Q: Can you explain "defined contribution" and "defined benefit" retirement plans? – K.W., Ashland, Ky.
A: Sure. Some examples will make it clear: A pension is a defined benefit plan, because the amount you'll receive from it in retirement is generally a known, fixed number. A 401(k) or 403(b) plan, on the other hand, is a defined contribution plan, because you know how much you (and perhaps your employer) put into it, while the amount you'll eventually end up receiving is not so certain.
Employers bear more responsibility with defined benefit plans, as they need to accumulate funds sufficient to meet their future obligations. Over the past few decades, many companies have phased out pensions and phased in defined contribution plans. Workers now bear most of the risk, and they need to be sure to contribute enough to their retirement accounts – and invest that money effectively – so they can support themselves in retirement.
For practical guidance about 401(k) plans and other retirement issues, visit Fool.com/retirement – and check out our "Rule Your Retirement" service at Fool.com/services.
Q: Is buying renters insurance smart? – P.R., Las Cruces, N.M.
A: Yes! It can protect you against theft or damage to your belongings and offer some personal liability protection. It's generally affordable, too, often costing just a few hundred dollars per year.
Don't assume your landlord will cover you, because his or her insurance will probably just protect the building itself and not your property in it.
You'll need to specify how much coverage you want when you buy a policy. Some policies cover only the depreciated value of items stolen or damaged, while others cover the full replacement cost; favor the latter.
Analyst stock ratings: Not what you think
If you're researching stocks, you'll likely come across "buy," "sell" or "hold" ratings issued for companies by Wall Street analysts. They can seem very important, but they're not as meaningful as you might think.
The ratings themselves can have many names. There are "buy" and "strong buy" ratings; "outperform" and "overweight" are also buy ratings, though a bit less enthusiastic. "Hold" can also be expressed as "market perform" or "equal weight," while many "sell" ratings are expressed obliquely, as "underperform" or "underweight." You'll sometimes see actual "sell" or "strong sell" ratings, but not too often.
So why are the ratings not so meaningful? Well, there are different kinds of stock analysts – "buy-side," "sell-side" and "independent" ones. Buy-side analysts work for institutional money managers (like mutual fund managers) and prepare reports and recommendations about companies for their employers.
The stock ratings you're most likely to run across are from sell-side analysts, who often work for major brokerages and prepare research and ratings that other companies buy. They can have conflicts of interest, such as when their employer also does investment banking work for companies – because negative, bearish reports can result in lost business. That's why "sell" ratings are relatively rare. Their employer may also own shares of the companies covered, and stand to benefit from bullish reports that get more people buying shares of the companies, driving up the price.
There are independent analysts, too, who are paid by companies that don't do investment banking work or who just offer their reports on a subscription basis. Pay more attention to their research.
And speaking of research, many brokerages offer access to a wide range of analyst research reports. If yours does, they may contain a lot of good information – so try to look well beyond a simple "buy" or "hold" rating.
You can learn more and get tips on uncovering analyst conflicts and protecting yourself by searching for "analyst recommendations" at SEC.gov.
My Dumbest Investment
I had a gym membership early in the last decade. I moved and kept "investing" in my health for a full six months after I moved. The lesson – check your bank statements weekly, and fix any unintended purchases that day. – J.N., online
The Fool responds: Your story is a great reminder that we make all kinds of investments that aren't in stocks, bonds, mutual funds or bank accounts. If you're financially crunched or just want to be able to save more money, it's worth thinking about which expenses you can do without. For many people, gym memberships can be replaced by workouts at home and in their neighborhood.
It's important to keep an eye on your bank statements and credit card statements, paying attention to any automatic payments and renewals. Failing to do so often results in your continuing to pay for memberships or subscriptions or other things that you no longer need or use.
You're smart to call your gym membership an investment in your health – because there are lots of important non-financial investments we can make. For example, investing in your health by eating nutritious meals and exercising regularly can save you a lot in health care costs, and investing in your career, perhaps by gaining new skills or certifications, can also pay off well. Invest in your relationships, too, by spending quality time with your loved ones.
Name that company
I trace my roots back to 1972 and a converted ocean liner called the Mardi Gras. Business boomed after "The Love Boat" aired. Today, headquartered in Miami (but incorporated in Panama, England and Wales), I'm one of the world's largest leisure companies. I recently sported more than 100 ships, more than 225,000 customers cruising per day (for a total of almost 13 million annually), and more than 150,000 employees. My brands include Holland America Line, Princess Cruises, Seabourn, Cunard, AIDA Cruises, Costa Cruises and my own name. I raked in more than $20 billion in fiscal 2019. Who am I?
Last week's trivia answer
I trace my roots back to 1967, when my founders incorporated me and then applied to serve the Dallas, Houston and San Antonio areas. In 1971, I got my (now misleading) current name. At the end of 2019, I employed more than 60,000 people, and I recently became the world's largest airline (in terms of scheduled seats). My fleet recently encompassed more than 700 Boeing 737s and, pre-pandemic, served more than 100 destinations – with 4,000-plus departures each weekday. I'm a rarity in my business, as I've been profitable for 47 years in a row. Who am I? (Answer: Southwest Airlines)
The Motley Fool Take
Banking on growth
Banks are feeling the heat these days as interest rates have fallen, the direction of the economy is uncertain and unemployed people may default on loans. But at now-depressed prices, some present good investment opportunities.
Consider Capital One Financial (NYSE: COF). It was the first major bank to sign onto the cloud with Amazon Web Services, and it invested in strong infrastructure to support its customer-oriented products and services. Its credit card segment accounts for 64% of total revenue; Capital One also operates a consumer bank (including a large auto-loan division), a smaller commercial banking division and a suite of small-business services. Most of its earnings come from the interest it charges on credit card balances and loans, and it targets average working Americans.
Capital One is in a good place because of disciplined decisions it makes during normal times. "We've ... been obsessed with resilience in our choices of businesses and segments and in all of our underwriting decisions in good times and bad," CEO Richard Fairbank explained.
Being diversified gives Capital One some cushion against any one segment pulling down the whole. Then again, if the economy tanks, banks will have trouble all around. Still, Capital One is a growth-oriented company whose youth and tech focus are a big plus. Its share price was recently down about 38% year to date, and it's likely to remain volatile until the economy picks up.