Sunday, September 16, 2007

What is your 401(K)'s ROR?

What is the average return you are getting on your 401(K) account? I track my 401(K) investment returns for the obvious reason - I want to know how my 401(K) is doing. If the bank offers you 10% interest and you put in $1000 - you would be expecting an extra $100 in your account at the end of year. So what is the ROR of your 401(k) plan?

The easiest way to get your ROR is by visiting your 401(K) account and viewing the available rate of return. Different financial institutions offer different levels of sophistication when it comes to ROR information. This calculation is complicated because of the periodic investment nature of this account. Every month some money gets moved into your 401(K) account and equities are bought with that. So the ROR is not the usual profit/loss divided by principle. What is generally used to calculate this personalized rate of return is called the Dietz method. You can calculate your portfolio return by using the old and trusted Excel(using XIRR or other more complicated methods to compute ROR). Other software products like Microsoft Money or Quicken may also be able to help (I have not used them) or you could seek professional help.

Bottom line is - to make changes to your current investment strategy you need to know how you are doing. If you are not measuring your progress - you have no way of knowing what to do to make improvements. Be smart and put your money to work - today!

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