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Amplifying gains––and losses

THE MOTLEY FOOL
Ask the Fool

Published: March 14, 2023

Q. I occasionally see references to people amplifying gains using debt. How does that work? -- A.L., Lima, Ohio
A. This is referred to as investing "on margin" when you do so through your brokerage.
Here's a simplified (and somewhat extreme) example: Imagine that you invest $100,000 in stocks and they double in value, to $200,000. You gained $100,000!
But what if you had $100,000, borrowed $100,000, and invested $200,000 in stocks that doubled? You'd gain $200,000, ending up with $400,000. After paying back the $100,000, you'd have $300,000 left. See how that gain was amplified?
Using debt sounds marvelous -- unless you lose money. In the example above, if the stocks fell by 50%, you'd have $50,000 left if you hadn't borrowed money. But if you'd borrowed that $100,000 in order to invest $200,000, it would have shrunk to $100,000 -- which you'd owe to your lender, leaving you with $0. Debt amplifies both gains and losses, which is why it's arguably best to steer clear of investing on margin.
Q. Which websites are good for researching and comparing mutual funds? -- T.P., Lubbock, Texas
A. Morningstar.com is a terrific mutual fund resource, where you can learn about the performance, fees, taxes, holdings and much more of thousands of funds. And the Financial Industry Regulatory Authority (FINRA) has a handy fund analyzer tool at FINRA.org/fundanalyzer, letting you compare fees and performances of various funds. (Inexpensive index funds often outperform managed funds, even if the managed funds sport higher pre-fee returns, so include fees in your comparison.) Both those websites can help you learn more about mutual funds in general, too.
Fool's School
Are You Saving Enough?
Don't assume that Social Security will be sufficient to support you in your old age.
The recent average monthly retirement benefit was just $1,828, or about $22,000 a year -- and that's just average. Plenty of people are receiving less than that. Clearly, most of us need to be saving and investing for our futures.
It looks like many, if not most, people are behind in their savings, too. According to the 2022 Retirement Confidence Survey, 34% of workers report that the total value of their savings and investments -- excluding the value of their primary home -- is less than $25,000. Even worse, roughly 1 in 5 people have less than $1,000 saved.
It has recently gotten even harder to save, with inflation kicking up the prices of so many necessities. The personal savings rate in the U.S. fell to a near record low in the fall, hitting 2.4% instead of the 7% to 9% that had been more common. On top of that, outstanding revolving consumer credit (such as credit card debt) has been rising, as people have charged some household expenses on cards.
If you're among those who are struggling, know that you're not alone. But still, try to minimize the revolving debt you take on and prioritize paying it off as soon as possible. Aim to start (or continue) saving aggressively for your future and investing long-term money effectively -- perhaps in low-fee broad-market index funds, such as those that track the S&P 500. A common rule of thumb suggests saving 10% of your income, but that's too little for many people, especially those who are far behind.
Taking on a side job for a short (or long) while can be a powerful strategy to dig yourself out of debt or generate money for investing. It doesn't have to be painful, either, if you can find activities you enjoy that you can be paid for -- perhaps giving music or language lessons, driving for a ride-sharing service or selling crafts you make.
The sooner you start investing, the more your money can grow.
My Dumbest Investment
Risky Investments
My worst investment move was trying to jump onto what I thought might be big short-term opportunities to make quick returns. I invested in agricultural chemical companies because supplies were strained around the world after Russia invaded Ukraine. Luckily, they were relatively small positions.
I quickly realized that I couldn't stomach these investments, as I was thinking about them way too often -- including right before going to bed. I did get lucky with a couple of them: Though they fell 30% almost immediately after I bought, the prices then shot up, and they paid generous enough dividends to give me only a small overall loss.
I learned some lessons: Only buy companies you are willing to hold for several years at the least, and invest in cyclical stocks only if you have a solid thesis for the sector and its potential. -- Ken, online
The Fool responds: Those lessons can apply to any stocks you buy. Be sure to always research a company before investing, so that you have good reasons to expect it to grow in value over time. And aim to hang on to the stocks you buy for at least a few years, to give the companies time to perform and to recover from any short-term drops.
Your investments sound like they were too speculative. It's risky to put money into investments in which you don't have a lot of confidence.
Foolish Trivia
Name That Company
I trace my roots back to 1935, when an adventurous couple in Seattle started importing Austrian ice axes. They soon formed a 23-person co-op, each paying $1 for a lifetime membership, and started selling items in a local grocery store. Today, I'm a major retailer of outdoor gear -- and the largest consumer co-op in America. I boast more than 21 million members and more than 180 locations in 42 states and the District of Columbia. I spend a big chunk of my profits on dividends for members, benefits for employees and investments in outdoor-focused nonprofits. Who am I?
Last Week's Trivia Answer
I trace my roots back to the late 1800s, when two brothers in Battle Creek, Michigan, worked in a sanitarium. They sought healthful foods for their residents and developed flaked wheat and corn. I was created as the Sanitas Food Co., and got my current name in 1922. I introduced Rice Krispies in 1928. Today, with a market value recently near $23 billion, I'm a packaged food powerhouse, with brands such as Pringles, Cheez-It, Special K, Pop-Tarts, Eggo, Mini-Wheats, Kashi, Rxbar and MorningStar Farms. I rake in close to $15 billion annually. Who am I? (Answer: Kellogg)
The Motley Fool Take
A Bargain-Priced Media Giant
With a recent market value of $156 billion, Comcast is a global multimedia powerhouse, boasting 57 million customer relationships across the U.S. and Europe. It offers broadband, wireless and video service via its Xfinity, Comcast Business and Sky brands, and delivers entertainment, sports and news via Universal Filmed Entertainment Group, Universal Studio Group, Sky Studios, the NBC and Telemundo broadcast networks, multiple cable networks, Peacock, NBCUniversal News Group, NBC Sports, Sky News and Sky Sports. But wait -- there's more! It's also the owner of Universal Parks and Resorts.
Comcast is still growing, too. Peacock more than doubled its paid subscribers from 2021 to 2022, to more than 20 million. In the same period, total revenue for the company grew 4.3% to $121 billion. This January, the company also boosted its dividend payout by 7.4%; the dividend recently yielded 3.1%.
The U.S. broadband market is fairly saturated, so Comcast has pivoted to offering more wireless services. It also expects further growth in part from a new theme park in Texas geared to young families and a horror-focused attraction in Las Vegas.
Comcast shares are attractively priced, with a recent forward-looking price-to-earnings (P/E) ratio of 10. (The Motley Fool has recommended Comcast.)
COPYRIGHT 2023 THE MOTLEY FOOL, DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION, 1130 Walnut, Kansas City, MO 64106; 816-581-7500.


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