Portage County Legal News

Investing for your kids

THE MOTLEY FOOL
Ask the Fool
Published: August 15, 2019

Q: Are stocks, bonds or CDs best when I'm investing for my kids? -- H.S., Fort Wayne, Indiana

A: It depends on factors such as their ages and your goals. Are your kids still very young and more than a decade away from college? Are they 16 and headed to college soon? Are they 21 and hoping to buy a home in a few years?

For long-term money -- funds you won't need for at least five to 10 years -- consider stocks, which have outperformed just about all alternatives over long periods. A low-fee broad-market index fund, such as one that tracks the S&P 500, can be all you need. You might also invest in the stocks of a few companies that your children know and like, and then follow them together.

With shorter-term money that you'll need within a few years, look for less-volatile investments, such as bonds, CDs or money market accounts. Remember, though, that inflation has averaged 3% annually over long periods, so if you're earning only 1% or 2% in interest, you're probably losing purchasing power over time. Consider Series I Savings Bonds, as their interest rates account for inflation. Learn more about them at TreasuryDirect.gov.

Q: Can you explain what "liar loans" are? -- T.B., Greenville, North Carolina

A: They're low- or no-documentation loans issued when a borrower's information, such as income, debt load and assets, have not been verified. Instead, the lender largely accepts the word of the borrower.

Liar loans tend to be nonprime, and they played a part in the last financial crisis. They're not problematic when a worthy borrower provides accurate information, but they can be abused by opportunistic borrowers -- and by lenders trying to cook their books.

Fool's School

How Should You Invest?

You're familiar with stocks and mutual funds, and you want to invest some money to build a war chest for retirement. Should you park your hard-earned dollars in stocks or in funds?

Mutual funds, featuring the pooled and professionally managed money of many investors, are appealing -- but they come with fees. They also aren't likely to perform as well as the best individual stocks. Netflix stock, for example, has averaged annual growth of more than 36% over the past 15 years. That's hard for any fund -- and most stocks -- to beat.

But investing in individual stocks requires you to have the time, interest and skill to study companies, looking for the ones that are healthy and growing at a good clip, yet are undervalued. You'll need to know the difference between net and gross profit margins, and be able to calculate or understand various metrics such as return on equity, return on assets and return on invested income. Ideally, you'll enjoy poring through balance sheets and income statements.

Once you identify and buy into some promising companies, you'll need to take the time to follow them, reading their quarterly and annual reports, and keeping up with their development. You want to know, for example, if their market share has been falling or if a scandal threatens to derail their progress. Also, after buying into a stock, you'll need to have a good sense of when to sell.

If all this doesn't sound like you, you're probably better off sticking with mutual funds -- index funds, in particular. The stock market has returned an average of close to 10% annually over long periods, and relatively few mutual funds top that. But you can roughly match the market average with a low-fee, broad-market index fund. Index funds tend to beat most managed funds, and they serve most investors well.

You might even invest in both index funds and some carefully selected individual stocks. With all funds, seek low fees and avoid sales loads. Learn more at Fool.com and Morningstar.com.

My Dumbest Investment

Betting on Losers

My dumbest investment has been betting on losers, hoping that they will turn around. Now I bet on winners only! -- T.I., online

The Fool responds: Careful, there. It's pretty much guaranteed that anyone investing in individual stocks will have some losers -- even the best investors, like Warren Buffett, have lost money on various investments.

Your aim should be to make much more from your winners than you lose with your losers. Hanging on to loser investments is a common, and costly, mistake. Such investments are often in troubled companies, which may be facing substantial headwinds that can keep them from recovering. Think about it this way: You probably have little to middling confidence in the future prospects of your losers, yet you're keeping your valuable dollars in them, hoping that they'll gain a lot of ground and make you a certain amount of money.

Instead, you might sell out of the losers and move the proceeds into one or more stocks in which you have great confidence. It's more likely that you can earn that certain sum of money through the stocks in which you have the most confidence -- right? So if you're down, say, $3,000 in Stock A, you can move what's left in Stock A into Stock B, and aim for a gain of $3,000 (or more!) from Stock B.

Foolish Trivia

Name That Company

I trace my roots back to the 1922 opening of a beauty salon. Over time, that turned into a chain of affordable salons in department stores. In the 1950s, my salons began to move into stand-alone stores in malls; today, they're all over. I'm based in Minnesota, and have a market value recently over $670 million. My empire spans more than 7,800 franchised, owned or partly owned locations globally, with brands such as Supercuts, SmartStyle, MasterCuts, Sassoon, Cost Cutters, Roosters and First Choice Haircutters. With my Empire Education Group, I'm also in the cosmetology school business. Who am I?

Last Week's Trivia Answer

I trace my roots back to Dallas in 1927, when my founder started selling basic goods from the dock of an icehouse. (Business improved after Prohibition ended and I could sell beer.) By the 1940s, my many stores were open 16 hours a day, and I changed my name to reflect that. In 1963, I experimented with staying open 24 hours a day every day. I was the first to sell coffee in to-go cups, and to offer a self-serve soda fountain. I trademarked the term "brain freeze," too. Today my name is on more than 68,000 stores in 17 countries. Who am I? (Answer: 7-Eleven)

The Motley Fool Take

A Healthy Opportunity

Pharmacy giant CVS Health (NYSE: CVS) has had a rough year. It began by lowering its full-year outlook, and announced that cost synergies from its Aetna acquisition would take longer to realize than originally anticipated. These, plus reimbursement weakness in CVS Health's pharmacy operations, sent shares plummeting. But these are short-term concerns, and the company's long-term outlook could be just what the doctor ordered.

The addition of Aetna is expected to boost CVS Health's organic growth rate while resulting in $300 million to $350 million in cost synergies in 2019, and $800 million in savings next year, up from a prior forecast of $750 million.

Remember, too, that the U.S. population is growing older and living considerably longer than it was a few decades ago. Pharmaceutical sales are projected to increase as the boomer generation ages, which places CVS Health in prime position to win at a well-defined numbers game.

While growth may be tepid now, CVS Health announced in June that it expects to deliver mid-single-digit growth in adjusted earnings in 2021, followed by low-double-digit growth in 2022 and for a few years thereafter. That makes the company's forward-looking price-to-earnings (P/E) ratio of less than 8 seem downright cheap, and its recent 3.6% dividend yield quite appealing. (The Motley Fool has recommended CVS Health.)

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