I received a question from one of the readers this week: “How can I earn an 8% annual return on my 401k?” This is a great question.

First, I will admit that I do not claim to be an expert and that I have made my fair share of mistakes as an investor and learned well from them.

One of those lessons includes trying to actively manage my 401k investments.

I know this is an extremely sensitive topic and there is always a heated debate between assets and assets. passive portfolio management

As a layman, if you were given $5000 today and given the task of outperforming the S&P in a given year, would you be able to beat the market? Now it gets even worse when you have $50,000 or more in your 401k. Would you be able to actively manage your account and beat the market?

That is a great self-imposed challenge. According to CNN money, 86% of active money eats poorly in 2014. Now try to beat the S&P year after year.

According to CNNmoney, “Nearly 89% of those fund managers underperformed their benchmarks over the past five years and 82% underperformed over the past decade.”

Here is a link to Money Chimp’s S&P Performance Tool – you can see the CAGR of the S&P 500 over a 100 year period. You can see that it is possible to achieve an average return of 8% per year over a long period of time. For example, S&P 500 CAGR (compound annual growth rate) from 1950 to 2014 was a whopping 11.42%

I am a fan of Warren Buffet and I value his opinions. According to CNN Money, this is what Warren says: 2. Buffett recommends passive: Even legendary stock picker Warren Buffett likes that approach. In his annual letter to shareholders last year, he wrote that he advised the trustee of his estate to put 90% of his assets for his wife into a “very low-cost” S&P 500 index fund, because he believes the “results to long term of this policy will be higher than those achieved by most investors”.

Now back to my story, to make a long story short, I didn’t beat the market by actively managing my 401k account. I soon learned my lesson though, this was a decade ago. I just set up my 401k to invest in a target date retirement fund that has a mix of stocks and bonds. It’s worked out pretty well and I’ve never had to break a sweat trying to manage my 401k account since. It has done much better than my active attempt to manage it, however it has not outperformed the S&P 500.

I understand that everyone’s financial situation is unique. You are the captain of your ship as I am of mine. Research and draw your own conclusions.

Finally, to answer the question, yes, it is certainly possible to achieve an ~8% return over longer investment periods with dollar cost averaging in the S&P 500 Index. I understand that everyone’s financial situation is unique. You are the captain of your ship as I am of mine. Research and draw your own conclusions. I will state the obvious that past performance is no guarantee of future results. As for me, I give my thumbs up to passive investing in the S&P 500 index.