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What’s the ‘long term?’
THE MOTLEY FOOL
Ask the Fool
Published: September 13, 2022
Q. I keep hearing that it's best to invest in stocks for the long term. But how long is that? -- P.W., Windham, Maine
A. Aim to hang on to stocks you buy for at least several years, if not decades. Then, keep your focus many years ahead. As long as the company remains healthy and growing, with a rosy future, and as long as its stock price isn't grossly overvalued, it's probably best to hang on. Remember that those who made fortunes on stock in, say, Microsoft or Starbucks did so over many years, and didn't sell after doubling their money.
It's also worth noting that long-term capital gains (from assets held at least a year and a day) are generally taxed at a lower rate than short-term gains. (Don't base investing decisions solely on taxes, though.)
Q. Can you explain what "high-yield" stocks are? Should I favor them? -- C.N., Garden City, Idaho
A. Sure. High-yield stocks are ones that pay generous dividends in relation to their stock prices.
A company's dividend yield is its current annual dividend amount divided by its stock's current price. So, if Meteorite Insurance Inc. (ticker: HEDSUP) pays $4 per year in dividends (perhaps via quarterly $1 payments) and trades for $100 per share, its yield is 4% -- 4 divided by 100 is 0.04, or 4%.
Dividend-paying stocks can be great investments, but don't look for the highest yields you can find, as they can be tied to shaky companies whose shares have sunk. Instead, seek meaningful yields from healthy companies, perhaps checking before you buy to make sure the stock hasn't fallen sharply over the past year due to lasting problems with the business.
Fool's School
A Powerful and Simple Investment
Perhaps you want to invest in the stock market right now, but are holding back because you don't have the time, interest or skills for it. Fortunately, you don't need any of those in order to profit over many years from America's or the world's growing economies; you can just invest in one or more low-fee, broad-market index funds.
Mutual funds come in actively managed and passively managed varieties. Actively managed funds have well-educated and well-paid managers studying gobs of securities and making lots of buy and sell decisions over time. Passively managed ones generally aim to roughly duplicate the performance (less fees) of a certain stock (or other) index by buying and holding the same securities that are in the index.
How do they compare? Well, over the 10 years ending in 2021, fully 83% of managed large-cap-stock mutual funds underperformed the S&P 500 index (of 500 leading U.S. companies), and a whopping 94% of them underperformed it over 20 years. It's hard to beat the market's overall average annual gain -- which has been close to 10% over long periods (not accounting for inflation) -- and many smart investors fail to do so.
So which index funds should you consider? Those tracking the S&P 500, such as the Vanguard 500 Index (VFINX) or the SPDR S&P 500 ETF (SPY), are a fine choice. The Vanguard Total Stock Market ETF (VTI) and Vanguard Total World Stock ETF (VT) will, respectively, spread your dollars across all of the U.S. market or most of the world's stock market.
Index funds also typically charge very low fees -- often near or below 0.1% -- while many managed mutual funds charge 1% or more. Your 401(k) plan at work is likely to feature one or more index funds. You can also invest in index-based exchange-traded funds (ETFs), which trade just like stocks, via any regular brokerage account.
Learn more in John Bogle's "Little Book of Common Sense Investing: The Only Way To Guarantee Your Fair Share of Stock Market Returns" (Wiley, $25).
My Dumbest Investment
It All Turned Out Bad
My dumbest investment was in a Chinese solar company. I used to follow a site about alternative energy where the stock was recommended. It all turned out bad. -- W.S., online
The Fool responds: Ask yourself some questions: What kind of reputation did this site have? Did it transparently report on the success or failure of its recommendations? Did it have a good long-term track record recommending stocks? Did you do your own research into the company -- looking into how much cash and debt it had, whether its revenue and earnings were growing at a good clip or if it was even profitable? Did you learn about the competitive advantages (if any) that it had, and what the stock's risks were? Answering questions like these can help us qualify or disqualify various stocks that you're considering investing in.
It's good to diversify your holdings, including some companies based outside the U.S. (or mutual funds with an international focus), but do so carefully, and consider the economic and political environment in which a candidate company operates. In China, for example, several business leaders have disappeared, and its government has occasionally issued decrees that have hurt various companies.
Remember that another way to invest internationally is via U.S. companies that derive much of their revenue abroad. Coca-Cola, for example, recently got just 36% of its revenue from North America.
Foolish Trivia
Name That Company
I trace my roots back to 1957, when a World War II U.S. Navy pilot started leasing out a fleet of seven cars in St. Louis, Missouri. (My name refers to an aircraft carrier he served on.) Today, I'm the world's largest car rental company; my own name is a brand, along with National and Alamo. I'm also one of the largest privately held companies in America (meaning you can't buy stock in me). My fleet exceeds 1.85 million vehicles, and I operate in nearly 10,000 locations in more than 90 countries and territories. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1930, when I was founded to provide seismographic data for the petroleum industry. In World War II my focus turned to submarine detection devices -- and after that, to transistors, integrated circuits, pocket calculators, radar and more. I sold my defense division to Raytheon in 1997. Today, based in Dallas and with a recent market value topping $160 billion, I'm a global semiconductor specialist; I have 15 manufacturing sites worldwide and produce tens of billions of chips annually. I make around 80,000 products for more than 100,000 customers and employ more than 30,000 people. Who am I? (Answer: Texas Instruments)
The Motley Fool Take
Making the World a Better Place
Many governments are working to cure disease, halt climate change, provide safe working conditions and/or close gender and racial pay gaps. These issues threaten quality of life globally, and some businesses are working toward such goals, as well.
If you'd like to be a more socially responsible investor, you might seek companies rated highly for their environmental, social and governance (ESG) behaviors.
What makes a good ESG stock? The company must align its operations to support programs benefiting the environment, local communities, employees and customers, as well as shareholders. Its performance history must be verifiable by ESG rating agencies. Solid financial performance is a primary theme of ESG investing, so ESG investors don't have to forgo reliable returns.
Here are 10 companies you might research and consider. Each has a high MSCI ESG rating -- and in recent years, each has reported robust annualized growth in net income and diluted earnings per share (EPS): Nvidia (Nasdaq: NVDA), Microsoft (Nasdaq: MSFT), Best Buy (NYSE: BBY), Adobe (Nasdaq: ADBE), Pool Corp. (Nasdaq: POOL), Salesforce (NYSE: CRM), Cadence Design Systems (Nasdaq: CDNS), Intuit (Nasdaq: INTU), Idexx Laboratories (Nasdaq: IDXX) and Lam Research (Nasdaq: LRCX). (The Motley Fool owns shares in and/or has recommended all of these companies.)
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