Ask the Fool: Hyperinflation?
Q: What’s hyperinflation? Are we experiencing it now in America? — B.H., Honolulu
A: Not at all. It’s true that the U.S. year-to-year inflation rate in March reached 8.5%, the highest rate in 40 years and well above the average annual rate of around 3.1% — but that’s nowhere near hyperinflation.
Hyperinflation is extreme, rather rare and typically short-lived when it happens. Definitions vary, but it’s often defined as a monthly inflation rate of at least 50%; it’s also been used to describe a three-year cumulative inflation rate of 100% or more. In an environment of hyperinflation, prices for common goods can double within days — or even hours.
The folks at Ernst & Young Global recently opined that the following countries were experiencing hyperinflationary economies: Argentina, Iran, Lebanon, South Sudan, Sudan, Suriname, Turkey, Venezuela, Yemen and Zimbabwe.
Q: When investing in stocks, how big a gain should I shoot for before selling? — T.W., Columbia, Missouri
A: It’s best not to aim for any particular gain, but to invest in financially strong companies that seem to have the most promising long-term growth prospects. Once you do, plan to hang on for at least five years, if not a decade or two — while keeping up with those companies’ progress and developments, to keep an eye out for any red flags and make sure they remain promising.
Yes, you might sell after netting a 50% or 100% gain, but that can mean you miss out on much bigger gains. Imagine selling shares of Apple or Microsoft years ago after doubling your money: Many investors regret doing just that. Great wealth built via the stock market often happens over many years.
Fool’s School: Hedge Funds 101
Don’t spend any time regretting that you can’t afford to invest in hedge funds, because, generally speaking, you’re not missing much.
Hedge funds look a bit like mutual funds — both feature the pooled money of many people that’s then invested by professional money managers.
But while mutual funds are regulated by the Securities and Exchange Commission (SEC) and offer prospectuses detailing their investment strategies, hedge funds are generally structured as limited partnerships, and face fewer restrictions on how they can invest their shareholders’ money. For instance, hedge funds can use more complex (and often risky) strategies such as investing with borrowed money, and they can invest in a wider range of things, such as derivatives and even currencies.
Some mutual funds charge a one-time “load” fee when you buy or sell shares, but many funds are “no-load.” Mutual funds get their income by charging a flat, specified annual fee, which averaged 0.47% of assets in 2021, down from 1.04% in 1996.
Hedge funds, on the other hand, were long known for their 2-and-20 fee structure, charging shareholders 2% of assets each year, and also taking 20% of annual profits — with some funds charging more, such as 3% and 30%. (These fees have been falling, on average, in recent years, but they’re still far steeper than most mutual fund fees.)
Steep fees might be acceptable if a fund’s managers are investing money so brilliantly that shareholders still do very well. But that often isn’t the case. Some hedge funds really have delivered outstanding gains to investors, but many don’t. A Forbes article earlier this year noted that in 2021, a year when the S&P 500 gained close to 27%, hedge funds averaged a gain of 10.4%.
Fortunately, average investors can’t invest in hedge funds even if they want to. Only institutional investors (such as pension funds) or “accredited investors” (those with high net worths and/or high incomes) can do so. Average investors can still do very well, though, by investing in low-fee index funds.
My Dumbest Investment: A Neglected Portfolio
My dumbest investment was in Black Elk Energy bonds. Total loss. I learned that bonds aren’t as safe as stocks after all. — R.L., online
The Fool responds: The Black Elk Energy story is quite a cautionary tale. The company was convicted of eight felonies in connection with a 2012 explosion at an offshore oil production platform that killed three subcontracted workers and severely injured others.
Meanwhile, the Platinum Partners hedge fund had loaned millions to the company and helped it borrow much more via a bond sale. The hedge fund itself didn’t appear to be of the best quality, having reportedly invested in (among other things) penny stocks, payday lenders and a diamond mine. Indeed, some of its executives ended up convicted on securities fraud charges. Black Elk investors like you didn’t have much of a chance.
Bonds are essentially loans. Many, such as those issued by the U.S. government, are far safer than stocks — but they generally offer lower returns over the long run. There are other kinds of bonds, though, including corporate ones issued by companies to raise money. The bonds of blue-chip companies with low risk of default are fairly safe, but offer relatively low interest rates; risky companies need to offer high rates for their bonds — which are thus known as “junk bonds.”
If you buy corporate bonds, research the companies first, recognizing very high interest rates as possible red flags.
– distributed by Andrews McMeel Syndication
