Sam Taub
Appearances
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
So when it comes to stock market investments like this, one good way to think about a normal return is by looking at the long-term average annual return of a stock index like the S&P 500. Over the last century, the S&P 500 has returned about 10% per year before inflation on average. But that's just the long-term average. In recent years, it's usually been higher than that.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
And in other years, it's a lot lower than that.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
That's exactly the long-term average, so it's not a bad return. But recently, the S&P 500 has done a little better than that. Mary is up 100% in seven years, and the S&P is up 120% over that time. The fact that it's up less than the market is not necessarily a bad thing.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Some mutual funds are designed to invest conservatively, which means that they won't go up as much as the market does during good times, but they also won't fall as much during a downturn.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
A mutual fund is just a publicly traded basket of stocks or other investments like bonds. A lot of people find it more convenient to invest in mutual funds than to pick and choose a lot of individual stock and bond investments themselves.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
With a mutual fund, the fund manager is doing all that investment research work for you, and that gives you exposure to a lot of different investments in one purchase. And there are all different kinds of mutual funds. Some are index mutual funds, and they just track the returns of a stock market index like the S&P 500.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Others are actively managed, meaning there's someone who's kind of more intently picking and choosing different stocks. Actively managed funds tend to charge higher fees, and some of them might beat the stock market index's returns from year to year, but generally speaking, most of them don't.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
It's a lot of work.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Right. If Mary wants higher returns, and if she's comfortable with taking on more risk, it's probably just a matter of selling that mutual fund and putting the money into a more aggressive one. Now, of course, I'm not speaking as a financial advisor here and listeners shouldn't take this conversation as financial advice.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
Having said that, given that this mutual fund seems to be more conservative than an S&P 500 index fund, switching to an index fund like that is probably a pretty cheap and easy way to accomplish the goal of getting more aggressive and seeking higher returns. Index funds tend to have really low expense ratios, too.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
That's right. It's higher risk and higher potential reward. Keyword being potential.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
If this is happening in her taxable brokerage account, in the one that is not an IRA, then potentially, yes. If it's in a retirement account, then capital gains tax is not something Mary's going to need to worry about.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
These are important questions because there might actually be a good reason why Mary put her money into this lower-risk, lower-return fund. If she needs the money in the next, say, five or ten years, it might actually make sense to keep it in a more conservative fund which, again, won't grow as fast as a stock market index, but also won't lose as much money if there's a downturn.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
However, if Mary's investing for a longer-term goal than that, then her investment would probably have plenty of time to recover from a bear market, and in that case, she's most likely better off getting more aggressive in her strategy.
NerdWallet's Smart Money Podcast
Behavioral Finance Mistakes That Hurt Your Portfolio and What “Good” Returns Look Like
If listeners want to learn more about mutual fund returns in particular and what they should expect, our how to invest in mutual funds page is a pretty comprehensive guide to these things.