I keep reading about Moderna and other companies working on promising COVID-19 vaccines. Is it worth investing in them? – E.P., Cleveland
A: Shares of Moderna and other vaccine-related companies have soared in recent months, some more than doubling or tripling in value. That means that expectations of successful vaccines are already baked into their prices. Some or all may continue to rise, but that's far from guaranteed, since much uncertainty remains. For example, which companies will end up with successful vaccines? Which vaccines will be most widely distributed? Which ones will generate the most profit for their makers?
If you're thinking about investing in one of these companies, you should look beyond vaccines alone. Consider how much cash and debt they have – can they stay afloat a long time? Are they generating profits now, and are those likely to grow? Do they have a pipeline of other promising treatments in development, and how close to getting approved are those? Remember that if any vaccine being developed fails, its company's stock is likely to fall, possibly sharply.
Vaccine makers can be risky investments. Digging into other health care stocks could turn up other exciting portfolio candidates that are more undervalued.
What good financial planning books do you recommend? – C.W., Cerritos, California
A: Here are a few: "Get a Financial Life: Personal Finance in Your Twenties and Thirties" by Beth Kobliner (Simon & Schuster, $17), "Managing Your Money All-In-One For Dummies" (For Dummies, $30) and "Your Complete Guide to a Successful and Secure Retirement" by Larry Swedroe and Kevin Grogan (Harriman House, $19).
Don't forget to rebalance. Asset allocation is a concept underappreciated by investors – and not paying attention to it can be costly. Your asset allocation is how you've chosen to distribute your money across various asset classes, such as cash, stocks and bonds.
Once you determine the best allocation for your needs and risk tolerance, you're not done. You'll likely want to change it over time – for example, taking on less risk as you approach retirement – an adjustment known as "rebalancing." (Target-date retirement mutual funds aim to do this for you, by the way.)
Imagine that you set up your portfolio to be 70% in stocks, 20% in bonds and 10% in cash. Stocks tend to grow more quickly than bonds, so in a few years, your portfolio's mix might actually be 85% stocks, 10% bonds and 5% in cash. If that's not the best allocation for you, you'll need to rebalance it – by selling some stocks and buying more bonds – to get back to your ideal allocation mix.
Rebalancing can be especially easy if you're mainly invested in low-fee index funds – such as ones that track the overall stock market and overall bond market. As examples, the SPDR S&P 500 ETF (SPY) will instantly have you invested in the S&P 500 universe of stocks, and the iShares Core U.S. Aggregate Bond ETF (AGG) will have you in a broad range of bonds. You'll simply sell and buy the number of shares you need to.
If you've invested in individual stocks, you might identify your least promising ones and sell some or all of those. Be careful not to end up overweighted in your best performers, though. If one surging stock comes to represent 40% of your portfolio, for example, consider trimming that position to a more modest level. You don't want too many of your eggs in one basket, even if it's a promising basket. You can learn more about asset allocation and rebalancing at Fool.com and by searching for those terms online.
My dumbest investment
Real Estate Woes: My dumbest investment was buying a house at the peak of the real estate bubble in California in 2006. I learned that if the price is too high, it's better to wait. – D.T., online. The Fool responds: Ouch. That's a good reminder that when you're in the market for a new home, it's smart to consider how inflated home values may be. After all, just as stocks rise and fall in value, so do homes -- though they often do so more slowly, so it can be harder to notice. It's actually best not to think of your home as an investment, because when it comes to building wealth, real estate generally isn't your best bet.
According to the Case-Shiller U.S. National Home Price Index, home values have grown by an annual average of about 3.5% over the past 30 years. Yes, some home values in some places will appreciate more robustly, but many others will grow more slowly. Also, even if your home surges in value, you can't put that value in your pocket unless you sell the home or borrow against it.
Try not to overpay for a home, especially if you aren't sure you'll be staying in it for a long time. If home values drop due to a recession, a wide-scale financial crisis or simply a bubble bursting, you don't want to end up having to sell for less than you paid.
Name That Company: I'm a major technology name, founded in a Silicon Valley garage like some of my peers -- but I was launched in 1939. My first products were audio oscillators, and Walt Disney was an early customer. I introduced the world's first handheld scientific calculator in 1972, initially pricing it at $395. My LaserJet debuted in 1984, and I've since sold more than 200 million. I merged with Compaq in 2002. Today, with a market value near $25 billion, I'm focused on personal systems, printers and 3D printing solutions. As of last year, I employed about 56,000 people. Who am I?
Last Week's Trivia Answer: 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? (Answer: Carnival Corp.)
The Motley Fool Take
A Big Blue Investment: Computing veteran IBM (NYSE: IBM) generated $11.5 billion of free cash flow over the last four quarters. The company turned around and poured $5.8 billion of that bounty straight into shareholders' pockets through dividend payouts. That happened in a year where Big Blue spent $34 billion on an acquisition. A less stockholder-friendly company might have paused its dividend policy in times like these, but not IBM. Instead, the company settled for symbolic dividend boosts of 3.2% in 2019 and 0.6% in 2020. (Its dividend yield was recently a hefty 5.1%.
IBM is committed to rewarding shareholders with dividends. Its payout has grown by 715% over the last 15 years.IBM's recent big acquisition was Red Hat, an open-source software specialist, which it took on debt to buy. Red Hat was growing at a solid double-digit rate prior to being bought, and its market share in the paid enterprise operating system market was recently second only to Microsoft's. Its OpenShift cloud platform is a market leader. IBM does have a lot of debt, but it's a strong cash machine, with great long-term growth opportunities in the cloud computing, blockchain, data security and artificial intelligence markets. Patient believers in the company can also enjoy meaningful income from its dividend.