Last week's question and answer
Based in Charlotte, N.C., I'm the third-largest bank in the United States, with 4,400 domestic branches, 134,000 employees, and customers in 150 nations. I serve more than one in four households in America, more than 150 customers per second. More than 1 million people pay their bills online through my Web site. I'm the No. 1 small-business lender. (I lent Walt Disney the money to build Disneyland.) I'm also the No. 1 debit-card issuer in the United States, with nearly 17 million cards outstanding. More than 3.2 million American families have mortgages through me. Who am I?
(Answer: Bank of America)
Yes, it's that season again. The folks at The Wall Street Journal have reviewed CEO pay levels and have found that this year bonuses were up 46 percent to a median $1.4 million. Yowza.
How do you get to a point where the $4.4 million median CEO compensation is 160 times the average earned by American production workers? There's an easy answer for that. You have their salaries and bonuses set by a small circle of other elites -- you know, the kind of folks who think personal use of the company jet and a $50,000 car are the right of everyone who's joined the club. And shareholders complain about union demands?
What's the right price for a good CEO? It's your decision, Fool. Read the proxy statements your companies send you to see who's getting paid what. Then review the financial statements and see what they're doing to earn it. Don't be afraid to feel OK if your company is doing well and rewarding management accordingly.
But don't be too proud to bail if things look terribly out of whack. You may not be able to change the salaries and bonuses at the top, but if you think they're wrong, you don't have to let them be paid with your money.
And remember, there are CEOs out there earning every penny they're paid. Chances are, those companies are the right places to put your investment dollars.
Lucky vs. smart
I got tired of going to bed poorer each night. I became convinced that all these financial advisers with their professional designations and all these mutual fund managers with fantastic results during the good years were more lucky than smart. I stopped reading financial magazines and watching financial TV, and I invested in preferred stocks. And I've done pretty well -- especially for someone without any financial background or professional designations. -- Frank Fatale, Southampton, N.J.
The Fool Responds: Good for you. You're being more smart than lucky. We've long taught that most of us, without MBAs or super-high IQs, can do quite well in investing. Preferred stocks tend to offer heftier dividends than common stock, but they also aren't likely to appreciate in value very rapidly. Learn more about preferred stock at www.fool. com/news/commentary/2003 /commentary031112sm.htm. Know, though, that not all advisers and professionals are merely lucky. Some are very smart and can help you greatly -- by getting your financial house in order or boosting your portfolio performance. Learn how to find a good adviser at www.fool.com/fa/finadvice.htm.
A prime question
What's the prime rate? -- C.B., Pueblo, Colo.
The prime rate is an interest rate -- one that banks charge their best (lowest-risk) commercial customers. It's important because lots of other interest rates, such as mortgage rates, home equity rates, credit card rates and other business loans, take their lead from the prime rate. A car loan rate, for example, might be calculated by taking the current prime rate and adding a certain set amount to it. There actually isn't a single prime rate. Each bank may set its own, but the major commercial banks tend to sport the same one most of the time.
The prime rate doesn't change every day. Instead, it stays put for a while, until major banks change their rates (which often happens when the Federal Reserve changes its discount rate, which is what it charges banks that borrow short-term money). It tends to move in step with economic conditions.
Should I bother with renter's insurance? -- O.S., Charleston, S.C.
Anyone who rents a home should definitely consider it. It can protect you against theft of or damage to your personal property, cover some or all of your personal liability, and maybe even pay for temporary housing if your apartment is damaged.
You decide the total dollar value of property you want to insure. Some policies will pay you enough to cover the depreciated value of various items at the time of loss, while others will cover replacement costs. The latter is much better.
Mutual funds sound perfect. Why bother learning how to select great stocks when some smarty-pants on Wall Street will do so for you? Well, consider this:
- The majority of stock mutual funds tend to underperform the overall stock market average.
- Many charge excessive loads, or sales charges, sometimes topping 5 percent. Even when funds charge a typical 1 percent or 2 percent annual expense fee, that can significantly hurt your performance.
- As funds grow bigger (and their managers usually try to grow them so they can collect more in fees), it becomes much harder to deliver strong results. The more money a fund has to invest, the more likely it is that significant sums will be invested in less promising investments.
Fortunately, there's a simple solution. Instead of trying to find those few above-average funds and instead of winding up with sub-par funds that underperform, you can choose to match the market average. Invest your long-term moolah in index mutual funds that are designed to track the performance of a broad market index. Two good choices are S&P; 500 index funds and "whole market" index funds that track the Wilshire 5000 index. The S&P; 500 is an index of 500 leading companies in America. The Wilshire 5000, despite its name, contains just about every U.S. stock, big and small -- more than 6,500 right now.
Index funds usually sport extremely low fees -- sometimes less than 0.20 percent (that's one-fifth of 1 percent). There's little turnover within index funds, too, which means minimal commission costs. Best of all, investing in index funds is simple, taking very little time or energy. Once you've invested in them, you can forget about them (ideally adding money periodically). However the stock market performs in the coming years, your index fund won't be far behind.
For pointers to many funds that have performed much better than average, grab a free sample of our Champion Funds newsletter at www.championfunds.fool.com. Learn more about funds in general at www.indexfunds.com and www.fool.com/mutualfunds/mutualfunds.htm. Or read "Common Sense on Mutual Funds" by John C. Bogle (Wiley, $20).