Market Watch
If you have a 401(k) plan at work, you cannot help but notice the incessant cheerleading for equity investment from your 401(k) provider.
But over the last 10 years, how good an investment have equities been? The answer is not that hot, even though the last two quarters have been quite good. As I have done before, you can see here the actual returns for five Vanguard mutual funds—their S&P 500 fund, their total stock market index fund, their total international stock index fund, their total bond market index fund, and their money market fund.
The graph shows that the bond market fund has done the best by far over the last 10 years, with the international fund just beating out the money market fund for second place (its last 12 months have only somewhat regained its dramatic losses over the previous 12 months, whereas the money market fund has paid very low dividends recently). But, still, if you parked $10,000 of retirement money in the money market fund 10 years ago, you would have $13,652 now. If you had invested that in the S&P 500 fund, you would have lost money, not just before inflation, but overall, with a position of $9,776.
Labels: investment advice, investment returns, money market funds, stock market, stupid financial tricks
Why Investment Advice Stinks
If you are lucky enough to be an American with a 401(k) plan at work, you have heard for years the continuing mantra that it is best to be in equities over the long haul. Bonds, never mind money market funds, are for losers who will never retire comfortably.
Take a look at this link and click on "Growth of $10,000 chart view": it shows the return over 10 years ending on 30 September 2008 of hypothetical investments in Vanguard's Prime Money Market fund, and its Standard and Poor's 500 fund, its Total Stock Market Index fund, its Total International Stock Index fund, and its Total Bond Market index fund.
Vanguard is famous for having low fees for all of its funds, so these returns are probably a bit better than the typical stock, bond, and money market funds, but they represent returns of investments one might actually have made. And they do not include the awful month that the stock market had had in October.
The money market fund—surprise—outdid the Standard and Poor's 500 fund, and was barely below the total stock market index fund (but would be ahead for the 121 months ending today). Anyone who bought the total bond market fund would be well ahead of either of the domestic stock funds. And only the international fund beats the bond fund over the 10-year period (but it declined about 20% in October, while the bond index fund fell only 3%).
Some lucky ducks surely have done better than the indices: anyone who bought a mid-cap or small-cap index fund 10 years ago would be ahead of each of these funds, but a lot of 401(k) participants do significantly worse than market benchmarks.
When Republicnas or Vlue Dog Democrats speak wistfully of putting Social Security funds into the stock market, remember that chart.
What is truly remarkable about these returns is that the last five years have featured lower taxes on pital gains and dividends. In essence, the federal government has goosed stock market returns by taxing most of its dividends and all of its capital gains at only 15% for investors investing outside their retirement accounts. Imagine how lousy the stock market might look if the 2003 changes had not gone into effect.
Labels: investment advice, investment returns, money market funds, stock market, stupid financial tricks
