With the first year of 529 contributions under our belt, it was high time to take a look back and see how they did. The first thing I did was log into the online account and see the rate of return posted in big bold letters.
Wow, that is terrible, especially considering that the fund we invested in returned a healthy 9.9% in 2014. Obviously something else is going on and you may have already guessed it.
That’s right, we didn’t invest everything on January 1st, instead we made contributions throughout the year. By giving Frugal Boy a big Christmas present/contribution, it effectively killed our rate of return because of the sudden influx of fresh cash that diluted previous gains. To properly calculate your return, weighted for irregular contributions, you will need to open up Microsoft Excel and use the XIRR function.
Here’s how to use the XIRR function.
In column A, enter positive contributions and negative withdrawals (or fees). In column B, use the Date function to enter in the date of that contribution. At the end of each column, enter the ending balance and date. Multiply your ending balance by (-1). So a positive ending balance would be displayed as negative (it’s just how the XIRR function works).
Finally, use XIRR(colA, colB, guess) where guess is your expected percentage return (e.g. 8%).
Here is an example:
Properly weighted, Frugal Boy’s 529 had a rate of return of 10.33%. Not too shabby 😀
Like our taxable investment account, we selected a low cost indexed fund that consists of:
- 70% VIIIX – Vanguard Institutional Index Fund
- 20% VDMIX – Vanguard Developed Markets Index Fund
- 10% VEXMX – Vanguard Extended Market Index Fund
The heavy equity exposure and associated risk seems appropriate for his age.