Don't expect to earn 8% right away on my recommended mutual funds


Q: Thanks to you, my 93-year-old mother thinks that I am a bad money manager because I'm not getting an 8 percent return on her money.

Why don't you tell your readers how your mutual fund picks are doing this year?

Year-to-date returns (as of the writing of reader letter): Ariel, minus 2.6 percent; FAM Value, minus 2.5 percent; Muhlenkamp, minus 6.4 percent; Oakmark Equity and Income, minus 1.8 percent; Royce Total Return, minus 5.4 percent; Third Avenue Value, plus 2.7 percent; T. Rowe Price Capital Appreciation, minus 2.5 percent, and Vanguard Wellington, minus 1.8 percent.

A: Please tell your mother (better yet, show her this column) that I would be concerned about your money management skills if you were getting her an 8 percent return.

Although I don't know anything about her or her financial situation, I assume that at age 93 your mother would not want you to take the risks necessary to achieve an 8 percent annual return. If her goals are generating enough money to spend each year while preserving her principal, a stock mutual fund portfolio designed for long-term growth is not appropriate. A return much higher than 4 percent today would suggest to me that you might be taking on too much risk and/or sacrificing liquidity.

Now let's address another matter. What you called my mutual fund picks actually are examples of funds I have owned for years that follow a disciplined investment style and have a record of strong long-term performance (anywhere from 8 percent to as much as 17 percent average compounded annual returns for periods ranging from more than nine years to almost 76 years).

In case you or other readers missed it, I'll repeat what I said then: All these funds, even the most conservative, go down in value from time to time. Future returns may not be as high, and, indeed, many respected market observers believe returns will be lower in the next decade, at least. And you shouldn't think about investing in any of the funds until you carefully read the prospectus and shareholder reports, understand the risks and decide that the fund fits your investment goals.

Despite these disclaimers, many readers apparently interpreted my previous column as an unqualified recommendation for everybody to buy these funds, regardless of their investment objectives or risk tolerance.

And some have accused me again of misleading readers by suggesting returns of 8 percent a year are possible, when, in fact, these funds may incur losses some years. Others said that, even if these funds do return more than 8 percent a year on average in the future, many investors won't realize those gains because they won't have the discipline to stay the course when the market is down.

My response? I agree completely. These funds will incur losses from time to time (although at the time you describe, much less on average than the stock market as a whole). They are intended for long-term investors with the financial means and discipline to ride out market downturns.

If you cannot put up with periodic market declines, it doesn't mean there is anything wrong with you. But it does mean that, to satisfy your need for stability and peace of mind, your choices are limited to more conservative investments that historically have produced lower long-term returns.

One of the greatest mistakes American investors make is not matching their investments to their time horizon. Some, to their lasting regret, bet their mortgage money in high-flying technology stocks that collapsed in 2000 (many even went into debt to get more money to throw at technology stocks). Others, when investing for a goal far away in the future, fret uselessly over meaningless day-to-day market fluctuations.

In the most recent column where I used 8 percent as a reasonable long-term rate of return, I was discussing how money in a Roth IRA can compound tax-free for your heirs.

In the examples I gave, involving leaving the money to a surviving spouse who did not spend it, and then that spouse leaving it to a child or grandchild, I was talking about time periods stretching as much as 87 to 111 years.

I ask you: When you invest for that long, do you really care if a fund is down a few percentage points year to date?

Humberto Cruz is a columnist for Tribune Media Services. E-mail him at

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