” S&P 500 index fund, because it believes that the “long-term results of this policy will be greater than those achieved by most investors.”
Now back to my story – long story short – I didn’t beat the market by actively managing my 401k account. However, I quickly learned my lesson – that was ten years ago. I just set up my 401k to be invested in a target date retirement fund that has a mix of stocks and bonds. It worked pretty well and I’ve never had to break a sweat trying to manage my 401k account since. It did much better than I was actively trying to manage it, but it didn’t beat the S&P 500 returns.
I understand that everyone’s financial situation is unique. You are the captain of your ship, just as I am mine. Do your research and draw your own conclusions.
Finally, to answer the question, yes, it is certainly possible to achieve a return of around 8% over longer investment periods with an average dollar cost in the S&P 500 index. I understand that the situation Everyone’s financial situation is unique. You are the captain of your ship, just as I am mine. Do your research and draw your own conclusions. I will state the obvious that past performance does not guarantee future results. As for me, I approve of passive investing in the S&P 500 index.
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