Stocks vs. funds
Q: I have mostly individual stocks in my IRA account. Is that reasonable, or should I stick with mutual funds instead?
A: It depends. Mutual funds offer convenience and instant diversification. They can also expose you to industries or regions you don’t know very well, such as the international arena. (If you invest in mutual funds, favor those with low fees and talented managers, or just stick with low-fee index funds such as one that tracks the S&P 500.) Carefully selected individual stocks, meanwhile, can deliver bigger returns than most mutual funds can, but that’s far from guaranteed. Plenty of stocks don’t perform well.
For maximum simplicity and market-tracking performance, just use inexpensive broad-market index funds. If you want to try to top that performance, you might park a portion of your portfolio in some carefully selected managed mutual funds and/or individual stocks. Healthy and growing dividend-paying companies can be powerful contributors to a portfolio, and dynamic small-cap companies can come through for you, too.
You can learn more about investing in stocks and funds at www.morningstar.com.
Q: I own a bunch of dividend-paying stocks, with dividend yields ranging from around 3 percent to nearly 10 percent. The underlying companies all seem to be in good shape, so should I move all the money into the higher-yielding stocks?
A: Look beyond yields and focus your money on the most promising investments you see. A company with a stock yielding 7 percent might be growing slowly, while another, with a 3 percent yield, might be growing more rapidly and significantly boosting its dividend each year. After some years, the second company might be giving you bigger payouts.
Valiantly hanging on to Valeant
Dear Fool: My dumbest investment was buying shares of Valeant Pharmaceuticals — or, rather, holding on to them through the stock’s collapse. I am now trying to use options to make back some of the loss.
The Fool responds: Many people buy stocks that seem promising but then end up cratering. When a stock falls, it’s valuable to investigate why it’s falling: If there’s a temporary issue, such as a fire at a factory that will delay shipments of a new product, it’s often best to just be patient.
But if there are deeper and potentially longer-lasting problems, such as a major scandal, spiraling debt or a competitor running away with market share, selling may be the best response.
Valeant’s shares traded for less than $10 apiece in 2008, only to pass $250 in 2015 before plunging again. They recently sold for less than $12.
What happened? Well, the company was slammed with allegations of improper behavior and faced intense criticism over its steep drug prices.
Its debt soared to more than $30 billion, too. At recent levels, some feel it’s fairly priced now and that its future is potentially bright, due to lots of new products.
If you agree, it can make sense to keep hanging on. Otherwise, move your money into one or more stocks in which you have more confidence. Don’t try to recoup your losses in a stock in which you’ve lost faith.
This stock is going places
The stock price of The Priceline Group (Nasdaq: PCLN) recently topped $1,900, but don’t let that scare you. The stock has surged some twentyfold over the past decade, but it’s likely to keep growing — and you can always buy just one or two shares.
Priceline has become the leader in the online travel industry through its unique combination of pricing power and global coverage. Offering hotels, rental cars, airline tickets and more, Priceline aims to be a one-stop shop for all of its users’ travel needs.
It has made smart acquisitions, with its 2005 purchase of Booking.com having been a prescient move that dramatically increased the international scope of its hotel network.
Competitors have attempted to mimic Priceline’s success, but none has managed to match the company. The online leader has also done a good job of fighting against the rise of new up-and-coming travel options such as Airbnb, listing private home rentals and similar properties alongside traditional hotel options in order to give its users as many choices as possible.
Priceline’s premier brands include Kayak, Agoda, OpenTable and Rentalcars.com. It now generates more than 80 percent of its revenue from outside the U.S., in large part due to the strength of Booking.com. With its demonstrated ability to adapt to changing conditions, Priceline is likely to serve your portfolio well for many years. (The Motley Fool owns shares of and has recommended Priceline.)
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