Q. Is it better to invest in bonds than in stocks because they're safer? -- T.W., Columbia, Mo.
A. Not necessarily. Stocks tend to grow faster – and you can still lose money with bonds. According to researcher Jeremy Siegel, stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012 and in 99% of all 30-year holding periods. Between 1926 and 2012, the annualized growth rate for stocks was 9.6%, versus 5.7% for long-term government bonds.
Meanwhile, interest rates have been very low for many years now, so they'll likely start rising one of these years. When they do, the value of existing bonds (with lower interest rates) are likely to drop. You can always hold a bond until maturity to get your full principal back, but that can take a long time.
The values of bond mutual funds can fluctuate with the bond market; they often hold a diverse range of bonds to reduce risk. The stock market can be volatile over a few months or years, but over the long run, it tends to rise. Park long-term dollars in stocks, and put short-term savings in short-term bonds, money market accounts or CDs.
Q. If a stock I own splits 2-for-1, what happens to my cost basis, for tax purposes? -- S.B., Treasure Island, Fla.
A. Let's say you buy 100 shares of Sisyphus Transport Corp. (ticker: UPDWN) for $100 each. Your cost basis is $10,000, or $100 per share. Imagine that it increases to $120 per share and then splits 2-for-1. You'll end up with 200 shares worth around $60 each, for a total value of $12,000. Your cost basis will still be $10,000, but it will now be $50 per share.
Macro- and microeconomics, explained
If you're interested in investing in stocks, you'd do well to learn about both macroeconomics and microeconomics, as they can help you understand the headwinds and tailwinds that can affect nations and businesses. (Remember, if you own a share of stock in a company, you're a part owner in it, and will gain or lose depending on how it performs.)
Macroeconomics takes a big-picture view on a regional, national or global level. It examines the interplay between inflation, unemployment, gross domestic product, public debt, fiscal policy and overall supply and demand – trying to answer questions such as, "What will spur economic growth?" It can help you understand how well your own country's economy is functioning, and it can help you spot other economies that might be fertile hunting grounds for investments.
Microeconomics is even more useful for investors, as it focuses on particular companies or industries, looking at factors such as supply and demand, labor markets, costs of production, price elasticity of demand (how flexible consumers are in what they're willing to pay), and competitive advantages. It examines the behavior of buyers, sellers and businesses, and observes or predicts the results of various actions, such as lowering prices or raising wages.
Competition is critical for investors to understand, because the best companies in which to invest often have sustainable competitive advantages. These might include a powerful brand, patents and other intellectual property, scale, and/or steep barriers to entry that prevent new rivals from materializing. (Think of airplane manufacturers – it's hard for any new company to fund the facilities and equipment needed.)
The microeconomic concepts of monopoly and oligopoly (when a market is controlled by just a few companies) are also good to understand. A company that's a near-monopoly has great freedom in how it prices its offerings, while companies in very competitive industries do not. Thus, investors often prefer companies that are monopoly-like, though anti-trust actions could threaten them one day.
Like accounting and even psychology, economics is a helpful subject to know if you want to be a better investor.
My Dumbest Investment
Driven to regret
My dumbest investment was buying a car when I was in my early 20s. It dropped my net worth by nearly $7,000. I've since learned my lesson. -- S.C., online
The Fool responds: Most of us have heard that a new car loses a lot of value as soon as you drive it off the lot, but few of us understand how much value is lost then – and later. The folks at Carfax.com have offered some detail, noting that new cars can lose more than 10% of their value in their first month, and more than 20% after a year. They will typically lose about 10% annually for the next four years, leaving you with a vehicle worth less than half its purchase price after five years.
Some vehicles hold their value better than others, but it's generally better, financially speaking, to buy a used car that's just a few years old. That way you get to enjoy a newish car for a few years before repairs start rearing their heads. If you really prefer a new car, aim to hang on to it for a long time. Buying a new car and trading it in for another after just a few years is a value-destroying proposition.
Remember that unless you're buying a collectible car, its value is likely to go to zero over time. Instead, whenever possible, try to put your dollars into value-increasing investments.
Name that company
I trace my roots back to 1985, when a Sears employee tested a new credit card. A year later, Dean Witter Reynolds, then a financial services subsidiary of Sears, debuted that card. It was unusual because it charged no annual fee, sported a higher-than-average credit limit and offered cash rewards to users. That card is under my roof now, and its name is part of mine. Today, with a market value near $21 billion, I'm one of America's largest card issuers. I offer banking services, too, and charge no fees on deposit products such as checking accounts. Who am I?
Last week's trivia answer
I trace my roots back to a home built in Fort Worth, Texas, in 1978. Today, with a market value recently over $28 billion, I'm the nation's largest homebuilder by volume – and have been since 2002. I operate across 29 states, recently employed almost 9,000 people and rake in close to $19 billion annually. I close on more than 60,000 homes per year, and have built more than 770,000 homes. My homes are sold under my own name, as well as Emerald Homes, Express Homes and Freedom Homes, with prices ranging from $100,000 to more than $1 million. Who am I? (Answer: D.R. Horton)
The Motley Fool Take
A company to gush over
With the price of oil down, shares of integrated energy giant Chevron (NYSE: CVX) have fallen considerably in 2020, pushing the dividend yield up – recently to 7%. Here's why you should consider Chevron for your portfolio.
For starters, while clean energy alternatives are increasingly displacing oil and natural gas, that's likely to take a long time. And with many energy companies drilling less in the face of low oil prices, those prices may well spike at some point due to low supply.
Chevron's strong balance sheet is another plus. The key to surviving in a highly cyclical industry like energy is being strong enough to handle the down years so you can thrive in the up years. That has long been a focus at Chevron, which has one of the best balance sheets in the industry. Its debt-to-equity ratio is lower (i.e., better) than many big peers -- and that's after it borrowed billions of dollars so it would have ample resources to deal with the impact of the COVID-19 crisis on energy demand.
Then there's that dividend. There's no guarantee it won't be trimmed or suspended in this pandemic environment, but Chevron's management has made it a priority to sustain its payout and increase it over time. Buying into the stock now may generate solid income for many years.
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