AKAMAI MONEY

By Deborah Adamson
Advertiser Staff Writer

Q. Where can you get mutual funds that make 8 percent a year? I read an article where the financial planner said invest in funds (with such returns). — Tsuruo Kishi, Honolulu.

A. It may be hard these days to imagine any investment making at least 8 percent a year, after the dot-com bust that ushered in the last bear market, and low interest rates that have held down CD and money market returns.

But that has not been the case historically, at least for stocks. From 1926 to 2003, the Standard & Poor's 500 Index had an average annual return of 10.4 percent, according to Ibbotson Associates, a Chicago-based investment consulting firm. Small-company stocks did even better: 11.7 percent. By contrast, bonds have brought in a 5.4 percent annual average return in the past 78 years.

Some stock funds have had average annual returns as high as 17 percent for the past 10 years, according to Lipper Inc., a Denver-based mutual fund tracking and rating firm.

Of course, there were prolonged bear markets when investors didn't get a good returns on stocks. That's why financial planners generally recommend a diversified portfolio of stocks and bonds. When stocks are down, bonds prop up your portfolio, and vice versa.

The 8 percent return you read about most likely is the return on a diversified portfolio of mutual funds.

A portfolio with 80 percent stocks and 20 percent bonds theoretically could yield a return of 8 percent a year for the long term, said Dennis De Stefano, a fee-only certified financial planner at Stefano Wealth Management in Kihei, Maui. But you should have a stomach for market volatility and potentially huge declines, such as 30 percent in one year. The 8 percent return, after all, is an average.

As such, don't focus on hitting that 8 percent. The optimal return is different for each investor, since everyone has different assets and needs. It's better to ask yourself whether the return you want is realistic and whether the fund's risk level is one you can tolerate, Stefano said.

Risk is increasingly at the forefront of investors' minds.

"There's been an absolute shift over the last one and a half years to (focus on) preservation of capital," said Tom Roseen, senior analyst at Lipper. "Investors are still shell-shocked about what has happened" in the last bear market.

Risk doesn't come only in market drops; there's also the risk of inflation eating away at your purchasing power, of not having enough for retirement or of outliving your savings, Stefano said. That's why you can't afford to be so conservative you hide all your money in the bank — unless you're loaded.

So it's important to strike a balance between risk and return. For long-term growth, include stocks, Stefano says. But be sure to hedge your bets by diversifying: Invest in both domestic and foreign stocks, he says. Within each group, spread your money among small-, mid- and large-cap value stocks and growth stocks.

According to Steve Claiborne of Tacoma, Wash.-based Russell, the company that calculates the Russell 2000 Index, large-cap stocks are shares of companies with market capitalizations (or market values) of at least $12.3 billion. Mid-cap refers to companies with market caps of between $1.6 billion and $12.3 billion, while small-caps have market values between $175 million and $1.6 billion.

Value stocks are those trading at a discount to what money managers believe is their true worth, while growth stocks are companies whose earnings are expected to outpace the market.

If you have limited savings, you might want to start with a large-cap core fund — one that favors neither value nor growth stocks — and add on from there, Roseen said.

Areas to add might include small-cap stocks, real estate investment trusts, natural resource funds and international stocks, the Lipper analyst said.

To search for a fund that fits your needs, visit www.lipperleaders.com. Click on your country of preference and "Find a Fund." For the categories "total return," "consistent return," "preservation," "tax efficiency" and "expense," choose "1-Lipper Leaders." These are funds that rank in the top 20 percent of similar funds. Funds ranked 2 are second-best, while the worst have a 5 rating.

Morningstar, a Chicago-based mutual fund tracking firm, also has a free mutual fund search service available at www.morningstar.com.

Got a personal finance or consumer question? Contact Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.