The low rate of return is due to a conservative asset allocation. About 50% of the portfolio is currently sitting in a stable value fund earning a guaranteed 2%. As I’ve shared before, back in late February 2020 and then in early March 2020 I sold a majority portion of my 401K into a stable value fund with a guaranteed rate of return of 2.5% (the rate has dropped down to 2% now). I watched as the stock market continued to tank and I thought that I was so smart for correctly timing the market.
Then when the stock market started roaring back in late March 2020, I didn’t have the guts to put my entire balance back into my stock market funds. I sat on the sidelines with this huge stable value fund balance. Market timing is extremely difficult because you need to perfectly time 2 different transactions: when to sell and when to buy. I’ve been dollar cost averaging the stable value fund back into a total market fund over the last year. Thankfully, we didn’t fiddle with our other accounts too much during this time.
If I had simply just held on to my funds without selling in 2020, my account value would have been MUCH higher by now (probably over $180,000 higher!) due to a ~60% increase in the US stock market since late March 2020. I wasn’t able to time the market properly and missed out on some huge gains. Oops - an expensive lesson learned. The stock market crash last year taught me that my risk tolerance wasn’t as high as I thought it was (previously 90/10). Our overall portfolio (IRA, taxable, HSA) is now 70% stocks and 30% bonds - and will probably stay that way moving forward.
My current new 401K contributions consist of:
71% Fidelity S&P 500 Index Fund (FXAIX)
6% Fidelity Mid Cap Index (FSMDX)
13% Vanguard Small Cap Growth Index (VSGAX)
10% Vanguard Health Care Index (VHCIX)
My wife is also maxing out her 401K with international stock market funds to further diversify our investments. We are Coast FI now but will continue to invest towards our financial freedom. Here is the Fioneers’ definition of Coast FI:
“Coast FI is when someone already has enough invested in their retirement accounts that would grow to provide them with a comfortable traditional retirement. They wouldn’t need to add another dollar. If someone has achieved Coast FI, it means that they only need to cover their actual costs of living with active income.”
You can find a great Coast FI calculator here. How is your financial progress? Keep investing my friends.