So, I'm looking @ VGSTX and TRSGX both have minimums of $1000. I have $600. I'm looking for a fund that offers aggressive (not overly) growth, that earns between 12-18% on average. I'm looking at these two. Tell me what you think, if you can suggest something that has a better return, with a max minimum of $1000. Let me know.

There is no way you can expect either of these funds to return 12-18% over any significant period. Both of these funds are balanced funds (both stocks & bonds) so 7%-9% is roughly what you might see over the long run. 12%-18% is the realm of high risk assets -- small cap value, emerging market, venture capital.

Which one would you pick & why?

TRSGX is a more aggressive fund -- 85% stock, 15% bond versus 60/40 for VGSTX. On the otherhand, VGSTX has a lower expense ratio: 0.35% versus 0.93%. If we say long-term, stocks return 10% and bonds 7%, the math is roughly:

TRSGX: .85 * (10-0.93) + .15 * (7-0.93) = 8.6%
VGSTX: .60 * (10-0.35) + .40 * (7-0.35) = 8.45%

At that spread, I'd go Vanguard Star as it would be the gateway to switch to more Vanguard funds as you build your portfolio overtime.

I love the STAR fund. It's what i recommend as a starter fund for those just starting out. It gets a decent return (though your 12% expectation is WAY over the top) it is moderate risk, it has low expenses and it's very diversified. It's a great single investment for someone just starting out.

When you're doing investment projections you would serve yourself well to use an 8% return assumption. 12% is above average and, while possible, would be risky. Better to underestimate the return and have more money than over estimate and come up short.

I have a friend who earns 14-18% a year.

I'm sure you do. And I'm sure he does. But for how many years? Unless it's been 20+, or heck, even 5+ then he's just following the market he's not getting anything special. Most people have been getting good returns for the last few years. I've been averaging in the low 20s myself. I didn't say it was impossible, I said it was risky and you said you don't want to be that aggressive. We've been in an up market so, as long as you were decently diversified, it have been pretty easy to get those kinds of returns. But, that's luck not skill and it just means he was doing average because that's what the market's been doing. Relying on luck to get you high returns (particularly when you don't want to be overly aggressive) and expecting the market to be up every year is not a good plan.

Expecting to earn that much every year is unrealistic. When you look at the history of the market, the average is about 10%. Assuming you'll perform above average for your entire investment life is pretty risky. You can make whatever assumptions you want, but most people realistically use 8% for long-term planning because if the historical average is 10% for 100% stocks. Since eventually you're going to become more conservative, 8% should be about what you average over your lifetime. And again, being too conservative and over performing and having "too much" money is much better than basing your assumptions on 12%, returning 8% and being screwed when your balance is 30% less than you'd planned on.

They are earning 14%-18% the last few years because EVERYBODY has been earning 14%-18% the last few years. Hell, I have funds that did 50% last year and I've got a few holdings that have jumped up 40%-45% in the past 4 months! But this is the very definition of volatility. When it's good, it's very good. But when it's bad, it's very bad. My portfolio from 2003-present, my annualized return has been over 15%. During 2000-2002, I had losses of -1%, -3%, -15%. After you factor those years, that drops my 2000-present return to 6.6% a year! Think about those loss numbers -- I really only had 1 truly bad year. Basically, 1 year of market losses and 2 years of flat growth dropped my return from 15.4% annual to 6.6%.

Time to present another math lesson. What is your return if you have a 50% loss and a 50% gain? Using the arithmetic mean fomula, we have: ( -50% + 50% / 2 ) = 0%. So 0% gain, right? NO NO NO! The proper formula is the geometric mean: ( ( (1-50%) * (1+50%) ) ^ (1 / 2) ) - 1 = -13% loss. If you suffer a 50% loss, you need a 100% gain to recover back to your original value! The order does not matter either. A 100% gain will be wiped out by a 50% loss. That means for investments, losses have larger weightings than gains.

So when your friend talks about how they've earned 14%-18%, perhaps you should ask what his/her performance is after you include the 2000-2002 numbers. Here's what happened to the Total Stock Market:
* 2000 -10.57%
* 2001 -10.97%
* 2002 -20.96%

And the S&P500:
* 2000 -9.06%
* 2001 -11.89%
* 2002 -22.10%

37% losses for both indexes during this period. Doing the math, +14% yearly from 2003+ gets you barely above breakeven! 18% from 2003+? 3.8% yearly return.

Mandy and Mossy: As always, fantastic advice. I'm learning so much from this site, and big props to both of you.

It seems really tough for people to keep realistic about returns and acceptable risk during bull markets. At the diehard forums, there was great discussion about how many people would really have stuck with or recommended high-risk (or generally 100% equity asset allocation in 2000-2002, while today it seems pretty common for people to say 100% equity is the way to go for 10+ year investing.

@Mandy and/or Mossy: I'm just a beginning investor too. Has your investing through 2000-2002 bear made you more conservative? Is there anything you wish you'd done differently to insulate yourself thru those losses?

@boldinvest: I think the Star Fund seems like a great intro fund. I'd recommend investing thru Vanguard directly and, if you have a regular job, using direct deposit to keep saving. You can use their money market mutual fund to keep cash available and still get good returns.

To be honest, I was so busy working on my business, I ignored the entire period. Which is the best thing I could have done. If I had been monitoring the markets, maybe I would have panicked and sold off my holdings missing out on the rebound afterwards.

No. I think timing your retirement investing is a great way to ensure that you underperform in the long run. I was (and am) 100% stocks through that period and heavy into tech. I've owned the same 2 mutual funds since 1986 - 50/50 Vanguard's Primecap and Health Care. In 2000-2001 I also started buying individual stocks. Some did well, some didn't. But when the drop came, I held what I already owned and continued buying on the way down and on the way back up. I don't look at losses because for LT investing they only matter when you sell. Since I'm not selling for another 30 years or so they don't much matter to me now.

Get a plan, stick to it. Don't second guess yourself. It's one reason why I suggest people only check their investments 2 times/year to rebalance and otherwise ignore them. Too much paying attention and you're more likely to react with emotion than with rational thought.

It's interesting when I talk to people in my age group (early-mid 30s) about investing. There seem to be 2 groups. 1 - only kinda realized that anything happened in 00-02 because they were just putting money away and not paying attention to returns. 2 - people who thought they could make a million in the market, were chasing performance and were totally over-weight in tech. Type 2 almost always says to me when asked about asset allocation "Oh, I'm 100% cash. I don't trust the stock market, you can lose too much." When pressed for details I'd say 90+% of the time they lost most of their money in those years because they weren't diversified and freaked out and sold at the bottom. Had they just held on, they'd be back to where they were before and then some. Had they stuck to an investment plan and continued buying through the drop they'd be FAR ahead.

So, when talking to those people I remind them that had they followed their plan they'd be rich, or at least not poor and the only reason they lost so much is because they thought they knew better than what history tells us and then freaked when they were wrong. For those folks I recommend things like the STAR fund because it's a good way to start dipping their toes back in the stock market. A bit higher return with not a lot of volatility.

For retirement I want steady growth, but for a more general taxable fund I'd like something thats extremely aggressive.
High risk = Higher gain/loss. Lower risk = smaller return/loss. I guess I have to find out how much I'm willing to lose.

To win, you have to be willing to lose.

No risk, no reward.

How old are you? If you're young, you should be extremely aggressive with your retirement money too. In fact, probably more aggressive with that than taxable since you'll probably tap your taxable sooner than retirement.

Mandy is right. Most people have the notion of "safe investments in retirement, aggressive in taxable" but the inverse is the usually the better strategy. Higher risk can give higher returns but it also requires longer timeframes to recover from market downturns. In addition, it's usually the case that more aggressive stock asset classes are less tax efficient and need to be in retirement accounts to keep the annual tax bill from eating away your returns.

But let's actually step back one minute and take a look at the big picture. What's the difference between the money in taxable versus retirement accounts? Money in your taxable accounts can be spent during retirement and money in your retirement accounts can be spent for non-retirement purposes. Of course, there's the 10% penalty for early withdrawal for retirement money but don't let the 10% penalty be the final answer to every question. What would you rather have? A 10% penalty + no annual tax drag versus no penalty + 1% decrease in returns due to yearly taxes? Over any long period, the 1% yearly tax drag is usually the bigger factor. Go back to Etiana's thread -- 1% expense ratio on 8% returns over 33 years ends up being a 28% decrease so I'd take the 10% penalty over 1% tax drag everytime.

A while back, I did some calculations to find the 10% penalty catchup point (due to no annual taxes) for various Vanguard index funds at 25% fed/5% state tax tier. Off the top of my head, it was something like:
* Total Bond - 6 years
* REITS - 7 years
* Small Value - 10 years
* Total International - 11 years
* Large Value - 12 years
* Total Domestic - 13 years
* Small Growth - 17 years
* Large Growth - 17 years

Decrease the years if you pay more taxes, increase if you pay less. Add +/- 50% for all the numbers to account for market swings. If your investment goal timeframe exceeds the +50% factor, there's really no point in having significant taxable accounts unless you exceed the yearly retirement account limits. Retirement accounts will win over the long run just from not paying annual taxes even with the 10% penalty.

So once you start considering everything as a single portfolio, the cliche about "taxable = you can afford to lose it = aggressive" clearly becomes nonsense. Toss that idea out completely because you can never afford to lose money over the long run. Instead, determine your overall goal -- if you have both taxable and retirement accounts, split your investments up by their tax efficiency. Put inefficient holdings (Bonds, REITS, Small Value) into retirement. Put tax efficent (Small Growth, Large Growth) in taxable. International, Large Value can go into either and probably should be in both to give you a rebalancing zone. (Example, to rebalance REIT againts Large Growth, you would do a Retirement: REIT->Large Value, Taxable: Large Value -> Large Growth.)

Remember, expenses are guaranteed -- taxes are guaranteed. Much like how paying down 18% credit cards is way better than investing in the stock market, making expenses and taxes the top priority gives you far bigger boost in returns over any "super aggressive versus XYZ" fund decision without having to take the extra risk.

Yes yes, timeframe is a key component of this. There is ample evidence (Ibbotson) to suggest (although we all know that past performance is no indication of the future) that there has never been a 20 year period in which the market hasn't produced a positive return.