ALEXANDRIA, VA (Sept. 17, 1999) -- It's hard to believe, but yesterday was the one-year anniversary of the inclusion of Mellon Bank (NYSE: MEL) in this portfolio. Lo and behold, the baby of the Drip Port is still in business. It has not gone bankrupt and management has not run off to Bermuda with shareholders' money. That's good news.

Over the past 12 months, the company has returned 13.1% with dividends reinvested, less than half of the S&P 500's advance of 27.7% during the same period. That's bad news, for those of you keeping score at home. (Note that this does not represent our return on Mellon. We have been investing in the company month-to-month, so our cost basis differs. But for the purposes of today's column, let's assume that we dumped our entire bank account into the stock one year ago.)

Boy, what a disaster. What fools (small "f") we are! We should have just invested our money in a plain-vanilla S&P 500 index fund. We could have earned twice as much! A lot of good our six-month-long study of the financial services industry did for us. We should have known better. (By the way, let me be the first to say that this is all Jeff's fault!)

That most of the banking sector has underperformed the market over the same stretch is of little consolation to us as we sit around licking our underperformance wounds. Just in case you are wondering, only two of the other 11 financial companies seriously considered by Dale and Jeff last year have done better than Mellon. Wells Fargo (NYSE: WFC), which acquired industry study finalist Norwest, has returned a slightly higher 13.8%, while the company that became Citigroup (NYSE: C) blew away the field with a 51.7% gain.

So much for our supposed stockpicking abilities. I imagine we should just put our money in an index fund and leave it alone for the next 18 years. That would be the Foolish thing to do, right?


While we whole-heartedly believe in the idea of beating the market, that's not what this portfolio is about.

For those of you who are new to The Motley Fool or to investing in general, this is an important point. There is a very good reason why investing in an index fund is step five of the 13 Steps to Investing Foolishly, appearing before any mention of investing in individual stocks. By taking advantage of the twin fairy godmothers of time and compounding interest, regular investments in an index fund can be an incredibly powerful way to build wealth over decades. It also happens to be the simplest way to ensure that you will never suffer from the market underperformance blues.

If our primary concern was to keep pace with the market during every single time period possible, we would just buy an index fund, rename the portfolio The Market Performer Port, and make jokes about Jeff's general appearance and hygiene habits until we were blue in the face. However, that has never been the Drip Port's goal.

Our goal with this portfolio is to earn an average annual return of 15.5% over the entire 20-year life of the portfolio. If the market's average over much of this century holds up in the years ahead, we will end up beating the S&P 500. Conversely, maybe a 15.5% average return in the next two decades might not be enough mustard to beat Mr. Market. Anything is possible, and we don't attempt to make projections about what the market as a whole might do. What we care about is the performance of the companies in which we are investing and our ability to hit our stated goal.

With that in mind, we can take the proper perspective with our Mellon investment. The company may not have fulfilled our 15.5% goal over the previous 12 months, but over the next 220 or so months we think the price appreciation of the shares we acquire coupled with reinvested dividends will get us to where we want to be. When your goal is years or even decades away, keeping the proper perspective is crucial. Giving up the whole race after a short period of underperformance is one of the most devastating and common mistakes a long-term investor can make.

We feel as confident about Mellon's prospects today as we did a year ago when we first sent in our DRP enrollment form. The company has changed over the past year, shedding some of its lower-growth, lower-returning business units and adding to its higher-growth, higher-returning areas. In the coming weeks, the company's name will change to Mellon Financial Corp. The switch is a clear signal to all that the traditional banking business is taking a back seat to the more profitable financial businesses of asset management, administration, and custody services.

We like what we're seeing and continue to believe that our 15.5% average annual return goal is attainable. We will continue to invest in Mellon, just as the company is reinvesting in itself. A 20 million share repurchase plan has been completed ahead of schedule and the firm is now initiating an even more ambitious 25 million share buyback plan. The lower sharecount and emphasis on higher-growth business areas should produce 14% annual earnings-per-share growth by 2002, according to projections made by management earlier this week.

So, we're not ready to drag Jeff out into the street and shoot him because of Mellon's performance. At least not yet. Disregard the market averages -- think about individual businesses. That's what we consider keeping the proper perspective.