The Motley Fool
Last week’s question, answer
Founded in 1946 by Edward Johnson and based in Boston, I’m America’s largest mutual fund company, offering more than 300 funds to some 18 million shareholders. The assets I manage total roughly $1.7 trillion. I’m the country’s top provider of 401(k) retirement savings plans, and I also offer discount brokerage services, retirement services, estate planning, wealth management, securities execution and clearance, and life insurance, among other things. Superinvestor Peter Lynch used to manage my Magellan Fund. I answer more than 200,000 phone calls per day and employ some 28,500 people. I’m privately held. Who am I? (Answer: Fidelity Investments, a.k.a. FMR Corp.)
How should I use a watch list? — S.D., Peoria, Ill.
Jot down compelling companies you run across. Ideally, enter them into an online portfolio so you can easily track their progress. Pretend you bought one share of each at the price at which you first noticed the company. Then you’ll be able to quickly see how much it’s risen or fallen.
Then, research the companies on your list and get to know them well — perhaps by reading annual reports and news reports. When you’re ready to buy, you’ll be familiar with a bunch of firms and will be able to compare them to see which ones are the most promising at current prices. (A rough way to evaluate price is to see whether a firm’s current price-to-earnings ratio is much above or below its multiyear average.)
A watch list also helps you notice when companies you like encounter temporary problems and fall significantly in price. If your research suggests that a problem is temporary and not fatal, that may be an attractive buying opportunity.
If you’re looking for recommended stocks to consider buying, check out our newsletters at www.FoolMart.com and Morningstar’s at www.morningstar.com/Products/Store_StockInvestor.html.
What’s the Dow Jones industrial average? — K.J., Lake worth, Fla.
Many people think “The Dow” represents the entire stock market, but it’s just an index (a 107-year-old one) of 30 companies selected by the editors of The Wall Street Journal. The 30 are currently: 3M, Alcoa, Altria, American Express, AT&T, Boeing, Caterpillar, Citigroup, Coca-Cola, DuPont, Eastman Kodak, ExxonMobil, General Electric, General Motors, Hewlett-Packard, Home Depot, Honeywell, Intel, IBM, International Paper, J.P. Morgan Chase, Johnson & Johnson, McDonald’s, Merck, Microsoft, Procter & Gamble, SBC Communications, United Technologies, Wal-Mart, Walt Disney.
Fear of flying
Many years ago, my broker called to sell me 1,000 shares of the hottest stock he’d ever seen. I asked what he was talking about. He said it was Southwest Airlines, and he was sending a messenger to pick up my check. I told him no and explained that there was a fare war raging, and that Braniff would shoot Southwest out of the sky. Can you imagine what those shares of Southwest would be worth today? Oh well. I probably would have sold them after doubling my money. — John McCully, Dallas
The Fool Responds: You’re right to avoid airline stocks in general. Overall, they’ve been lousy investments, as the companies struggle with volatile fuel prices, weather snafus, fare wars, scheduling logistics, labor issues, extremely expensive equipment and more. That said, Southwest has indeed been the exception, delivering terrific performance to investors. A thousand shares bought when the company went public in 1971 would have become some 300,000 shares, worth more than $4 million today.
Asset allocation for retirees
Asset allocation involves distributing your investment money among stocks, bonds, cash, etc. Various categories move differently, so that while one is up, another may be down. With a portion of your money in each area, you can reduce your risk while achieving some growth. Periodically, after some investments have grown (and perhaps others have shrunk), you’ll find that your allocation has changed. At that point, you should rebalance your investments to restore your desired proportions.
How much should you park in each category? Well, conventional wisdom used to advise subtracting your age from 100 and devoting that percentage to stocks. Therefore, a 50-year-old would have 50 percent of her portfolio in stocks, and a 70-year-old only 30 percent. As people started living longer, the number to subtract from became 110. There may be some logic in this, but it’s probably not right for everyone.
You’re best off assessing your own situation yourself, carefully, to determine the right allocation mix — one that will allow you to sleep at night while still generating the income and portfolio growth required for the rest of your life.
Figure out how much you have, how much you want to withdraw each year, how quickly you expect your nest egg to grow invested in your various options, and how long your money needs to last. Know that the stock market, on average over the past few decades, has gained about 10 percent or so annually — though that’s far from guaranteed over any time span. Meanwhile, fairly conservative bonds have offered between 3 percent and 6 percent annually, while cash can actually lose value over time, due to inflation.
Determine which mix fits your risk tolerance for losing money yet still best achieves your objectives, which should be growth and income (T. Rowe Price’s online calculator can help at www3.troweprice .com/ric/RIC). Adjust for risk by controlling the ratio of stocks within that portfolio. A major factor in your decision-making should be your desired withdrawal rate from your portfolio, a topic we’ll cover next week.
Learn more about retirement investing in our how-to guides at www.FoolMart.com and at http://money.cnn.com/retirement.