Motley Fool

Ask the Fool

The Rule of 72

Q: Can you explain what the "Rule of 72" is? -- G.L., Houston

A: It's a way to quickly estimate how long it will take a sum to double: Divide 72 by your growth rate.

Let's say you've invested in something that's growing at 4% annually. Dividing 72 by 4 gets you 18 — meaning that it will take about 18 years to double your money. Earning 7% annually? Your money should double in about 10.3 years.

The rule works in reverse, too: If you're aiming to double your cash in eight years, divide 72 by 8, and you'll see that you'll need a growth rate of about 9%.

It can even help account for inflation: If inflation is averaging 3% annually (as it has been, historically), divide 72 by 3, and you'll see that prices are likely to double in about 24 years.

Q: How can I invest in wind-power stocks? — H.K., Boise, Idaho

A: You might look into manufacturers of turbines and wind-related products; General Electric and Vestas Wind Systems are two of the biggest, with Vestas being a pure play in wind and General Electric focusing on wind along with other kinds of energy. Energy companies such as NextEra Energy, Dominion Energy and Xcel Energy are worth consideration, too; in 2018, NextEra Energy generated more electricity from the wind and sun than any other company in the world.

There are also exchange-traded funds (ETFs) focused on wind energy, with assets spread across many wind-related companies. The First Trust Global Wind Energy ETF (FAN) is one example.

Be sure that you're not invested only in wind stocks or only in energy companies. Diversify your holdings across a range of industries.

Fool's School

Fees and Costs of Mutual Funds

Mutual fund fees have been falling in recent years, but they can still cost you a lot if you're not paying attention. Fees in 2018 averaged $48 per $10,000 invested, down from $93 in 2000, per a Morningstar report — but mutual fund companies are still raking in tens of billions of dollars in fees annually.

You can pay a lot less in fees by parking your long-term dollars in broad-market stock index funds, such as those tracking the S&P 500 index of major American companies. Index funds are passively managed: Their managers simply invest in the same securities as the index they track; they aren't busy studying companies to decide which to buy or sell. Thus, it's not surprising that the average fee charged for passive funds in 2018 was only $15 per $10,000 invested — and with some companies, it's much lower. Vanguard, for example, averaged just $9.

A mutual fund's expense ratio, or annual fee, is clearly listed, but there are other costs to owning mutual funds. For example, if a fund's managers are selling and buying various securities frequently, you'll end up with short-term gains, which generally face higher tax rates than long-term gains; any commission costs for all that trading will be passed on to you.

You can assess how busy managers are by looking at a fund's "turnover ratio," the percentage of the entire value of the fund that's traded over the course of a year. Favor funds with lower ratios, ideally 30% or less.

Another way to lose money in funds is to be impatient with good funds. Stocks and stock-based mutual funds don't grow in value at a consistent rate; expect some volatility and down periods. And if an actively managed fund doesn't outpace its benchmark index (the index to which its performance is compared), consider just switching to a simple, low-cost index fund. Index funds tend to outperform most managed funds, anyway.

You can learn more by searching for the terms "mutual funds" and "Motley Fool" using Google.

My Dumbest Investment

Engagement Ring Regrets

My dumbest investment? The first engagement ring I bought. It gave me a massively negative return on investment. — C.C., online

The Fool responds: Yikes. People getting married often have some big expenses looming, such as the wedding itself, a honeymoon and perhaps a down payment on a home. Given that, it's best to rein yourself in when buying a ring, lest you set yourself back financially or end up taking on costly debt.

Guidelines for how much you should spend vary widely. Not surprisingly, the jewelry industry often suggests spending at least two months' salary on a ring. For someone earning $48,000, that would be $8,000! Most people aren't following that guidance, though: According to the Knot's 2019 Jewelry and Engagement Study, the average price paid for an engagement ring is $5,900, but a third of survey respondents reported spending between $1,000 and $3,000, and a tenth spent less than $1,000.

Ignore the "guidelines" and make your own decision based on your preferences and sensibilities. You may, for example, prioritize travel, education, a new home and/or savings over jewelry. Remember that there will also be wedding bands to buy, and those often cost $500 to $1,000 apiece.

Also, you might spend modestly on the engagement ring and consider it a starter ring; you can always upgrade to a fancier, pricier one later, when you're more flush — perhaps for a big anniversary.

Foolish Trivia

Name That Company

I trace my roots back to 1958, when my founder paid $6,000 to open my first location in Virginia. (Gas cost 28 cents per gallon back then.) Today, based in Knoxville, Tennessee, I'm North America's largest operator of travel centers, with more than 750 locations in 44 states (and six Canadian provinces) and over 28,000 employees. I sell more than 7 billion gallons of fuel per year, and serve more than 1.6 million guests daily. I offer truck care centers, too. I'm the 14th-largest private company in America, and Warren Buffett bought a big chunk of me in 2017. Who am I?

Last Week's Trivia Answer

I trace my roots back to the 1893 creation of a carbonated beverage for a pharmacy's customers. My CEO in the 1950s was married to Joan Crawford. In 1965, I acquired Frito-Lay. Today I'm a snack and drink giant, with a market value recently topping $185 billion. People in 200 countries and territories consume my offerings more than a billion times a day. My brands include Doritos, Fritos, Rold Gold, Tropicana, Mountain Dew, Lipton, Cheetos, Gatorade, Ruffles, Tostitos, Near East, Naked, Sabra, Smartfood, SodaStream, Quaker and Life. Fully 22 of my brands generate more than $1 billion each. Who am I? (Answer: PepsiCo)

The Motley Fool Take

Creative Earnings

Creative software specialist Adobe (Nasdaq: ADBE) has seen its stock quadruple in value over the past five years, with the company benefiting from many of the tailwinds driving the economy. The rise of software as a service, the gig economy, and increased use of digital design, digital media and digital marketing are all reasons that the total addressable market is essentially unlimited for its products, which include Photoshop, Illustrator and Lightroom.

Adobe caters to the largest corporations, creative college students and everyone in between. It's incredibly efficient as well, with operating margin at 28% and its relatively low debt of $4.1 billion almost entirely offset by over $3.6 billion in liquid assets. In the company's recent third quarter, it reported record revenue of $2.83 billion, up 24% year over year, with net income rising 19%.

Seven years ago, CEO Shantanu Narayen repackaged Adobe's products into an all-encompassing suite called Adobe Creative Cloud, now the industry standard for graphic design. Millions of subscribers pay $80 a month or $360 per year, and Adobe estimates that by 2022, its addressable market could rise to 45 million potential users.

Adobe shares may not be a screaming bargain today, but they still stand a good chance of rewarding long-term investors. At least keep them on your radar in case they drop in value. (The Motley Fool has recommended Adobe.)

What's your reaction?

0
0
0
0
0