facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external

Is 13-20% Return Good?


"My 401k isn't matched, but the rate of return, is between 13%-20%. Is this good, unusual, or does it matter?"

I appreciate your question and am going to try to do a little deciphering of your question.  First of all let’s take a look at what is your 401k.  Your 401k is a collection of investment options.  You will probably have options to invest your money in stock mutual fund, bond funds, balanced funds, and/or cash.  Please don’t worry if you do not know what all of these are.  The point that I am trying to make is that each of these options will contribute to your rate of return—not your 401k.

When you make the statement that your rate of return is between 13% and 20%, you are probably looking at the historical performance of the investment options that I referred to above.  This is nothing more than what each particular option did last year or so far this year.  The most common disclaimer in the financial industry is that past performance does not guarantee future results.  This is very true especially in the numbers you mention so don’t get too caught up in these.  It is even more important for you to realize that even though recently stocks have been doing very well, you should not consider consistent returns between 13%-20% to be realistic.  These numbers are a lot higher than what we would normally expect.

So on to your real question.  I would say that these numbers do not matter.  What you need to evaluate is what are the individual funds investing in, how does that fit into your investment strategy, and how much does it cost to invest in each option.  These are not easy questions to answer if you are just starting out.

The most important advice I can give you is to start setting money aside now either in your 401k or in an IRA.  It sounds as though you are on the path to accomplishing this.  Good job!  The second most important piece is to have an investment strategy and implement it.  A fee only financial planner can help you decide how much to set aside and where to invest the money.  The earlier you start making the best decisions the better for your long term financial future.  Though this may be self-serving, I strongly encourage you to speak with a professional if you have some doubts.  Small decisions both good and bad can have a huge impact 20, 30, 40 years down the road.  A fee only advisor will help minimize those small errors (and big ones too) and enable more of your money to work for you.