In April of 1992, as a still fairly new employee at the DOT, I started contributing to the state version of a 401k: a deferred compensation plan. I started pretty small and put my money in Fidelity Magellan. This was my first exposure to investing in the stock market. I have been contributing ever since, slow and steady. By January of 2000 I calculated that my savings had doubled in value and I had more in gains than I had invested. But by September 2002 that gain had been completely wiped out and my savings were worth *less* than what I had put into the account.
The amount of my contributions varied over time so it was hard to calculate an average rate of return to see how I was doing. I finally figured out a way by guessing an interest rate and applying that to every quarterly balance in my spreadsheet. If the total of all those quarters of interest and my contributions adds up to what I actually have in the account, then that’s my number, otherwise I just guess higher or lower until I zero in.
My original estimate when calculating the hundreds of thousands I would have saved up by retirement was 7% which reflects the historic stock market return of 10% minus 3% for the historic inflation rate. I have been investing now for 13 lucky years. And I finally have the answer for the average annual rate of return during that entire period: 1.75%.
The accepted reasoning is that you will live long enough for the stock market to even out the ups and downs and get a 10% return. However, I chose to go the way of an averse risk taker and settle for the fix rate return of an annuity even though the return is 5% but gains are not taxable until received.
Sure, now you tell me.
That’s depressing.
It seems my spreadsheet neglected to divide the interest rate by four quarters. So 1.75% was the *quarterly* return I’ve been getting. If I divide the interest rate by four to represent each quarter, it will come out to four times that, or 7% per year. At least for now. That’s very interesting because 7% is what I was shooting for anyway.