…and how you can do it too

I learned how to manage my own 401(k) portfolio the hard way and I missed out on plenty of gains over the years. I’m telling you my story so you can learn from my mistakes and avoid making them yourself. Hopefully you enjoy it.

I was always a good kid. I studied hard, got good grades and received a couple of university degrees. Fun! But that didn’t help me at all when it came to personal finance. I was clueless.

Retirement? 401(k)? I’m too young for that

Take retirement savings for instance. At 30 years old I had exactly $0 in a retirement investment account. In fact, I had spent my 20s not investing a single cent anywhere.

This is pretty sad because that’s even worse than the average millennial in the U.S. I can’t even pat myself on the back for doing less poorly than others my age. Great!

Average 401(k) balance by age. Ages 20 to 29 - $15K; Ages 30 to 39 - $50,800; Ages 40 to 49 - $120, 800; Ages 50 to 59 - $203,600; Ages 60 to 69 - $229,100; Age 70+ - $213,600

Average 401(k) balance by age. Source: CNBC

Leaving statistics aside, let’s get back to what matters here – me! Now, I had a good software engineering gig. I was able to save something like 30% of my salary per month on average – pat on the back for that! – while living in one of the most expensive cities in the U.S.

My employer at that time offered this thing called a 401(k) plan which I had only heard of before because my previous employer offered it, too. But I hadn’t even paid attention to it back then since I was in my 20s. As most twenty-something year olds I thought “What retirement? Pshh, that’s like 100 years in the future!”

Anyhow, apparently this employer also offered a generous 5% match with no limit and with no vesting period, whatever that meant.

Well, as you may have already figured, my financial literacy was quite terrible back then. I did not invest in what I didn’t understand. I didn’t understand finance or stock markets and from what I gathered this 401(k) retirement plan invested in stocks! In school I studied Computer Science, not Finance. Investing was for bankers, I thought, not for me.

As a result, instead of investing in a 401(k) and getting the extra free money from my employer’s match, I was doing what I knew at that point to be the logical thing to do with savings. I threw them in a savings account. It was called a savings account for a reason, right?

Dipping my toes into 401(k) waters

It wasn’t until around 2013, when I started contributing to a 401(k). I had spoken to several “more experienced” coworkers who contributed to this 401(k) plan and that made me feel more comfortable contributing some of my paycheck to it. At that point I contributed just enough to get the employer match. I set the contributions to 5% and forgot about them for the next few years.

girl reaching toward the water with her foot

Investing for retirement is really not that scary and you should start as soon as possible especially if your employer offers a contribution match.

Fast forward to 2016 when another coworker, who had previously worked at a financial institution and I regarded as someone who knew a lot more about money and investments than I did, told me that I should be maxing out my 401(k) to lower my taxable income.

I don’t know exactly how much I had in savings accounts by then. It must’ve been enough that I didn’t think twice about increasing my contributions to the 401(k) plan this time. Obviously, I’m now glad I did.

Then, in 2017 I landed a new gig and that meant a new 401(k). Oh boy, I was in uncharted territory, again. What was going to happen to my old 401(k)? My ex-coworker wasn’t there to tell me what to do. So I did the easiest thing I could – nothing. I just continued to follow the old advice of maxing out my 401(k). Luckily for me, this employer also had a match, albeit a smaller one.

Knowledge is power

This employer, however, offered something much more valuable. I could speak to financial advisors, free of charge, about my retirement investments. I spoke to them on a few occasions and learned quite a bit. Most importantly I learned that I had control over what my 401(k) money was being invested into. Wow! I could change the allocations and there were all these different funds I could choose from.

The financial advisors explained that instead of paying the higher fees for a blended target fund I could create my own portfolio and invest in cheaper funds. I could even somewhat replicate the blended fund. I also learned about “expense ratios”, which would end up being one of the main factors for choosing an investment in the future. But more on that later.

However, once again, this was getting a bit complicated for me and I thought that if I tried to change things I would probably F it up. So I left the allocations as they were.

A couple of years later I spoke to the financial advisors again. They had asked if I wanted to do a simple check in. That’s when I asked about my old 401(k) and eventually they helped me roll it over into my current employer’s plan because it had been charging me higher fees for years. This employer’s target fund had a lower expense ratio than my old one, and that was good enough for me.

And with great power comes great… Overconfidence

In late 2019 I had been reading a lot about the leading indicators for recessions and it seemed as though one was just around the corner. My spidey-senses were tingling. Somehow at that moment I decided it was the right time to start managing my own portfolio.

I was going to “time the market”. I converted my stocks into short term treasury bonds. That was the closest thing to cash that my 401(k) plan offered. Then I waited for the markets to crash and for the recession to arrive.

Interestingly enough, a few months later it started. The Dow Jones and the S&P 500 were in a free fall. I looked smug and I kept reading. Everything was pointing to a long and awful recession and maybe even a depression. So I stood on the sidelines and watched as the market went down, hit the bottom, and then started going up.

“Not yet”, I thought. Not even close. But the market kept creeping up little by little. “Quantitative easing, blah blah”. I thought there was no way this was the end of the crisis. We were in the middle of the worst global pandemic of a few lifetimes! The whole world was shut down! The market had to go down regardless of what governments around the world were doing to stimulate their economies.

Instead, the markets went up. And up. And up some more. At this point the S&P 500 was above where it had been before I did the portfolio reallocation. But I waited, and waited, expecting a second wave down. It never came.

Finally in 2021 I went back into the market. The end result of my little “timing the market” experiment was an opportunity loss of about 25% in capital gains for my retirement investments which had grown to a decent amount over the previous 5-6 years. Let’s just say the estimated opportunity loss was more than $50,000. It’s painful but it taught me a valuable lesson.

Lessons learned

This whole experience was necessary for me to eventually reach a conclusion that many others had reached before me. I realized that the best performing investment portfolios were the ones that people simply forgot about. I also confirmed that I was definitely not clairvoyant and had no super powers, and therefore shouldn’t try to time the market.

Now that I think about it, the worst possible outcome would’ve been that I was correct in timing the market both on the way out and then again on the way in. Of course I would’ve then attributed this great success to my “superb understanding” of financial markets. Then I would’ve probably made an even more disastrous mistake years later.

The good news is that I now have even more experience managing my own 401(k) investments. Today, I have a 401(k) which follows a Vanguard Target Retirement Fund with a fairly low expense ratio of 0.09% as well as a Traditional IRA where I created my own breakdown with more Vanguard ETFs. It currently holds: 50% VTI, 20% VNQ, 15% VXUS, and 15% BND and has a weighted average expense ratio of 0.056%.

An elderly couple on vacation. Hopefully if I manage my own 401(k) portfolio and save on fees this would be my wife and me one day.

The plan is to retire early and travel the world. Managing my own 401(k) should hopefully help with that!

How you could “manage” your own 401(k)

I use quotes around the word “manage” because based on my experience and on further research I’ve done, there really isn’t much need for active management. Passive investment combined with yearly portfolio re-balancing is all that you need to do. That said, if you are younger you don’t even need to do any re-balancing for a long time so it can be truly a hands off approach.

In addition, there are some fairly easy steps you could take to improve your returns and enjoy an earlier and wealthier retirement.

First and foremost: Start as early as possible

Compound interest is really magical. All you need to do is give it time. The earlier you begin contributing to a 401(k) plan the more it will grow.

Make sure to contribute at least enough so that you get your employer’s match (if that’s offered). If you are able to contribute up to the yearly limit, which for 2021 is $19,500, while still living comfortably, I would do it. I max mine out every year and have no plans to stop while I’m still working and earning a salary.

Second: Make sure your money is invested in low-cost funds

Vanguard funds traditionally have the lowest fees across the board. If you are in a Vanguard fund, chances are it’s already low enough and you don’t need to touch it. My first 401(k) had something like 0.65% expense ratio which is on the higher end.

Investment costs really matter. They could significantly impact your account balance in a retirement account.

To put this into perspective, imagine the following scenario. You have $100,000 in an investment account with no costs or fees of any kind. After 30 years if you don’t contribute anything else to that account, at a 6% rate of return, which is the average, you would have an ending balance of $574,349. Very nice!

If, on the other hand, you are paying a 2% annual fee on that investment, then your ending balance would be just $324,339. A whopping $250,009, or 43% of what you would have earned, would have been lost because of fees! This is how the banks and investment companies make their money. The reason why at 2% per year in fees you “pay” 43% of what you would’ve earned is due to compound interest – “the eighth wonder of the world”.

The cost of a 2% annual fee on your investment over 30 years. This is why I manage my own 401(k)

In blue this is your $100K with no fees. In red you are paying a 2% fee per year.

The good news is that it’s easy enough to take the “management” of your 401(k) account into your own hands and pay as low as 0.03-0.09% expense ratio these days. If you did that for the above scenario, you would have $569,492 in the account after 30 years. A cost of $4,856 over 30 years sounds much more reasonable, doesn’t it?

Third: Roll over your old 401(k)

If you change jobs and your new employer’s 401(k) has lower fees, you can rollover your old 401(k) into your new employer’s plan. The procedure is pretty easy. Just call your new 401(k) investment company (it may even be the same) and tell them you want to do a roll over. This has the added bonus that it lets you manage all your retirement investments in a single place.

Alternatively you can roll over your old 401(k) to a traditional IRA. There you will have even more freedom to invest in whatever funds you like because usually 401(k) plans have a limited choice of investment options compared to IRAs. Remember you want low-cost funds!

Fourth: If you’re young, don’t bother with bonds for a while

If you don’t expect to retire for at least another 20 years, I personally would just invest in stocks and no bonds in a retirement investment account. If your 401(k) has the Vanguard funds (e.g. VTWAX, VTSAX, or the ETF versions: VT and VTI) you could be paying very low fees and let your money multiply while still being very diversified owning the total stock market index (which is 9037 holdings in VTWAX for instance). You can get some bonds later as you get closer to retirement. There’s a simple formula that you could follow to create your portfolio that works for most people:

Percent invested in stocks = 120 – Your Age
Percent invested in bonds = 100 – Stocks

For example, if you are 23 years old, following the formula you’d be investing 120-23=97% of your portfolio in stocks and 100-97=3% in bonds. But again, honestly, I wouldn’t even follow this formula until you reach maybe 40 years of age. If you want to retire sooner, however, that may change things a bit. Then again if you are thinking about early retirement, you probably already know what you’re doing with your money and don’t need to follow this general rule.

Final thoughts

Retirement investments really aren’t that complicated and everyone should be able to enjoy higher gains and account balances by avoiding pesky fees. I happily manage my own 401(k), Roth IRA, Traditional IRA, and taxable investment account now without spending much time on them because I am sticking to passive investing and low-cost index funds.

For more tips on how to invest for retirement check out my previous post on the topic.

I’ll close with an entertaining video from John Oliver that you should absolutely watch as it has more details about financial advisors and types of fees to watch out for. As usual, thanks for reading and I look forward to your thoughts in the comments section below.


P.S. Note that this post goes over my 401(k) story and focuses on retirement investments, but everything here could be applied to other types of investment accounts, such as Roth IRAs, Traditional IRAs, and regular taxable investment accounts.

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