Depressing

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 years better...

-Tad

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.

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.

--Bill

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

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 diversified. 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 international funds. 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 last five. 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 will happen?

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 worth using.

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?

-Tad

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.

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 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 times.

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

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 individual stocks. 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 international. But I didn't foresee the stock market heading off the cliff the way it did. 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 portfolio].

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 trouble.

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.

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.

-Tad

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).

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 aren't. So you're almost by definition selling high and buying low.

Regarding the spreadsheet, remember I've increased the amount I've put in as the years have gone on, so a consistent input wouldn't accurately reflect my situation.

Again, I got rid of the bond fund partly because I have low risk investments in other accounts, so I've looked at the 401k as a place to gamble. Unfortunately, so far it hasn't paid off. If what you guys are saying is true, if I hold on for another five years I should be showing a return, yes? Barring another collapse.

The only alternative I can think of would be to buy back into the bond fund, but I'm thinking that would have a worse effect than selling it in the first place. Wouldn't that just lock in my losses from the international funds (which is what I exchanged my bond fund for)?

Tad was right - I started at the beginning of Dec 1999.

One interesting thing to note - that $500 that was deposited at the beginning of Dec 1999 -- makes for over $1000 difference in the end with the bonds - that's the result of compounding the average annual return over the nearly 12 year period for that very first $500 payment. For bonds, that was 6.2%/yr.

The difference for the stocks, however, was putting in that extra $500 at the beginning and at the end, you end up only $548 more -- the average annualized return over that 12 year period for stocks was, in fact, only 0.29%. So, yeah, if you'd made a lump sum deposit in Dec 1999 and did nothing else but let it compound over 12 years, it was pretty much a lost decade.

The 60/40 annualized return over the 12yrs was just under 3% and the 40/60 annualized return over 12yrs was almost 4.2%

One more minor note - when I asked Tad to check against the Vanguard Balanced index, he got $71,000 ==> $97,000 even though that fund is 60% stocks and 40% bonds, too. Why did the 60/40 portfolio I noted above do worse? It's because the stocks in my portfolio above are just the S&P500 and the Vanguard Balanced Index, for stocks, tracks the MSCI US Broad Market Index, which includes a micro, small and mid-caps all missing from the S&P 500, and over that decade, small-caps averaged 5.4%, just a bit under what bonds did (though with a lot more volatility). As a check against this, if I do 40% bonds, 42% S&P500 and 18% small-caps, I get exactly what we expect: $97,089 and an annualized average return of 4.04% over the period.

I was going to do some of these portfolio historical return numbers anyway, and this was a great excuse to add the "periodic investment" question at the end of it. Thanks for sparking this interesting discussion!

(And thanks, of course, to Tad for the numbers check!)