Ask the Fool: Stocks or Funds in an IRA?
Q. Is it a problem that I’ve filled my IRA account with individual stocks? Should I have mutual funds instead? — C.G., Arlington, Virginia
A. It’s not a problem as long as you’ve studied the companies, are confident in their likelihood to grow in value over time, and plan to keep up with their progress and news regularly. If so, and if you’ve chosen well, then you might outperform many mutual funds — though there’s no guarantee, and lots of stocks never live up to their expectations.
Many people don’t have the time, skills or interest to be active investors, though. For them, mutual funds make sense, offering convenience and diversification, ideally for a low or reasonable fee. Consider focusing your mutual fund dollars on index funds, which are passively managed and simply buy the securities that are in the index they track. They aim to deliver roughly the same return as the index — fewer fees. If you purchase shares in an S&P 500 index fund, for example, you’ll be invested in 500 of America’s biggest companies.
Q. How can a stock be “trading below cash”? — M.V., Issaquah, Washington
A. That means that the company’s net cash (its cash reserves with debt subtracted) is more than its entire market value — in other words, its net cash per share exceeds its share price. Some interpret that to mean that a company is greatly undervalued, but others see a red flag. Either way, some research is warranted. The company might have plenty of cash but be burning through it rapidly, for example.
For best investing results, just focus on healthy and growing companies with reasonable or attractive valuations, and, ideally, lots of cash and little to no debt.
Fool’s School: Dollar-cost averaging: pros and cons
Dollar-cost averaging is an investment approach worth understanding so you can decide whether it makes sense for you. Here’s an introduction.
When you dollar-cost average, you put a certain sum of money into a stock or fund on a regular schedule — no matter whether the market or the investment is rising or falling in value. For example, you might allot $3,000 every quarter to an index fund. If you have a 401(k) account that receives a certain sum from your paycheck every pay period and puts it into one or more investments that you’ve specified, that’s another example of dollar-cost averaging.
When the price of whatever you’re investing in is up, you’ll get fewer shares, and when it’s down, you’ll get more. The upsides are considerable: For one thing, you don’t have to spend any time thinking about whether it’s a good or bad time to invest. Also, the practice can keep you from loading up at a bad time or selling off in a panic.
The stock market has always risen over long periods, though, so if you’re sitting on a large sum to invest and you plan to stay invested for many years, it’s reasonable to invest it all at once, or in a few installments over a few months. Otherwise, you’d be leaving cash on the sidelines for a long period, very possibly missing out on gains. Dollar-cost averaging is best suited to those who keep generating money to invest over time.
It has a few drawbacks, however. If your investment account charges for each trade, those costs can add up. (Many major brokerages charge nothing for trades these days, though.) Also, if you’re dollar-cost averaging in a non-retirement account, things may get complicated when you want to sell some shares. You’ll need to keep good records of how much you paid for your shares each time, so you’ll be able to determine your taxable gain (or loss).
Dig deeper into dollar-cost averaging if you’re interested in giving it a try.
My Dumbest Investment: After a Few Beers …
My dumbest investment? Well, it was a Friday night, and I had gone to a bar after work “for one beer.” Later that night, I logged on to my brokerage account — I was a total newbie to investing — and decided to get adventurous. I was looking for a good stock at a low price. With beer in hand, I decided to be a captain of industry, and invested a couple of hundred dollars into an all-American steel manufacturing and shipbuilding company — Bethlehem Steel. About a week later, I realized they were days away from filing for bankruptcy. D’oh! — J., online
The Fool responds: This must have happened in 2001, when Bethlehem Steel filed for bankruptcy. Around that time, the company had more than 12,000 active employees and nearly 130,000 retirees and dependents. That was part of its problem — it owed significant pension and healthcare benefits to its retirees, and it hadn’t socked away enough money to cover them. Meanwhile, it had taken on substantial debt and was facing competition from abroad. Many investors lost a lot on Bethlehem Steel, but in many cases, the fate of retirees was worse, as they didn’t receive what the company had promised them.
It’s smart to study a company’s financial health before investing in it — and, as you know, best to avoid buying and selling stocks while not quite sober.
– distributed by Andrews McMeel Syndication
