In Financial Planning, Assume Stocks Won't Cooperate.

INDIVIDUAL investors have been scoring poorly of late in a game that purports to test their stock market savvy.

But the whole contest is rigged. The problem lies with the question, not their answers.

The subject sounds innocent enough -- what outlook for stocks should Joe and Flo Public adopt in the aftermath of the big bear market?

If they warily pull some of their money out of stock mutual funds, as they did in March, this is portrayed as evidence that they are losing their nerve, quite possibly giving up at just the wrong time. If they show confidence that stocks will still produce high returns in the future, as some did in a recent survey, they are cast as benighted optimists in a Mad magazine "What, me worry?" mold.

The truth is, no matter what kind of financial conditions prevail at any given moment, "what return do you expect from stocks?" is a trick question. Since no one ever knows in advance what the stock market will do next, the only correct answer is "no opinion."

To recognize this has philosophical as well as practical benefits. "Blessed is he who expects nothing, for he shall never be disappointed," said Alexander Pope.

Past performance

Of course people with money to manage can't stop there. You have to take an educated guess at what results you might reasonably look for, striking a balance between hope and fear.

So you start with something you do know about, the past. From 1802 to 1997, reports Jeremy Siegel of the University of Pennsylvania's Wharton School in his book "Stocks For the Long Run," the market brought investors an average of 7 percent a year on their money, after subtracting for inflation. A bounteous payoff, much better than bonds or Treasury bills.

In the long stretch of U.S. growth and prosperity since World War II, stocks' "real" return stayed close to form, at 7.5 percent a year.

So it looks neither greedy nor gloomy to figure that in a world of 2 percent to 3 percent inflation, stocks would average a nominal payoff of 9 percent to 10 percent a year from here on out. Remember that total return includes dividends as well as price appreciation.

This assumption comes with two significant "howevers." Firstly, "the future will not necessarily be like the past," as Robert Shiller of Yale University puts it succinctly in his book "Irrational Exuberance."

As obvious as that may sound, it makes a crucial point. For instance, no plan to allow Social Security participants to invest part of their contributions will ever work if it depends on some assumed rate of return from stocks. The market never cooperates with such plans.

Secondly, stock returns can vary wildly from year to year or even decade to decade. Siegel's data show that stocks' real returns averaged 12.8 percent per year from 1982 to 1997, but minus 0.4 percent a year from 1966 to 1981.

Rarely average

Though average real return may be between 7 percent and 8 percent, the largest of all index funds, the Vanguard 500 Index Fund, has posted an annual return in that range only once in the last 10 years -- in 1992, when it returned 7.4 percent. In other years over that stretch, the returns went as high as 33 percent, in 1997, and as low as a 9 percent loss, in 2000.

So when you consider how much to invest in stocks, you need to base your plan on multiple possibilities. Suppose, for instance, you think you'd like to put 70 percent of your retirement money into stocks.

Sit down with a calculator and figure out where that would get you by age 65 or 70 with a 10 percent annual return on stocks. Then keep punching the keys and figure out how you would come out if stocks returned 30 percent a year; 20 percent, zero, and minus-10 or minus-20 percent.

It's the same way you think about other important numbers in your life, such as your statistical life expectancy. While the average provides a starting point for your calculations, you don't have a good money-management plan unless it leaves room for all potential outcomes.

Chet Currier is a columnist for Bloomberg News.

There's Silver Lining Behind Gold Decline

Before gold mutual funds drop completely off our financial radar screens, a few words are in order.

Let's not call this a post-mortem. While gold has been out of vogue in recent years, the market is far from obsolete.

But if the game is never over, many of the players have given up, and the score is dismal indeed for gold funds and their partisans.

A generation ago, in the inflation-wracked 1970s and early 1980s, gold was such a staple of investing it was anointed an asset class unto itself. Stocks, bonds, money-market securities, gold.

Even if you believed completely in the enduring merits of paper securities denominated in paper currencies, you seriously considered gold for at least 5 percent or 10 percent of your nest egg, just in case something went wrong.

These days plenty of things still go wrong -- a world currency crisis here, a hedge-fund collapse there, and most recently a ferocious bear market for stocks around the world. But the gold market barely registers a pulse.

On a much more positive note, you can look at gold's fall from grace as an inverse gauge of well being, a sign that humankind is actually making progress. Gold has always been criticized as means of locking up wealth rather than putting it to productive use.

This casts gold as a natural adversary of whatever political economic systems people may devise, such as capitalism. When you frame it in those terms, gold's loss is capitalism's gain.