The 13 Steps to Investing Foolishly
Step 3: Set Expectations & Track Your Results

Most people in the U.S. know what place their local sports teams are in. They know what film won the last Academy Award. They know what Teletubbies, Beanie Babies, and Furbies are, for goodness sake, and perhaps they even are aware of controversies surrounding such toys. 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?

Very simply, 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. We've got our own favorite Foolish story about what happens when Fools put their "Eyes on the Wise" and ask professionals to account for their results against the market.

Coming down the digital road now are more than 2 million Fools proposing 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 (yikes!), or 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 most of you have more than an hour a year to devote to this 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 more than three-quarters of the equity mutual funds that are thrown at us from brokerage houses, banks, and insurance agencies perform worse than average each year? (Actually, it could only surprise you if you skipped Step One, as we've mentioned this already.)

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%, mostly 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, socializing, and foxhunting immediately come to mind -- without having to spend time pondering growth stocks, allocation models, and their consistent, predictable, and enduring market underperformance.

If that sounds harsh -- absolutely, 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. The Motley Fool's "Portfolios 2000" tracking system lets you enter all of your investments and check their returns against the major market indexes (as well as our own real-money portfolios) to find out how each has done since the day you purchased it. (This is a free service -- all you have to do is register, which is also free.)

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 personal portfolio, links to your favorite Fool features and discussion boards, and free Fool newsletter subscriptions. 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...

Next Step: Index Funds »

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