Updated and revised 2013. You often hear that stock investing is a sure thing over the “long run”. But as this chart from the NY Times and Crestmont Research shows, there is still a lot of variability involved. The matrix below visually displays the annualized returns for the S&P 500 for every starting and ending year from 1920 to 2010, adjusted for inflation, taxes, and transaction costs.

(click to enlarge)

Your actual returns depend a lot upon when you start, and also when you finally withdraw:

After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”

Some further observations:
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I’ve written about how recent fee disclosure requirements for 401(k) retirement plans have brought a spotlight on bad 401k plans and their potentially embarrassed plan sponsors.

But after reading the fee disclosure on my wife’s own 401(k) plan, I must say that I’m now thinking that maybe nothing really happened at all. Check out what mine says under “Potential General Administrative Fees and Expenses”:

Administrative Fee – Per Account When applicable, other general administrative fees for plan services (e.g., legal, accounting, auditing, recordkeeping) may from time to time be deducted as a fixed dollar amount from your account. The actual amount deducted from your account, as well as a description of the services to which the fees relate will be reported on your quarterly benefit statements.

Translation: We might charge you some fees. We might not. Helpful, eh?

There’s more:

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An important tenet of portfolio construction is diversifying between stocks and bonds. While poking around on Morningstar, I stumbled across a quick real-world example of how this works.

Let’s say you had $10,000 back on January 1st, 1993. Now, let’s see how that money would have grown over time until today (August 9, 2013) depending on what you invested it in. That’s means holding over a 20-year period – that’s 20 years of bubbles, crashes, euphoria, fear, and a constant flow of bold predictions and catchy newspaper headlines.

1. Vanguard Total Stock Market Index Fund, Investor Shares (VTSMX).

Let’s say you invested in this huge, popular index fund that passively tracks the entire US stock market. (See What’s Inside the Vanguard Total Stock Market Index Fund?) From afar, you may be happy with this chart. But having lived through it, I can say that it was quite a wild ride. People tend to remember the highest value of their portfolio. Your money would have grown to $37,000, only to fall all the way back to $23,000 in the Tech Bubble Crash (a 38% drop). Later, your $46,000 would have dropped 50% all the way to $23,000 during the Housing Bubble Crash. So between 2003 and 2009, your money would have gone nowhere even as inflation rose. Many people went to cash. But if you stuck it out, today you’d be sitting on a balance of $58,621.

2. Vanguard Total Bond Market Index Fund, Investor Shares (VBMFX)
Now, what if you invested in this fund that tracks the overall US bond market?

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Along with other factors, new fee disclosure requirements for 401(k) plans have brought a lot of attention recently on “bad” 401(k) plans. These are plans with little or no employer match, higher-than-average fees, and/or limited investment choices.

I’ve gotten a few questions from readers who wonder if they should stop contributed to their subpar plans completely? As with most things, the answer depends. But here are some factors that I’d consider first.

Can You Save Better Elsewhere?
Depending on your situation, it may be better to put money away in other tax-advantaged vehicles like a Traditional or Roth IRA instead of your 401k/403b/similar plan. If you plan on socking away $5,000 a year, that is under the IRA annual contribution limits. Alternatively, if you have self-employment income you can look into a SEP-IRA, SIMPLE IRA, or Self-Employed 401k plan where you can choose the custodian.

Bad 401(k) Now, Awesome Rollover IRA Later?
According to the Bureau of Labor Statistics, the median employee tenure is less than 5 years. Even workers in “management, professional, and related occupations” had median tenures of 5.5 years. In other words, these days people don’t stay in their jobs very long. (Of course, some people may stay in their jobs for 30 years.)

When you switch jobs, you’re free from the bonds of your crappy 401k plan and can roll it over to a new provider with low fees and great investment options. Very few plans are so bad that you wouldn’t endure five years of mediocrity in exchange for 20-50+ years of precious tax advantages.

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