Investment Newsletter #3 (June 10, 1999)

Long-Term Rewards

In my previous letters, I expressed some opinions as to what might be in store in the not-to-distant future, trends which so far at least show some signs of becoming reality. In this letter, I'd like to take a look backward to show the great long-term profit potential that has been available in both stocks and bond mutual funds during the last 10-12 years for those who stuck it out for the entire period.

Beginning in the mid-80's, when I was in my early 40's, I began purchasing some of my many current investments in mutual funds. To illustrate the exceptional opportunities afforded by mutual funds, I will present real data, namely a sample of my own investment results. I will mention only a few of the fund investments I started during this period since the funds listed below represent several of the major categories of funds and their results are quite typical of my other investments. These are not necessarily the best performing investments I made during the period.

Let's look at the results for four funds in the Vanguard Group of mutual funds. All results are as of 6-9-99.

1. 500 Index Fund

2. Extended Market Index

3. International Growth

4. Long Term Treasury

Here Are My Results for the Vanguard 500 Index Fund

Investment period: Jan' 87 - current

Total invested: 11,258.58

Total redemptions: 9,211.35

_________

Net cost: 2,047.23 (Investments minus redemptions)

Current value: 16,127

Current profit: $14,080 (Current value minus cost)

Investment performance: 18.31% annualized
(Total return)

All my investments and redemptions in this Fund were made in 1987 and 1988, except one additional investment of $1000 made in 1994. As of March 1988, at the time of my last redemption, my accumulated shares were worth $2035.

Using the Quicken PC program, my performance with this Fund over this 12 1/2 period works out to about 18.31% per year. These results are nearly identical to those shown on the Vanguard web site ( www.vanguard.com ) for the Fund's performance for the last 10 years (18.81%). However, my results include the 1987 stock market crash while the Vanguard 10 yr. figure does not.

Note: My actual investment performance was calculated by the Quicken from the date the investment began thru June 9, 1999 taking into account prices at the time of purchases and sales and re-invested dividends and capital gains.

What does this data tell us? It shows how well large-cap stocks within the S&P 500 have done since `87. It also shows the value of a buy and hold strategy. An investment that was worth about $2000 in 1988 grew to about $16,000 with just one additional $1000 investment. It's too bad that I redeemed a lot of shares in `87 and `88 or I would have done even better. But fortunately, at least I redeployed some of the redeemed proceeds into other stock investments.

Here Are Similar Data for the Vanguard Extended Market Index

Investment period: March `88 - current

Total invested: 9,250.00

Total redemptions: 2,000.00

_________

Net cost: 7,250.00 (Investments minus redemptions)

Current value: 18,322

Current profit: $11,072 (Current value minus cost)

Investment performance: 15.48% annualized
(Total return)

My actual performance for this Fund as calculated by Quicken is a little better than the 14.25% shown on the Vanguard web site for the most recent 10 yr. period, even though my results include the rather flat year of 1988 after the `87 crash while the Vanguard 10 yr. figure does not.

These stocks represent a mixture of mid to small sized stocks, not in the S&P 500. Their performance while good, has been moderately less than those of large-cap stocks over a roughly similar period.

Here Are My Results for the Vanguard International Growth Fund

Investment period: June `87 - current

Total invested: 39,791.10

Total redemptions: 12,990.69

_________

Net cost: 26,800.41 (Investments minus redemptions)

Current value: 48,587

Current profit: $21,786.59 (Current value minus cost)

Investment performance: 10.46% annualized
(Total return)

My results are slightly better than the 9.63% shown on the Vanguard web site for the latest 10 yr. period. These results, consistent with other international funds, show that foreign stocks have significantly underperformed US stocks, large and small, over the last dozen years or so.

Here Are My Results for the Vanguard Long Term Treasury Fund

Finally, these are the somewhat surprising results for my Vanguard Long Term Treasury Fund investment, a fairly aggressive government bond fund.

Investment period: Aug `88 - current

Total invested: 30,200.04

Total redemptions: 28,800

_________

Net cost: 1,400.04 (Investments minus redemptions)

Current value: 17,173

Current profit: $15,772.96 (Current value minus cost)

Investment performance: 11.53% annualized
(Total return)

These results are also somewhat better than the 10.35% shown on the Vanguard web site for the latest 10 yr. period.

This seems to show that bond funds, while usually thought of as vastly under-performing stocks, can earn respectable returns, in this case even better than those earned for the Vanguard International Growth Fund, a very highly regarded foreign stock fund. And, this was over an extended period (greater than 10 years).

Conclusions

1. Investing for the long-term has lead to considerable rewards, even when the `87 crash is included in the picture.

2. My returns for the three latter funds, where I tried to buy when prices seemed undervalued and sell (although less frequently) after significant gains, suggests that my performance was modestly improved through the use of this method.

3. Unless you have another equally powerful strategy in place to fund your retirement, can you afford to bypass the potential rewards of a similar program of long-term investing?

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