Comparing Current 401k to Index Funds Performance

Investing
#1

Hey everyone!

Just completed Jeremy’s course. I immediately started to look at how my 401k is being invested. Since I just turned 30, I figured I’d looking at ways to optimize.

I did a backtest to compare what I’m currently invested in versus a target date and the three fund portfolio. My current allocation came out slightly better.

Since I’m fairly new to this - I wanted to see if I’m missing something or are there some cases where you don’t need to do all index funds?

Thank you :innocent:

1 Like
#2

Hey @cforcam!

Very cool analysis! I loved that you dug in like this! Here are my thoughts:

  • You’re not exactly comparing apples to oranges. I assume Portfolio 1 is your 401k? I don’t believe there are any bonds in there, so you’re comparing a 100% stock portfolio to a 90% stock portfolio which have a bit different result. If I switch the 3-fund portfolio of index funds to a two-fund portfolio, it slightly outperforms your 401k allocation.
  • The time period in this analysis is very short, only about 2.5 years. And those 2.5 years where the market has pretty much screamed straight up. That makes the all stock portfolio look better. The next 2.5 (or 40 years) won’t look the same. If I switch out those new Fidelity Zero funds for older vanguard funds in order to widen the time horizon, the index fund outperformance widens a bit.
  • There’s some randomness/luck built in. Over short periods of time some actively managed funds absolutely do beat the market. But study after study shows that picking those funds is unlikely to result in outperformance going forward.
  • There’s some hindsight/survivorship bias built into 401k funds. Your company or their industry advisors probably suggested “good funds” that have outperformed the market looking backwards. But that’s kinda like buying last week’s winning lotto numbers. It looks like you’re buying into winners, but it’s not likely to happen again going forward.

All that said, it’s not like your 401k allocation is BAD. The most important part is putting more money in. But studies show the only reliable way to improve the performance of your investments going forward is to minimize fees, hence why we go with index funds. :slight_smile: