cargo hopeful

I’m getting conflicting reports on what the average return rates for long term IRA’s are. I’m talking if you invest for 30 to 40 years. For example Dave Ramsey says it’s around 12% and some other calculators say it’s around 8%. Which one is more accurate? Should I just average the two figures out or what?

Also I need a little clarification as to which one is best for short term savings a money market account or short term mutual funds? I’m trying to figure out which one is the best to set aside some money strictly for a “car fund?” I would also like to know what the average returns on money markets and mutual funds are. I’m guessing money markets are around 4%, I could be off a little.

Any financial gurus out there, a little help?

ArmyRC12Dude

Dave Ramsey's data of 12% is based on the average rate of return from the stock market since 1926, adjusted for inflation. My wife and I went through his Financial Peace University a few years ago, and based off that we are investing for retirement (and our kids colleges ESAs) in mutual funds that have a 10 year track record of at least 10% and preferably more than 12% average annual returns. They are out there, you just have to find them. For short term, our emergency fund is in a money market account with check writing priviledges, and our car / travel / other expenses / outside of retirement and college investing is in a different account that gets money market rates as well. My take, learned from Dave and other financial folks, is anything we will need in less than 5 years should not be in mutual funds.

Hope this helps!

cargo hopeful

Thanks for the reply, so what is the average rate of return in money market accounts? 4 or 5%?

ArmyRC12Dude

Ours is averaging 3.5% for the past couple of years - probably not the best out there, but it is with USAA, where all our other accounts are, so it keeps managing it handy.

cargo hopeful

Hey ArmyRC12Dude, thoes mutual funds that have that kind of good track record, are they compounded daily, monthly, quarterly, or annually?

Also what kind of fees are associated with them? I know that the fees can be the hidden killer in some mutual funds.

ArmyRC12Dude

Mutual funds don't really work like that - they are tied to the stock and bond market. If the stocks or bonds the fund owns go up, the fund value goes up, if the stocks or bonds go down, the fund value goes down.

rickair7777

A mutual fund is basically a managed pool, where the "shareholders" contribute money, which the managers then invest in a variety of stocks and/or other instruments. There are also funds which invest in real estate or commodities.

The advantages are:

1) By pooling their money, small investors can afford a professional manager, who can usually provide better returns than do-it-youself investors.

2) The funds are usually diversified, holding more than one stock, so if a certain company fails or has serious issues you don't lose it all as you would if you just owned that one stock.

3) Each fund has a stated "philosphy" and guidelines about what it will, and will not, invest in. This allows you to pick a fund which matches your desired level of risk, to invest in (or avoid) certain industries, or even to use quirky criteria such as environmentalism to select stocks.

Note that mutual fund managers don't just invest in stocks and then sit there and do nothing...they continually adjust the stocks they hold, and the ratios, to account for market and economic conditions. Unless you really know what you're doing, and spend all day doing it, you probably can't beat a professional manager's performance (unless you have some industry knowledge that profession traders don't).


The downside is that there are fees. Usually one of two types:

1) Transaction based: You pay an annual fee, and then you pay fees for each transaction. I avoid this because the manager has an incentive to "churn" the fund by moving money around just to collect fees.

2) Annual Percentage: The manager takes a percentage of the value of the fund.

My manager has standing orders to stay out of airline stocks for long-term investments (if he thinks he can make money on short-term swings, that's up to him). My criteria for my manager is that he must beat the market average to keep my portfolio (he always has). Otherwise I could just invest in an index fund on my own and not pay as many fees.

beechbum

This is true if you have a managed account, but not necessarily for buying mutual funds. Mutual funds can either be load, or no load. Load meana you pay a sales charge up front commonly 5.75%, and then only pay a yearly expense fee of about .5% (the fees will be listed in the prospectus). A no- load mutual fund is a fund that you don't pay an initial sales charge, but you pay a higher yearly expense fee, normally between 1 and 2%. No loads are an easy sell because you don't pay a "fee" but you usually spend more money by going this route over three to four years. There are some no-load funds with low expenses, but overall they don't perform as well as the other, more expensive funds (less salary to manager = less quality of a manager, less research budget, etc.)...remember the saying you get what you pay for.

A managed account sounds good because your brokers salary goes up if your account goes up, but he also still gets paid no matter what your account does. If you are a day trader, a managed account will benefit you until you gamble all your money away, but for the serious long term investor it normally is only to make the broker a lot of money.