If you're new to investing, you may have read that the stock market, on average, advances about 10% per year. That may be true (well, actually, it is true, over the past century or so), but please understand that that's just an average, and in many ways, it's of limited value to you as guiding information.
The 10% average is over long periods of time. So if you're looking at any small period of time, such as a few months or a year, you'll most likely not get a 10% return. In the short run, the stock market is especially volatile, and your performance over a few months could be a gain of 25%, or a loss of 18%, or something else.
This point was driven home to me over the past week, when I received quarterly summaries of the investment performance of two retirement plans from former employers. (Both are invested solely in mutual funds.) See whether you notice what I did:
Plan A:
Your performance this period (October through December): 9.37%
Your performance year to date: 10.70%
Plan B:
Your performance this period: 12.1%
Your performance year to date: 12.3%
What couldn't be much clearer here is that the vast majority of my returns over 12 months occurred in the last three months. Had I been an impatient sort and sold some holdings before October, frustrated at not seeing enough progress, I'd have missed out on a lot of gains. (Of course, the January to March quarter may end up eroding these gains, but that's why investors are smart to focus on long-term performance.)
Another important point to remember about that 10% average is that even in the long run, you may never, or rarely, see it. Let's say you'll be invested in the stock market for a total of 30 years. Over those specific 30 years (perhaps 1993 to 2023), you may earn an annual average of 8% or 10% or 16% -- we won't know until 2023. Meanwhile, someone else investing over a different 30-year period (perhaps 1996 to 2026) is likely to end up with a completely different average.
A final point to note is that my Plan A above is invested mainly in an S&P 500 index fund, which gives me average results, and which we recommend for most investors. (Invest in the S&P 500 and you'll instantly have money plunked in firms such as General Electric (NYSE:GE), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), and Citigroup (NYSE:C).) But you can do better than average in your 401(k)s if you carefully select some outstanding mutual funds. In the short reported period above, my managed mutual funds outperformed my index fund. Will this continue over the long haul? We'll see. I suspect they might, though.
If you're interested in finding some above-average mutual funds, take advantage of a free sample issue of our Champion Funds newsletter.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
