If you are a 40 year old with $500,000 in 401k assets, chances are you have 80% in stocks. If you were that 40 year old 10, 20, and 25 years ago, what would your equity portfolio be worth today?
If you achieved market returns, which few do, you earned an average of 8% a year over the past 10 years, and that $400k has grown to $883k. If you earned 7% you have $800k, at 6% your equity portfolio is worth $724k. At 5% it’s worth $655k. If you don’t know whether you are on the 8% side of this range or the 5% side, ask your “financial advisor” why not, and get the number. As you can see by the differentials, the cost of your not having this information could be exorbitant and any advisor worth her salt is providing performance information quarterly. It’s the only real way to know if you have made good investment decisions, good retirement decisions and good advisor decisions. Know your numbers, know what you earned, and don’t settle for 10% returns on your equity portfolio when the market is up 13%. What you don’t know costs so much more than you might realize.
If you had been invested for the past 20 years the positive effects of good markets and the time value of money really kicks in. Market returns were 10% average per year, and your $400k would be worth $2.9 million. At 9% it would be $2.4 million, at 8% it’s $2.0 million and at 7% it’s $1.6 million.
Over 25 years, where the average annual return is 9.8%, your $400k would have been $4.6 million, at 8.8% average annual return it’s $3.6 million, at 7.8% it’s $2.8 million and at 6.8% it’s $2.2 million. $2.2 million is a lot of money, but it’s not $4.6 million.
If your portfolio didn’t grow at the upper end of this range and you want equity portfolio returns that keep pace with the US equity market, consider engaging a professional investor with a successful track record. A seasoned advisor who invests in a low fee portfolio managing your retirement assets as a fiduciary who acts in your best interest will help you earn competitive returns net of all fees.
Don’t be wondering in 10 years what your investment decisions cost you.
These calculations are based on the average annual returns of the US equity market over the past 25 years (Russell 3000, 1990 to 2014, compounded monthly) and the portfolio returns reflect risks commensurate with US equities. They are unique returns for this past 25 years and no one knows what the returns of the next 25 years will be. But whatever the returns, it has been well documented in portfolio management research that low fee and market competitive portfolios earn significantly more than high fee, low performance portfolios. The dollar value of just how much more you earn depends upon the US equity market returns in any given tracking period, and the longer the period the more significant the difference. There are years when your portfolio will lose money.
Know your returns, know the risks you are taking in your portfolio, and maximize your returns in your risk profile. There is a good possibility you are already taking the risk, make sure you are getting returns commensurate with those risks you take.
Past performance does not guarantee future results and high past returns are a poor predictor of high future returns.
. % Return, FV of $400k FV of $400k FV of $400k FV of $400k
. Avg Ann @R3k @R3k-100 bp @R3k-200 bp @R3k-300 bp
1y 12.56 453,235 448,770 444,346 439,961
3y 20.51 736,219 714,812 694,011 673,799
5y 15.63 869,682 827,782 787,869 749,850
10y 7.94 882,807 799,289 723,613 655,048
15y 4.82 822,807 708,578 610,131 525,296
20y 9.96 2,906,879 2,383,676 1,954,323 1,602,042
25y 9.78 4,568,880 3,565,082 2,781,250 2,169,309