THE MOTLEY FOOL ASK THE FOOL

Setting realistic expectations

Q. I’ve only been investing for a few years, and my average annual return is 18%. I don’t think that’s going to last; what kind of average gain should I expect over, say, a decade? – G.C., Keene, New Hampshire

A. That’s very hard to predict. If you invest primarily in index funds that track the broad market, such as an S&P 500 index fund, you can expect to earn roughly the same return as the index, less any fees. (The best index funds have miniscule fees.) Over many decades, the S&P 500 has averaged annual gains of close to 10%, but over your particular investment period, the average might be higher or lower.

You might outperform the stock market’s average handily if you invest in some individual stocks or mutual funds that perform very well – but that’s far from guaranteed and, arguably, unlikely.

The vast majority of actively managed stock funds, for example, underperform their benchmark indexes. And plenty of blue-chip stocks – such as Boeing, Exxonmobil, Procter & Gamble and Walmart – have underperformed the S&P 500 over the past decade. Superinvestor Warren Buffett recommends that most people invest via low-cost, broad-market index funds.

Q. Do any index funds focus on stocks outside the U.S.? – O.L., Madison, Mississippi

A. Yup! Many major mutual fund companies offer a wide range of index funds. At Vanguard, for example, the Vanguard Total International Stock ETF (ticker symbol: VXUS) covers the world market except for U.S. stocks. The Vanguard FTSE Emerging Markets ETF (VWO) focuses on developing economies, which can be riskier but grow rapidly. Among many others, you’ll find the Vanguard FTSE Europe ETF (VGK), the Vanguard FTSE Pacific ETF (VPL) and the Vanguard Total International Bond ETF (BNDX).

FOOL’S SCHOOL Shopping for retailers

When investing in stocks, you might want to start by looking at companies you understand. For example, retailers are relatively uncomplicated. Here are some tips for investing in retail companies.

Spend some time at stores of interest, observing: Are they full and busy? Are the shelves well-stocked? Are shoppers buying a lot? At shopping malls, see what brands people are wearing and where they’re shopping. Note which stores’ bags show up most often in shoppers’ hands.

Once you have a few promising retailers, look up their financial reports online to see how healthy and growing they really are. (You could also start with this step and do on-the-ground research later.) Most major companies’ websites have an “investors” section, offering financial reports, presentations and more.

Check out each candidate’s sales (revenue) growth via its income statement (sometimes called a statement of operations). Ideally it should be growing overall sales by adding more stores, and also by increasing its “same-store” sales from established stores – generally those that have been open at least a year.

While sales reflect a company’s top line – how much money it has taken in – net income or earnings per share (EPS) reflects how much of that it keeps as profit. The percentage it keeps as profit is its profit margin. Favor companies that are profitable, but don’t rule out a company just because of a low profit margin – some companies make up for that via high volume. (You could sell two pianos a year with a 30% profit margin, but it would be much better to generate millions of dollars of sales with a 2% profit margin.)

On the balance sheet, check inventory and debt levels. High or rising inventory levels could lead to markdowns, and if inventory levels are growing faster than sales, that’s a red flag. High or rising debt is also a concern.

You can find more factors to examine with a little searching on “how to invest in” or “evaluating” retail stocks.