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Pathetic Annualized Return? 5.74% since '03
Old 10-09-2012, 11:33 PM   #1
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Pathetic Annualized Return? 5.74% since '03

So, I'll admit I pay very little attention to my investments. I just make sure I put money into my 401K and Roth accounts. That probably should change.

My 401K goes to a target fund. I opened up my Roth in 2003, and kind of randomly picked some funds. In the 5 or so subsequent years, I stupidly added money to the best performers. I've since learned about rebalancing and now contribute to level the funds. I just looked at my latest quarterly statement and it says my annualized portfolio rate of return since initial investment in 2003 is 5.74%. Is that not pathetic?! It seems like it is. Year to date since 1/1/2012 looks better- 13.83%.

What are some basic things I can do to improve my portfolio performance? Right now I have 45% growth, 35% growth and income, 15.44% equity-income, and 3.79% balance funds. What are the implications of moving it all into a target fund? I really feel like I need to see better returns if I'm going to retire early!
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Old 10-10-2012, 12:13 AM   #2
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Actually, that doesn't sound too bad. If you had checked in 2009, you would have seen a whopping negative return. Since then, you've bounced back, and bounced back enough to have a pretty reasonable annualized return even if the timeframe includes the "great recession" stock debacle.

You might want to visit bogleheads.org with your specific portfolio and they will give specific recommendations. Of course they will probably also tell you to get out of actively managed funds and into low cost indexes.
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Old 10-10-2012, 12:37 AM   #3
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What are some basic things I can do to improve my portfolio performance? Right now I have 45% growth, 35% growth and income, 15.44% equity-income, and 3.79% balance funds. What are the implications of moving it all into a target fund? I really feel like I need to see better returns if I'm going to retire early!
What do your funds' expense ratios look like? Some managed funds can be 1% or more higher than others (or index funds). Compounded annually, that can add up considerably over time. Target funds generally have lower expense ratios than other managed funds.

What exactly is your AA, and is it where you think it ought to be?

I agree with G_O. We'd all like to see better returns, but if the economy chugs along at a reduced pace, or sees further downturns, we have no control over that.
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Old 10-10-2012, 02:19 AM   #4
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You are making a return which is higher than inflation (I assume after fees) over a time period which has featured some fairly wild swings in the market. That's better than many people have done over this period (think of those who sold at the bottom or who had leveraged into real estate shortly before the crisis).

Seaching for "better" returns is all very well, but anytime I make a positive real return which is higher than my (target post retirement) withdrawl rate I sleep well.

Before deciding whether your return is "good" or "bad", you need to have a look a a few things:

1. expense ratios (as Tyro mentions)

2. how the return was calculated - there are various ways to do the calculations and fund managers are good at picking the one(s) which make them look the best

3. what a comparable benchmark would have done during the period

A lot of people go with very simple protfolios as a starting point: X% equities and Y% bonds and rebalance whenever the allocations get too far away from target. It takes a lot of the emotion out of things and may help avoid performance chasing. If you want something more sophisticated, you can add other asset classes to your portfolio.
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Old 10-10-2012, 04:02 AM   #5
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As others have observed, 5.74% is not a bad annualized return at all, considering recent economic events. Especially if it is net of fees. What I worry about is the level of risk your portfolio has. If you are young, that may be acceptable, but if you are approaching retirement, it's really important not to lose money, big time.
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Old 10-10-2012, 05:06 AM   #6
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So, I'll admit I pay very little attention to my investments. I just make sure I put money into my 401K and Roth accounts. That probably should change.

My 401K goes to a target fund. I opened up my Roth in 2003, and kind of randomly picked some funds. In the 5 or so subsequent years, I stupidly added money to the best performers. I've since learned about rebalancing and now contribute to level the funds. I just looked at my latest quarterly statement and it says my annualized portfolio rate of return since initial investment in 2003 is 5.74%. Is that not pathetic?! It seems like it is. Year to date since 1/1/2012 looks better- 13.83%.

What are some basic things I can do to improve my portfolio performance? Right now I have 45% growth, 35% growth and income, 15.44% equity-income, and 3.79% balance funds. What are the implications of moving it all into a target fund? I really feel like I need to see better returns if I'm going to retire early!
I don't know if it's good or bad but, your return is comparable to my 401k return over about the same period; up, down, then back up again; stayed in the whole way. My after tax investments return is higher though; different AA.
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Old 10-10-2012, 06:02 AM   #7
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Not too bad considering what we have been through since then. I just hit 10 years in my company's 401k and I track the performance quarterly. My 10-year annual IRR is 5.11%. Our expenses are high - averaging 1% and it was probably higher in the past when we had a different plan (and were a much smaller company then). That 1% expense ratio eats up 9% of my 401k over 10 years.
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Old 10-10-2012, 06:46 AM   #8
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That 1% expense ratio eats up 9% of my 401k over 10 years.
Do you get a match?
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Old 10-10-2012, 06:50 AM   #9
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Do you get a match?
Yeah, we get 100% match on the first 4.25% so it's not so bad about the expenses.
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Old 10-10-2012, 09:20 AM   #10
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Yeah, we get 100% match on the first 4.25% so it's not so bad about the expenses.
That's not bad, a 100% return on the first 4.25%. In regards to the 1% expense ratios, those are higher for a 401K plan, assuming there are significant assets in the plan. However, one has to consider that merely switching to lower ER plans does not guarantee better results, it depends on AA and other factors..........
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Old 10-10-2012, 09:21 AM   #11
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Thanks everyone. I just didn't know if I was doing terrible compared to everyone else. I remember auditing a retirement plan when I was in public accounting, and they'd always talk about one employee that actively managed her portfolio and it's performance was terrible. Most of the other employees were much more hands off.

I'm not particularly close to retirement- turned 33 a couple months ago. So I know it's kind of aggressive/risky. I'll check the expense ratios on the funds I own. My 401K is a vanguard 2045 target fund, so I assume expenses are pretty low there. And it is 10% bonds, which I feel should be lower, given my age, maybe?

Tyro, what is AA?

I used this calc. here for the S&P 500: CAGR of the Stock Market: Annualized Returns of the S&P 500
for Jan 2003 thru Dec 2011 and the annualized return is 6.12%
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Old 10-10-2012, 09:25 AM   #12
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Thanks everyone. I just didn't know if I was doing terrible compared to everyone else. I remember auditing a retirement plan when I was in public accounting, and they'd always talk about one employee that actively managed her portfolio and it's performance was terrible. Most of the other employees were much more hands off.

I'm not particularly close to retirement- turned 33 a couple months ago. So I know it's kind of aggressive/risky. I'll check the expense ratios on the funds I own. My 401K is a vanguard 2045 target fund, so I assume expenses are pretty low there. And it is 10% bonds, which I feel should be lower, given my age, maybe?

Tyro, what is AA?

I used this calc. here for the S&P 500: CAGR of the Stock Market: Annualized Returns of the S&P 500
for Jan 2003 thru Dec 2011 and the annualized return is 6.12%
AA is asset allocation. I am not a big fan of target funds. The premise is good, but their performance for the most part has been quite ordinary. You could always post the fund choices on here and we could take a crack at it for fun..........
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Old 10-10-2012, 09:34 AM   #13
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Thanks everyone. I just didn't know if I was doing terrible compared to everyone else.
The only thing I'll suggest is that you concentrate on the long term, not what happened over the last 12 months.

For DW/me, who have been in the equity market for our respective retirement funds over the last 3+ decades, what happened in the short term (less than 10 years) dosen't matter, as long as it meets our joint goal for returns (6%, over the long term).

We have surpassed that goal quite well, and over those three decades had only three years with "losses" - well made up over subsequent years.

"Doing terrible compared to everyone else"? The only person you need to "beat" is yourself - that is beat the mark that you set. And not over a year, but over an extended period of time.

Been there, done that...

Just some comments from an old phart who has been on the path (along with DW), for many, many years.
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Old 10-10-2012, 10:03 AM   #14
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If someone would guarantee me 5.74% right now, I'd take it. Our target has been a modest 4% and we've been beating that pretty handily. But 5.74% ain't too shabby these days.

4% was a conservative target for us because we concluded 3 or 4 years ago that if we could get 4% on what we had, and 4% on what we expected to add for 3 or 4 years and then 4% long term, we could make it. We have one long term, well secured investment that is paying 6.5%, with 6 more years to go, and the savings/retirement accounts have been way exceeding the goal. Every time I look at the whole situation, I think something like 8% to 10% would be really wonderful and make me comfortable, but we don't really need those kinds of returns.
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Old 10-10-2012, 11:30 AM   #15
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Remember that you must factor in the biggest market crash in our lifetimes. That 5.74% includes a huge drop in 08/09 coupled to a non-event year of 2011.

I'd look at what you were averaging on a year to year basis up until 08 and since 09. That might give you a more accurate sense of performance for those funds or at least help you factor out the crash as a contributing factor.
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Old 10-10-2012, 11:52 AM   #16
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If I knew of a guaranteed 5.74% return vehicle for the next 10, or better yet 40 years, I'd gladly take it. To me guarantee implies no risk of default and return would be exclusive of principal withdrawal...for annuity proponents.
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Old 10-10-2012, 02:47 PM   #17
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If I knew of a guaranteed 5.74% return vehicle for the next 10, or better yet 40 years, I'd gladly take it. To me guarantee implies no risk of default and return would be exclusive of principal withdrawal...for annuity proponents.
But it would be exposed to inflation risk.
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Old 10-10-2012, 02:50 PM   #18
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If someone would guarantee me 5.74% right now, I'd take it.
But, isn't the reason they earned almost 6% because they took risk? Had they invested in 100% guaranteed paper, their return would probably have been a lot lower. My 2 cents.
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Old 10-10-2012, 03:25 PM   #19
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Your AA is the first place to start. The percentage in stocks versus percentage in bonds is the first thing. Your balanced fund will have some bonds. At 33, you might want 10% to 30% bonds, though I'm in the 0% camp. It's mostly a personal choice that determines how much your portfolio value jumps up and down, though more bonds will historically lower your long-term returns. Your bond exposure from the balanced fund is probably small. Next, I'd look at percentage of home country stocks versus international stocks. That's the big three in AA, bonds, domestic stocks, international stocks. You can look at the Vanguard target retirement funds for example of percentages that might be reasonable for you.

You can further subdivide into growth/value and large company/small company, developed country/emerging country, and add real estate, commodities, and other specialty assets if you like. If you don't do it specifically, at least be sure both growth and value stocks are represented in your fund choices. One old mistake is to choose all large company growth funds. I think your growth/equity and income funds should have some value stocks in them, but you might check. Try checking out your funds at Morningstar.com if you know the symbols for them.

You might want to check how your possible portolio compares against a benchmark fund to see if it's worth the trouble. If a Vanguard target retirement fund is doing way better than your portfolio over 10 years or so you might consider simplifying.
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