Set Expectations & Track Your Results

Most people in the U.S. know what place their local sports teams are in. We know what film won the last Academy Award. We know what Teletubbies and and Barney are (though we may wish we didn't). We know the latest about Jennifer Lopez, and we know that Michael Jackson lives in the aptly named "Neverland." We live in a society that pays a lot of attention to some pretty weird stuff, but one thing we don't seem to pay much attention to is how our investments are doing compared to the market's averages. Why is that?

Because nobody ever taught us how, and because no one who is selling investment advice has had it in their best interest to show us how to account for our investment performance. If you think most money managers, mutual fund managers, and brokers want you to know how your investments are doing in relationship to the market, we've got a "limited edition" Tinky Winky doll we'd like to sell you for, oh, a couple of thousand bucks.

Professional investors just don't want you to pay much attention to how they're doing. It gives them a lot of room for error. Fools propose that unless you're going to take the time to measure your results, you shouldn't put investment dollars into anything but an index fund -- a mutual fund that tracks the market, step for step.

Don't buy stocks, bonds, gold bullion, heating oil futures, or (especially) managed mutual funds. If you can afford to put money away for five years, but don't have the time to keep tabs on how you're doing, buy an index fund and leave it at that. To help you with just what an index is, we've developed an Index Center that explains and compares the various indexes and shows how each is doing, year-to-date.

We suspect, though, that many of you have more than an hour a year to devote to this, are interested, and wouldn't mind aiming to be better than average if it were possible. You should know that accounting for your savings, just like a business would, doesn't take much. Nor is it beyond your abilities to beat the stock market over time. One of today's great travesties is that most people don't consider their personal finances a business and don't think the market can be deciphered, let alone beaten.

That's because not enough people have gotten Foolish yet.

Let's start with some basic expectations... and again, this is for the money that you can afford to put away for five years (ideally more).

Would it surprise you to hear that some three-quarters of the equity (i.e. stock) mutual funds that are thrown at us from brokerage houses, banks, and insurance agencies perform worse than average each year?

At first, it's shocking to think that the achievements of paid professionals are so significantly shy of mediocre. But on second consideration, those numbers shouldn't come as any surprise at all. Managed mutual funds charge their investors average annual fees of 1.5%, partly to "fund" their active and national marketing plans.

That's 1.5% of the total assets in your account, not just the "earnings" (if there are any). And most fund managers have enough to do -- golf, tennis, cocktail parties, and foxhunting immediately come to mind -- without having to spend time pondering growth stocks, ever-changing allocation models, and their consistent, predictable, and enduring market underperformance.

If that sounds harsh, it's meant to be. Bad and overpriced mutual funds deserve much poking, and since they don't provide much in the way of results, they should at least be recognized for their vast capacity to amuse. But we're here to do much more than that, we hope. Finding problems in the financial "services" industry isn't much of a challenge. It's tacking on useful solutions that makes things difficult.

Here's our solution to baseline accountability: Any money that you have to invest for five years or longer should not underperform the market over that five-year period. If it does, you've blundered, because you can get average market performance out of an index fund without doing any research and without taking on significant risk.

Remember -- a 10% return one year might seem great, but if the overall market advanced by 13%, then you (or your managed mutual fund) actually underperformed. Conversely, you might be bummed to have lost an annual average of 4% over the past two years -- but if the overall market lost an annual average of 7%, then you've not done so poorly. Don't look at your portfolio's returns in a vacuum. (Or a Dustbuster.)

Stick close to those expectations, prepare and aim to beat them, and know why you have or haven't. Set up your own My Fool page, which can include your portfolio, links to your favorite Fool features, Fool free email subscriptions, and discussion boards. Browse our Stock Research area, which offers our top-notch stock research newsletters, How-to Guides, online seminars, books and more. Laugh at the business pages of our national newspapers and magazines, which devote plenty of room to "professional" predictions but don't typically allow even a day each year for reviews of bottom-line performance -- including the deduction of all trading costs.

But we've gotten ahead of ourselves. Here we've been yapping away about index funds without even explaining what they are. So, without further ado...