I started a 401k through my current job and started putting money in a
mix of mutual funds in 2000.
I recently calculated the amount of money that I've put into it over
the years and the value of my 401k right now is actually a little less
than I've put into it. In other words, I haven't made a dime. 11
years and I haven't made a dime.
I was looking at the Dow, there were steady increases from 1980 to
1990, and from 1990 to 2000. But from the time I started putting
money in, it's been essentially flat. I remember reading books about
investing from the 90s saying you could probably get 10% interest a
year, but it looks like I missed the ride up. I know 10% isn't
considered realistic anymore, but still, 11 years and I haven't made a
dime. It's a little disturbing, and frankly, a little depressing,
considering how hard I've worked to earn that money to invest.
I have other options and accounts for retirement so I should be okay.
But all my projections for getting compound interest on my 401k have
come to squat, and it's a little frustrating.
I'd suggest taking a hard look at exactly what you've invested in over
the years because this didn't need to be the case. Most of your
investments since 2000 - salary deferrals and any match - should have
gone into your account when US and foreign stock markets were at lower
levels than they are now, especially after factoring in dividends. By
extension, a buy and hold portfolio of stock funds that at least did not
much worse than the US broad market should have made you quite a bit of
money. Employer match, if you have any, would have made it even better.
Here's my two-minute estimate: imagine that once per month, at the start
of each month, you invested $500 in a lump sum in a broad-market US
stock index fund via 401k plan. Dividends were reinvested and you paid
no tax because it's a tax-deferred account. Based on Yahoo fund data,
and using one of the Vanguard funds as the investment, you would have
invested $71,000 since January 2000 and your account would be worth over
$92,000 as of yesterday's close. Only 15 of your 142 monthly investments
had lost money, as of 10/30/2011. What lost decade?
And that's a pretty aggressive example, being invested 100% in US
stocks. Adding in other asset classes like bonds, REITs, or foreign
stocks could have made this even more positive. Both a balanced index
fund and total-international index fund would have left you with more
than that $92k of a US-stock index fund.
What were you invested in? Did you move money around a lot or buy and
hold? And do you have any employer match (which would have shown up as
even higher returns)? A good look at this now may help make the next 11
I came to a slightly different conclusion. I don't know which fund
you used - I picked VFINX. I computed the final value at $85,630,
which corresponds to a 3.24% IRR. However, inflation eats up 2.51% of
that, so the real return is only 0.73%. It's not nothing, but it's a
far cry from the ~6.41% average real return from the S&P 500.
Your "lost decade" has given rich rewards to those not chained to the
generic big cap averages. Just break the stock market down into
slightly finer categories, like tech, mid cap, small cap, and even
expand out to foreign (you may have to paste this link together if it
gets broken up):
This displays SP500 instead of Dow, but shows almost any alternative
made significant returns over the decade. Or you could have made
spectacular returns such by weighting up emerging markets such as
Since I am not a financial advisor I don't have to patronizingly tell
you the obvious... how that can increase volatility (clear from the
graphs!). That is less important over a long term investment like
retirement, but could still suffer from unlucky starting points or
ending points. But it should be clear that there have been ripe
opportunities if you keep watching and aim to overachieve the dreary
big cap indicies.
To me, it had been achingly obvious that high returning emerging
markets were lower risk than their stereotyped view, and now they turn
out to be the only adults in the room with solvent gov'ts and people
with work ethic instead of entitlement ethic. But that observation may
have been from my travels there, and I am not suggesting they are the
choice from here on out.
Rather the point is to show that paying attention to relative
performances can pay off. Even a slow as molasses series of modest
tweaks to your portfolio can pay off over the years. For instance I
have heavily evolved towards midcaps with success you can see on the
graph despite their reversals. Maybe just watch and make imaginary
shifts for a year or two, and see if you have right touch.
I have been told that company retirement plans sometimes have a
foolish mix of mutual funds with big loads and excessive management
expenses. Could that be true in your case? It would be interesting to
see what your gain would have been if you had invested in no-load
funds with low management expenses. Another exercise I would like to
see is what kind of gains there would have been over that period with
a diversified mix of dividend reinvestment plans (DRIPs), which have
zero loads and zero management expenses. I am a fan of self-
constructed "mutual funds" based on DRIPs.
There are questions for you -
Does your employer offer any matching? In my case, I see a 6% deposited,
so even a decade like the 00s saw a respectable return, if not from he
market, then from the match.
What are your fund choices and fees? When you say other options, a
401(k) should have choices to keep you diversified so you are not at the
mercy of just one sector. A well diversified portfolio would have done
better than the zero return you saw. And others have pointed out, a high
fee adds up over the years.
To answer a few questions, and give a little more info:
No, my employer does not match funds. They do offer a pension and a
seperate retirement account that they put money into for you.
I also have a Roth IRA (I like the idea of having some tax free income
when I retire), so between all the accounts I think I'm pretty well
These latter two accounts have made money, but not my 401k.
The 401k money is spread out over a mix of large cap, mid cap, and
I've basically tried a buy and hold strategy, except I had a bond fund
that I dropped before the big crash in favor of the international fund
because it wasn't producing.
Of course, once I had dropped it, it started to get higher returns.
My company has dropped some funds and substitued them with other
similar funds a few times, so I was forced to change. I don't know if
they charged me fees for these transactions, but my guess is they
did. I hate to trade out of these funds and thus lock in my losses.
Also, I've increased the amount of money I've put in over the years as
my salary increased, so it's not all an even spread.
I checked the fund performances today and they are all down or near
even for the past five years, and for the past ten, but especially the
The Dow and S&P 500 are both lower now than they were in 2000 when I
started so I can't imagine I'm the only one in this boat.
I'm sure a more savvy investor might have turned a profit in this
time, but it hasn't worked out for me.
If the market goes back up, that will change, but who knows if that
you still don't mention the fees. The S&P fund my 401(k) offers has a
.05% expense ratio. That's a percent over a 20 year period. Most are
much higher than this, some high enough to make the 401(k) account not
The index you see and chart on Yahoo will not include reinvested
dividends. This skews things enough that while I see the S&P start 2000
at 1469 and end 2010 at 1258, it wasn't down this bad, the nearly 15%
the index shows. The CAGR was .31%, for a total 4% return.
I am not suggesting the decade was good by any means, it was just 20%
better than the index alone implies.
The figure I gave before was for a Vanguard total-market index fund,
based on its reported results on Yahoo Finance. Not the point-to-point
data though, which is highly sensitive to your begin and end dates - I
used the "adjusted close" data which allows you to see how much a dollar
invested on a given date in the past would be worth today. As I
mentioned, only a handful of monthly investments during the past 11
years should have shown losses as of 10/30/2011.
Note from Bill's post that a broad-market fund did better than VFINX
(the 500 index fund) which is skewed to large-caps. Meaning, mid-caps
and small-caps generally did better over this period (a total market
fund includes the smaller stocks as well). International had done better
as well. So to the extent you had more invested in mid-caps and
international stocks, your returns could have been even better. Though I
guess a big move into international relatively recently could have
killed off the gains of the prior decade.
Generally though, if it was mostly buy and hold, this may be an
illustration of the effect of a high expense ratio on long-term returns?
Or of how an active manager can muck up things? I can't imagine how this
sorted out unless you had some much-bigger investments at unlucky times
(parts of 2007 for example). Can you be more specific about the funds?
I suspect it's because of this, which was in the OP's followup:
So we have no way of knowing exactly why his portfolio behaved
as it did over that time period, but if a chunk of it was used
to sell low and buy high - by selling bonds before their runup
and to buy stocks at the peak - that could easily erase a big
slice of what should have been the total return of either a
balanced portfolio or even an all-stock portfolio. In the
case of the all-stock portfolio over that decade, one would
not have bought *extra* right before the crash.
That's likely a bigger effect than expense ratios or even
specific fund choices within the asset classes.
David S. Meyers, CFP(R)
easily erase a big slice of what should have been the total return of either a
balanced portfolio or even an all-stock portfolio. In the case of the all-stock
portfolio over that decade, one would not have bought *extra* right before the
That's an interesting point, maybe that's the cause right there.
The one move I made and it screwed me.
My rationale at the time was the bond fund wasn't producing, and I had
other low risk investments in my other accounts, so I figured that
would act as a balance.
I don't think there's too much point in talking about the specific
funds because, as I said, the company has substituted them out several
XOM (Exxon Mobil)
GIS (General Mills)
EMR (Emerson Electric)
EXPD (Expeditors Int"l)
JNJ (Johnson & Johnson)
SHW (Sherwin Williams)
That is a diversififed portfolio in solid companies whose businesses
are understandable to the average individual. There are many other
household names you can think of easily. Start with a paper portfolio,
read 10K's, then pick a company you really like, and buy some for real
on a nice dip in the market (don't buy high). Keep reading for a few
hours (two 10K's) a week. Add another company. If the market is down,
so much the better. After a while you find you're learning quite a bit
about the world. These are buy and hold, so if you can't do them in a
401k, don't worry - sell gradually, pay the taxes, and feel patriotic
about it all.
I appreciate the tips, although it doesn't have much to do with the
topic, which is mutual funds in a 401k.
However, it has occured to me that I might have been better off just
putting the money in the bank, considering my lack of profit.
I guess that's similar to what you're suggesting, except to put it in
I could also do this within my Roth IRA.
Of course if the market ever recovers, I'll be doing better.
But watching the news today, I don't know of anyone who is expecting
that to happen soon.
I thought I had solid reasons for selling off my bond fund and buying
But I didn't foresee the stock market heading off the cliff the way it
I wasn't naive, I knew the boom couldn't go on forever.
But I didn't expect things to get as bad as they did, for as long as
they did (and they may even get worse before they get better, if they
ever do get better).
How far off is your future retirement? Can you afford to save
enough that you can retire without any real return? Cash in the
bank, at best, may keep up with inflation. That's a zero percent
real return. In fact, right now, cash in the bank is returning
less than inflation. It's a loss. You'd have to save a heck
of a lot.
There may be other options with less risk (in terms of volatility
and downside protection) than a balanced stock and bond portfolio,
but those options always have other tradeoffs (generally high
costs and/or less up-side potential). Cash is an extreme version
of such an alternative option.
What's your time horizon and risk tolerance?
Maybe. You have to put the bond fund into your portfolio with
the right perspective. It's not supposed to do the same things
as the stocks. If it had "performed" on the up-side like the
stocks, it might well have gone down the same way, too. You put
the bonds in there to (a) lower overall volatility; (b) not be
correlated with the stocks; [and in some cases, (c) for cashflow
generation, though this is likely not the issue for your retirement
It sounds like you bought it for performance. By itself, that
might have made sense (is you had some solid reason for thinking
that bond funds were going to perform well at some particular
point in time). That's the kind of betting that gets people in
It's hard to beat the historical performance of a diversified
balanced portfolio with low costs. Diversified and balanced
lower your volatilies and risk. Low costs just go straight to
your bottom line.
A couple of others have demonstrated (as have you in your Roth
and your employer-funded account) that by *not* making the
unfortunate market-timing move, you'd have come out ahead. If
I had a bit more time, I'd run a spreadsheet similar to the
one Tad did, but with the 60/40 Vanguard Balanced Index fund.
That should prove quite interesting, I'd think.
David S. Meyers, CFP(R)
Using same assumptions - $71k became over $97k as of 10/30/2011. Only 3
out of the 142 monthly investments would have lost money as of 10/30/11,
factoring in dividends. And overall, a slightly lower freak-out factor
because the drops weren't as large as for all-stock...which has to be
mentioned as a non-numerical advantage of a balanced approach.
Let's not overlook that while 71 >> 97 looks like a 36.6% overall gain,
it's a dollar cost averaged return, the average time held is half the
OP's period or less than 6 years. A CAGR of nearly 6%.
Not the long term average we'd like, but far from a lost decade.
I've modified a spreadsheet I use for some portfolio backtesting
so that it now has a couple of columns for putting $500/mo in starting
on 1/3/00. (I think I've gone one month more than Tad - the
total running up to a few days ago is 71500). The funds used
are VBMFX (Vanguard Total Bond) and VFINX (Vanguard SP500),
Assuming monthly rebalancing. And this is in actual funds,
not some theoretical index.
A 100% S&P 500 portfolio: $71,500 ==> $85,604
A 100% Bonds (Agg) portf: $71,500 ==> $101,868
60% stock/40% bond: $71,500 ==> $93,352
40% stock/60% bond: $71,500 ==> $96,678
Hardly a lost decade indeed. And a heck of an
argument for a balanced portfolio (though, of course,
you'd get different numbers for different decades -
this was a relatively unusual one).
David S. Meyers, CFP(R)
I've never done monthly rebalancing. Mainly because I didn't want to
pay fees for the transactions.
Interesting idea though. By rebalancing, you're always selling off
the funds that are doing better and putting them in the ones that
So you're almost by definition selling high and buying low.
You shouldn't have to pay transaction fees for rebalancing in
your 401(k). If you do, it's kind of a rip off.
That said, monthly rebalancing is almost certainly overkill.
I just did monthly because I was working with a monthly series
of data, and was assuming monthly additions to the portfolio.
There have been some studies (it's not difficult, but it does
take a heap of data, especially if you want to go back a good
distance and use longer periods) of the differences in long-term
returns which come from different rebalancing frequencies. Here's
a pretty nice one:
As you can see, the frequency makes very little difference:
On average, you actually do better with *longer* periods -
rebalance every few years - rather than every month. That's
likely because the "buy low sell high" effect from the
rebalancing actually works a bit better if the time periods
between the rebalances is long enough for the momentum of
one asset class or another to get to play out a little bit.
But the effect really is quite small - as you can see on the
chart, the widest difference in averages gets you some 0.23%
difference. That's non-trivial - that's more than the expense
ratios for good index funds. But it's not big enough to make
yourself crazy over, either.
That's precisely what it does for you. It's a way to systematically
buy low and sell high - in addition to keeping you on track for
your target allocation which would, over time, drift if you didn't.
And the drift without rebalancing is exactly in the direction you
likely don't want - it's towards the assets which have had the
highest returns (and likely present the higher risk).
David S. Meyers, CFP(R)
I had assumed you have to pay some sort of fee for every transaction.
Are you trying to say you shouldn't have to pay fees for transactions,
or that you shouldn't have to pay for rebalancing?
If it's the latter, what do you have to do, notify the company that
you want to rebalance and ask that they not charge you a fee?
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