Question: I have just read several books on investing in mutual funds for retirement. I am 35 and would be investing about $300 a month. I want to invest in a Vanguard mutual fund and am having a hard time deciding on one. Part of the problem is that I am suspicious of the yearly return figures that are always used as examples in these books and that are posted on the "performance" window of a mutual fund's overview (like on the Vanguard website). So many authors say things like, "your investment should be able to average an 8% return per year". The historical return charts on a typical mutual fund seem to support this statement, but when I played a few examples out on paper it didn't add up!.... My question is...Are proponents of mutual fund investing misleading me with their claims of 8% yearly returns?? Does the 5 or 10 year return percentage (found in the performance section of mutual found websites) actually give me any valuable info in selecting a fund? Natalie, Sedro Woolley, WA

Answer: You're right to be suspicious. There are a number of different series that capture long-term stock market returns. My favorite is the series put together by Professor Jeremy Siegel of the Wharton School. Since 1802, he figures, the compound average annual return on stocks adjusted for inflation has been about 7%. The same average return figure holds for the post World War 11 era. However, on average Lake Eerie never freezes. For instance, the bull market of the 1990s lasted for much of the decade and the stock market rose by some 300%. But the stock market is currently down 45% from its October 2007 high. Yet it's up 27% from its March, 2009 low. Even a cursory glance at history shows that stocks fluctuate wildly.

The return figures you're seeing at the mutual fund websites do tell you how the fund has done over time. It's useful information. I also like to send time studying even more detailed return figures published by mutual fund rating services Morningstar. A number of factors account for the difference between an equity mutual fund performance and the stock market. Among the most important are fees and the composition of the portfolio.

Congratulations on setting up an automatic savings plan. For the stock market portion of your portfolio I am an advocate of investing in a broad-based equity index mutual fund. The fund will mirror the results of the underlying index, such as the total stock market index or the Standard & Poor's 500. It's also important to diversify among a number of different assets. A good, short primer on the investing basics is The Random Walk Guide to Investing: Ten Rules for Financial Success by Burton Malkiel.

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