Who needs Jim Cramer when you have Kevin McKee!?
I just checked my 2010 401k return on investment, and it was good. Really good.
For a frame of reference, Moneychimp says the S&P 500 had a 14.32% gain in 2010, which is a pretty good year considering most experts project an 8-10% annual return in an average year.
My personal return on my 401k was 26.85%!
I got almost double the S&P 500. In fact, the S&P 500 is one of the four funds I held in 2010, and it was my worst performer.
I’m no investing expert, but I do understand the basic concepts of investing. One fundamental rule is this: the higher risk you are willing to take, the higher reward you can potentially get. My portfolio is extremely risky, and it paid off this past year.
Here are the four funds I have in my 401k:
- Company Stock – 50%
- S&P 500 – 20%
- REIT Fund – 20%
- Emerging Markets Fund – 10%
Is it smart to keep 50% of your 401k in company stock forever? Almost certainly not. Is it smart to have 50% of your 401k in company stock when your company has a great year, with plans to de-leverage at a certain price point? I’ll answer that question with this question: Is a 26% annual return good?
Is it also risky to hold 20% in a REIT fund, which stands for Real Estate Investment Trust and is essentially investing in property at a time when the real estate market is so depressed? The answer, of course, is yes. Remember, more risk means more potential earnings!
How did you do in your 401k? Were you afraid to make risky bets, and did it cost you potential earnings? Do you have a better mix of investments that not only had a higher return, but is also less risky? Do you think I’m stupid for leaving 50% of my 401k in the hands of my employer? There are so many discussion points here. Let’s discuss!
This post was featured in the Carnival of Wealth at ControlYourCash
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
While your net worth is small, it is worth taking extra risk to get a boost. I knew you had a lot in company stock, but didn’t see your net worth until a few days ago. I think you made the right move! Is the 26% included company contribution? If so, I am not that impressed. :p
I’ll wait for your answer before I tell my 401k gain.
ps. come see my directorial debut!
It does not include my company match (which I don’t even get until March of this year for my 2010 contributions). It does, however, include the massive gains I got on investing in company stock. 🙂
I thought I did well with my 401k at 18%, but you won by a mile. 🙂
The reason I got 18% is because I had a lot of Emerging Market and Small Cap funds in the 401k.
I still follow my asset allocation, most of my Blue Chip funds are in the employer contribution portion and individual account.
Good move in 2010!
I had the same question as retirebyforty, and also if that includes your own contributions. 26% is really impressive, but when you’re young, you can take those risks, and probably should. Playing it safe your whole life? BORING!
That’s an ROI, so it doesn’t include contributions from me or my employer. I don’t know the exact formula for how it’s calculated because some gains are annualized, but I trust the 401k company that they know what they are doing.
If you just take my interest earned in 2010 divided by my balance on Jan 1 2010 using the formula below:
(Balance on Dec 31 2010 – Balance on Jan 1 2010 – Contributions in 2010) / (Balance on Jan 1 2010)
Then my return was like 22%. That calculation makes more sense to me, but I also understand why they annualize gains.
That’s pretty amazing, congrats! Obviously working for a great company has paid off!
That’s awesome.
I’m the same way — I take risks in my investments but I have a good chunk of it in cash or in “secure” investments I never plan to sell.
I only send out my money to the riskiest bets I can make, if I can afford to lose it.
Awesome job.
My retirement is gonna be fine even if I lost everything I have saved to this point, so I’m happy to take the risk! It would suck though…
First off, congrats on a great annual return. However, looking at this objectively, the return is very much attributed to, as you put it, maximized risk…and also luck. I’m all for taking on a lot of risk to get higher beta over long time horizons. My 401k is about 95% equities. So I’m with you there. However, company stock? I’m 0%. And I think virtually everyone else should be too. Reason being, there is no reason any one particular person’s company stock should outperform the market in the long-run. Otherwise, everyone’s company would outperform each year which is impossible.
Not only is it “luck” when your particular company outperforms, but you’re also taking on double-jeopardy. You already derive your paycheck from this same company. You may also hold restricted stock or options (I do), so make that triple jeopardy for some. Basically, I already benefit when my company does well without holding stock. But if the company starts to sink, not only does your 401K decline, but you may also find yourself out of a job if the going gets real rough.
I applaud your success this year, but I’d suggest you reconsider the extremely high concentration of company stock and get out of that overlaid risk situation you’re in now.
I agree that it’s not a good long term solution, but to say someone should be 0% in a company’s stock is crazy to me. If you like the company and think they will do well, then you should be invested in them, just like any other company.
And I have mitigated the risk of me losing my job by being a top performer and kicking butt in a critical role. Job security is the absolute least of my concerns right now.
I understand the risks, and I’m happy to accept them.
Good job. As you say concentration is a risk that doesn’t make sense with $500,000 at age 60 but with relatively small amounts in your 20’s it really is not risking anything significant. Even if the company stock went to 0 it wouldn’t affect your retirement account 40 years from now significantly. But as you grow the value and move closer to retirement the risk is not wise.
Too often people talk about risk without looking at the individual circumstances.
I certainly wouldn’t not suggest over 20% in company stock (of your total retirement portfolio) with less than 20 years to retirement. Another mistake people make is see 40% in company stock in my 401(k) – and say that is horrible. Oh I have only been at this job 1 year and I have a 401(k) from my previous job that has 20 times the value and is well diversified. In that case 40% of some small percentage of retirement assets is not a big risk.
It is all relative, I agree. I also just know a lot about my company and feel strongly about it doing well. I also have stocks and options for my company outside of my 401k, all of which I will be unloading at a certain price point.
Nice work this year, Kevin. 50% in one company’s stock is seriously risky but if you’re young and single, then go for it. I would encourage anyone with a family not invest that much in a single stock no matter what stock it is. Too many random things can happen with a single company. All it takes is for the CEO to do something stupid like get a DUI or say something inappropriate to an employee of the opposite sex. Just look at BAC, just “rumors” that wikileaks had something on them and their stock tanked. Please be careful out there!
I am young and single, so I think I’m good!
And I’m confident my CEO could get hit by a bus tomorrow and my stock would still be profitable in the long run. I believe in the company, not just the dude running it.
This is why you will never win the race to a million. Not because of your crazy ridiculous risky 401k investments…but because I got a 28% return (2% better) 🙂
We had a great year too, but not 26%. Most of our stocks pay 3-6% dividends, my mutual funds for the 401(k) and Roth IRA return 10-20% a year, and the rest of our cash is making less than 1.5% at ING.
Not that I have any clue what you do, my office had a client who worked at C and for years we begged her to diversify her holdings…she didn’t.
Her net worth dropped by 70% or so when C hit the fan.