Q: Is it best to invest only in mutual funds to avoid losing money in stocks? – D.G., New Orleans
A: You can make mistakes and lose money (or just not grow your money much) with many mutual funds, too.
The simplest way to invest in stocks for the long term is to stick to low-fee, broad-market index funds, such as ones that track the S&P 500 index of 500 big American companies. Invest a lump sum, or keep adding to your investment regularly, but either way, hang on through thick and thin. It's important to not sell in a panic, as many people do when the market temporarily swoons.
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It's very possible to make blunders with mutual funds, such as buying ones that have soared after one unusually good year, only to watch them underperform in subsequent years. Other mistakes include buying funds that charge high annual fees or that have high turnover rates due to fund managers buying and selling too often.
For the lowest fees and turnover rates, your best bets are index funds.
Q: Do single people need life insurance? – P.R., St. Joseph, Mich.
A: They often don't. Life insurance exists primarily to protect anyone who depends on you financially, such as a spouse, your kids, your parents or perhaps even your business. If your kids are grown and no one would be hurt financially by your demise, you don't need it.
It's usually best to buy term life insurance, and just for the term over which you'll need it. Don't buy insurance as an investment, because you can end up with insurance you don't need and an investment that's less profitable than many alternatives, such as stocks.
Understanding P/E ratios: It's best to buy stocks when they're undervalued. But figuring out whether a stock is undervalued is easier said than done. Even smart investors can disagree on how to decide. One handy metric offering a rough idea of valuation is a stock's price-to-earnings (P/E) ratio.
You can find P/E ratios for stocks already calculated for you at financial websites, but doing the math yourself is fairly easy: To calculate a P/E, take the stock's current price per share, and divide it by the earnings per share (EPS) over the past 12 months. (For a forward-looking P/E, divide by the expected EPS over the coming year.)
For example, imagine that Holy Karaoke Inc. (ticker: HYMNS) is trading at $48 per share. If its EPS for the last four reported quarters ("trailing 12 months") totals $3, divide $48 by $3, and you'll get a P/E of 16. A P/E ratio will rise when the stock's price increases or EPS falls – and vice versa. So if Holy Karaoke is trading for $48 but its EPS is only $2, its P/E ratio will be 24 ($48 divided by $2).
The P/E ratio tells you how much you'd pay per dollar of earnings if you bought the stock. In finance-speak, a stock with a P/E of 24 might be referred to as "trading at a multiple of 24."
When assessing a company's P/E, compare its trailing and forward-looking P/Es. If it's expected to report higher earnings next year (a good thing), the forward P/E ratio should be lower. (Note that P/E ratios are not calculated for unprofitable companies, as they have no earnings and you can't divide by zero.)
In general, the lower the P/E, the more attractive the stock's valuation. P/E ranges can vary by industry, so it's best to compare a stock's P/E with those of peers in its industry, or with its own five-year average P/E. Also, don't focus too much on that particular ratio. Look at other numbers as well, such as revenue and earnings growth rates, profit margins, debt levels and the trends you see in each.
My dumbest investment
I . P. Oh No. My dumbest investment was investing in LendingClub's initial public offering (IPO). I bought into the hype about it and learned the hard way that IPOs tend to benefit insiders most: Once the shares hit the public markets, it's usually too late to cash in on that initial share price increase. – R.L., online
The Fool responds: Your take on IPOs is generally true. Here's how it traditionally works: A company wants to raise money by selling off a piece of itself to the public. It works with investment banks to determine the company's value and how many shares will be offered. So if the company seems to be worth $10 billion, it might sell 10% of itself – $1 billion worth – via, say, 50 million shares priced at $20 apiece. Insiders and well-connected big investors often get first dibs on the shares.
If there is much excitement when the stock debuts and investors are willing to pay more for shares, it will immediately pop in value, benefiting the early investors. Regular folks may only be able to buy shares at much higher prices.
Peer-to-peer lending pioneer LendingClub's shares popped 56% upon their debut, but they were down 25% six months later – and have been heading south ever since. Once valued at $9 billion, the company was recently valued at less than $1 billion. It's often best to steer clear of IPO stocks, giving them a year or so to settle down.
Name that company: I trace my roots back to 1950, when a teenager recruited five high school friends to help build a bungalow in Detroit, and sold it for $10,000. I kept building, and in 1972, started offering mortgage services to my homebuyers. By 1995, I was the largest homebuilder in America. Today, based in Atlanta, I have operations in more than 40 major markets nationwide, under names such as Centex, Del Webb, DiVosta Homes, American West, and John Wieland Homes and Neighborhoods. I close on more than 20,000 homes annually and have delivered around 750,000 homes over my history. Who am I?
Last week's trivia answer: I trace my roots back to 2001, when my founder wished that potential audience members of a New Orleans jazz show could pledge to buy tickets, and thereby make the show happen. He and his team launched me in 2009. Since then, more than 19 million people have pledged more than $5.6 billion to more than 500,000 projects – about 38% of which have been successful. More than a dozen films funded through me have been nominated for Academy Awards. Other funded projects won Grammy Awards, were exhibited at major museums and were even launched into space. Who am I? (Answer: Kickstarter)
The Motley Fool Take
Electrified: Traditional auto companies such as General Motors (NYSE: GM) have been overlooked in recent years as investors have become enamored with electric vehicles (EVs). Even companies with little or no revenue have been bid up to multibillion-dollar valuations. That may make GM's large and profitable auto business downright boring – but its stock offers long-term investors potentially high growth over the next decade.
GM has announced that it's going to transition its entire fleet to electric by 2035. With its growing lineup of compelling vehicles and manufacturing capacity that startups can't match – as well as its own battery platform, Ultium – investors shouldn't count out the company.
Not only is GM a leader in the future of EVs, but it also has a controlling stake in autonomous driving company Cruise, which could ultimately become the company's most valuable asset. Cruise is developing technology to enable ride-sharing vehicles without steering wheels; GM's role will be to manufacture these vehicles. If the world uses autonomous EVs to move beyond vehicle ownership, Cruise will be the path forward, and that makes GM's future very promising.
GM also announced the launch of a new business, BrightDrop, which offers a motorized pallet (to assist with warehouse logistics and last-mile deliveries) and an electric delivery van. And there's still more to come, such as a variety of cloud-based fleet management services.
General Motors is an old company, but it's changing with the times.
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