Stock Fund Selection

Funds I Have Held 10 Yrs. or More

Funds I Have Held Less than 10 Yrs. but More than 3 Yrs.

Funds I Have Held 3 Yrs. or Less

Overall, the magnitude of these returns is high which suggests I have done a pretty good job in selecting my funds. I do a considerable amount of research before selecting a fund to invest in. That's not to say I couldn't have jumped on board funds with even better PAST performance records, in the hope that these PAST results would continue. But my goal was to chose funds that would achieve good returns without subjecting me to what I consider to be overly high levels of risk. Such risky funds would include, for example, those that are highly concentrated in a particular industry, such as technology, and those which exhibit a very high degree of volatility.

How Good is Good?

According to the "Rule of 72" which I studied in a Financial Planning course I took a few years ago at U.C., Berkeley, you will double your investment in 6 years if you earn 12% per year. (This is calculated by dividing 72 by your annual rate of return; e.g., 72/12 = 6). Investments returning greater than 12% will double in fewer than 6 years; those returning less than 12%, in more.

The practical implication is that you may be able to project how long it will take to get to accumulate a particular amount. So, if you have say $100,000 invested and can earn an average annualized return of 12%, after only 12 years, you will have accumulated $400,000 even without any additional investments! And the doubling process will continue every 6 years as long as you maintain the investment and the 12% return. (However, unless your investments are tax-free or tax-deferred, you will have to pay out some of your earnings during those years to Uncle Sam. But nothing says you have to redeem any of these investments to pay such taxes; if you can, you should probably pay them from another source such as from your more liquid assets.)

In this decade of high double digit returns, 12% may not seem like anything special. However, the long-term average for stock returns going back to the beginning is something like 11%. So a 12% average annual return on your total stock portfolio seems like a realistic and achievable goal to shoot for. You should realize though that the 12% here is the AVERAGE return you might obtain over a long period. Obviously, this implies there will be years in which your returns may be significantly lower.

How Bad Can It Get?

Only one of my present stock fund investments currently has a negative total return, the Vanguard Pacific Index. This fund invests primarily in Japanese stocks, which as you probably are aware, have performed very badly for many years after doing so well during the previous decade. I purchased this fund, together with the Vanguard Europe Index, to index the two key developed non-U.S. regions of the world. Although the return for Vanguard Pacific has been admittedly poor, if taken together, the two funds have a combined average annual return of about 8.5% for the last five years, about average for international mutual funds during this period. (It is interesting to note that year to date, Vanguard Pacific is up about 21%; Vanguard Europe, on the other hand, is down about 1%.).

A few other points are noteworthy:

1. The over 60% return shown for the T. Rowe Price Value Fund is most likely completely unsustainable. Over the two months I have owned the fund, my investment has appreciated by about 10%, or about 60% when converted statistically to a yearly return.

2. The 32.8% return shown for my shares in the American Century International Growth Fund while also probably unsustainable, shows how by closely following a fairly aggressive fund and patiently waiting until the price has dropped significantly to make your purchases, you may be able to outperform the figures for the fund's performance shown in the newpapers.

Concluding Comment

As can be seen in the above results, funds consisting of smaller, foreign, and to some extent value-oriented stocks have performed less vigorously over 5 and 10 years than the large cap, domestic, and growth-oriented funds. Since the laws of probability suggest that these imbalances will even themselves out over time, I am personally gradually putting more of my new investment dollars, and even some of my old ones, into the former rather than the latter category of funds.

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