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?” This is a great question.

First, I will admit that I don’t claim to be a pundit and I have made my fair share of mistakes as an investor and learned well from them.

One of those lessons include trying to actively manage my 401k investments.

I know this is an extremely sensitive topic and there is always a heated debate that goes on between active vs. passive portfolio management.

As a common man, if you were given $5000 today and tasked to beat S&P return any given year, would you be able to beat the market? Now it gets 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?

That’s a big self imposed challenge. According to CNN money, 86% of active money mangers stunk in 2014. Now try beating S&P year after year.

According to CNN money, “Nearly 89% of those fund managers underperformed their benchmarks over the past five years and 82% did the same over the last decade.”

Here is a link to Money Chimp’s S&P performance tool – you can see CAGR of S&P 500 over a 100 year period. You can see that an average return of 8% per year over long period is certainly possible to achieve. For example, S&P 500 CAGR (Compounded Annual Growth Rate) from 1950 to 2014 was a whopping 11.42%

I am fan of Warren Buffet and I value his opinions. According to CNN Money, here is what Warren says – “2. Buffett recommends passive: Even legendary stock picker Warren Buffett likes that approach. In his annual shareholder letter last year, he wrote that he’s advised the trustee of his estate to put 90% of its assets for his wife in a “very low-cost” S&P 500 index fund, because he believes the “long-term results from this policy will be superior to those attained by most investors.”

Now getting to back to my story – long story short – I didn’t beat the market by actively managing my 401k account. However, I learned my lesson soon – this was a decade ago. I just set up my 401k to get invested in a target date retirement fund that has a blend of stocks and bonds. It has done fairly well and I have never had to break a sweat trying to manage my 401k account since. It has done much better than my actively trying to manage it, however it has not beaten S&P 500 returns.

I understand that everyone’s financial situation is unique. You are the captain of your ship just like I am of mine. Do your research and draw your own conclusions.

Finally, to answer the question, yes it is certainly possible to achieve ~8% return over longer investment periods with dollar cost averaging into the S&P 500 index. I understand that everyone’s financial situation is unique. You are the captain of your ship just like I am of mine. Do your research and draw your own conclusions. I will state the obvious that past performance is no guarantee of future results. As for me, I give my thumbs up for passive investing into the S&P 500 index.

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