Ask the Fool: Shifting Assets
Q. Is it good to move money into bonds when stocks fall, and vice versa? — L.T., Warsaw, Indiana
A. Not necessarily. Instead, you might just figure out what portion of your assets you want to invest in bonds and stick with that until you have a reason to change your asset allocation, such as if five or more years have passed since you set it up, and you’re older now.
Younger folks might keep all or most of their assets in stocks if they have several decades of investing ahead of them. Those in or nearing retirement might move a larger portion of assets into bonds.
One rule of thumb suggests subtracting your age from the number 110 to arrive at a good allocation for stocks. So if you’re 40, you’d park 70% of your assets in stocks. If you can tolerate more risk, it’s fair to subtract from 120, instead, for a higher stock allocation. Remember that over long periods, stocks have generally outperformed bonds.
Q. What does the insurance term “float” refer to? — S.N., Bellevue, Washington
A. Warren Buffett, CEO of the insurance giant Berkshire Hathaway, has referred to float as “other people’s money” — “money we hold but don’t own.”
When you — and other buyers of insurance — pay your insurance company your premiums every year, the insurer collects the money, which will help cover claims from customers. The money is collected up front, but claims are paid out throughout the year. Until that money is needed, the insurance company gets to invest it in stocks, bonds and the like — and gets to keep any profits from such investments.
Fool’s School: Mutual Funds Face Problems
It can seem reassuring if an actively managed mutual fund that you’re considering is massive — meaning that many investors have trusted lots of money to it. But managers of big funds face challenges.
As fund managers become more successful, delivering strong returns for their shareholders, more dollars will likely come their way. They’ll collect more in fees, but they’ll also have to find additional promising investments for that money. Ideally, they will invest in the best, most lucrative securities they can find. But they can’t always put as much as they want into any one stock.
Most funds managers want their funds to be classified as “diversified,” so they’re required by law to have at least 75% of fund assets invested in no more than 5% of any particular issuer’s securities. Even if they’re extremely bullish on, say, six different stocks and want to invest 10% of fund assets in each, they can’t. For better or worse, they can’t make huge bets on any particular stocks. Therefore, they end up investing in their best ideas, and their next best ideas, and plenty of securities that are far from the top of their list.
The Fidelity Contrafund, for example, had spread its assets across 344 different securities as of late March. In late April, it had nearly $1 billion invested in Home Depot stock, but that made up only 0.854% of fund assets. Only 18 holdings made up more than 1% of assets.
How has Fidelity’s Contrafund performed? Well, on an after-tax basis, it has lagged its benchmark index over the past three, five and 10 years — so investors would have been better off with a low-fee S&P 500 index fund.
Go ahead and consider large (and smaller) actively managed mutual funds, but research them well before buying. Consider not only their performance over many years, but also fees and factors such as their managers’ tenure.
For practical retirement guidance and model portfolios featuring recommended funds, check out our “Rule Your Retirement” service at Fool.com/services.
My Dumbest Investment: Learned My Lesson
My dumbest investment move has been trading too frequently in certain stocks. For example, I rode Tesla until its 5-for-1 stock split in 2020, selling at around $480 per share. I then bought shares again at $550. That’s a gain of $70 per share that I missed out on. So now I’ll keep those shares no matter what.
After that Tesla education, I went back to school with another stock: I bought and sold it for gains of between $20 and $30 per share a few times. Then the other day, I sold it for a $40 gain. And once again, it’s gone up even more. So I bought it back and I swear I’ll not sell it again. I hope I’ve learned my lesson this time, but I suspect I’ll need another reminder or two. — M.J.K., online
The Fool responds: Maybe you can avoid making this mistake again: Next time, before you sell, ask yourself what you think the company’s long-term growth potential is. If you can see it continuing to grow over many years, consider hanging on, so you have the chance to enjoy much bigger long-term gains.
Selling before you’ve owned a stock for more than a year will also subject you to the short-term capital gains tax rate, which is the same as your ordinary income tax rate — and very likely higher than most people’s long-term capital gains tax rate of 15%.
– distributed by Andrews McMeel Syndication
