ROI Question

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NoMoreInvestingExcitement
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ROI Question

Post by NoMoreInvestingExcitement » Thu Jan 03, 2008 10:12 pm

Hi All:

New poster here.

I came in way too late on the "Jeff AKA Chuck D" post regarding 2007 ROIs for my reply post to have any hope of getting feedback, so I thought I'd try my own post.

Here's a copy of my reply post to that inquiry (in short, as you will see, I'm curious to know how Bogleheads categorize the "free" money they get from company matching on 401Ks: should such moneys be counted as net inflows for purposes of calculating each year's ROI or should that "free" money be counted as part of your return on investment?). Thanks for your input!

"I converted from active management to the Boglehead way of life during the first quarter of 2007 (to the extent possible ... the options available in my 401K prohibit me from going all out with indexing, unfortunately).

Anyway, I calculated my 2007 ROI based on W. Bernstein's Four Pillars footnote at hardcover pages 186-187. Basically, since I had net inflows, the equation per Bernstein is (2007 close minus one-half of my 2007 net inflow) divided by (2006 close plus one-half of my 2007 net inflow) minus 1.

Before I spill the news, I calculated it in two ways ... and I'd like to hear what you folks have to say about the variation. I think I know what your input is going to be, but let me know anyway.

When counting my company's 401K match as an investment inflow, my ROI for 2007 is 6.3%.

When counting my company's 401K match as a return on investment instead of as an investment inflow, my ROI for 2007 is 9.6%.

Glad to join the board..." All the best for a great 2008 (investing and otherwise).

diasurfer
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Post by diasurfer » Thu Jan 03, 2008 10:26 pm

ask yourself the question, what is the purpose of calculating your ROI in the first place? If you are calculating to see how your investment portfolio performed relative to a benchmark such as S&P500, it makes no sense to treat your employer contributions as "returns". I guess if you want to see how much your money is growing on top of what you put in, then the other way makes sense.

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tdhg566
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Post by tdhg566 » Thu Jan 03, 2008 11:26 pm

Although my spreadsheet does give me a "growth only" number (excludes my contributions), I only capture that at end of year and only for historical purposes. For all other purposes I don't even distinguish between our 401k or IRA contributions versus compound growth, much less breaking out the company match. All I really care about at any point in time is my total portfolio value, and whether I'm in the right asset classes and "in balance" across them. Earn it by compounding or save it from income, result is the same to my bottom line.
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tetractys
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Post by tetractys » Fri Jan 04, 2008 12:19 am

Well I guess if you consider your work an investment, and the matching contribution as a return, then hey, why not? And again, maybe you could care less about the returns of each holding individually, and are only concerned about the return of your investments in aggregate, then hey, why not? But then isn't that company match a free lunch? Hell no! -- Tet

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wlpotts
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Post by wlpotts » Fri Jan 04, 2008 3:48 am

My view on this subject is that a comany match is just a contribution that you record as if it was your own personal contribution.

If I were just starting out investing and contributed $1000.00 and recieved a 50% match, would my automatic return be 50% in a constant market? No! It is $1500 that has been invested on by behalf.

Of course I would probably be fee'd to death over the term. :lol:
Some have it. Some don't. Either way, here I am!

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NoMoreInvestingExcitement
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Thanks for your input

Post by NoMoreInvestingExcitement » Sat Jan 05, 2008 1:47 pm

Sorry I couldn't get back sooner ... big power outage in the Bay Area.

Anhow, thanks for your input.

I was pretty sure most folks here would take the view that 401K company matches should be considered the same as an individual's IRA contrib or 401K contrib or taxable account contrib, etc.

I thought it was worth getting your opinions, however, b/c I always hear and read things like "don't leave company match money on the table because it's essentially free money that gives you '100% return' and you just can't beat that" or other things to that effect.

I guess I just can't do it that way though ... feels like I'm conning myself into believing my portfolio did better than it actually did. So, I guess I'll stick with my hard-fought 6-and-change-percent ROI and forget the 9+ percent ROI!

As some of you folks clearly said, it's the $ bottom line that counts in any event.

Thanks again.

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