Which is best investment: house or stocks?

Q: What should I spend some extra monthly money on — paying down my mortgage faster, or investing it in a stock-market index fund? — T.M., Norwich, Connecticut

A: Paying off your mortgage early is often worthwhile, especially if you’re nearing retirement, as few people want to be on the hook for mortgage payments in retirement. But whether it’s smart to prioritize paying off your mortgage depends on some factors, such as interest rates.

If your mortgage interest rate is 5 percent, then any extra principal you pay off will save you 5 percent in interest payments, which is like earning a 5 percent return. If you hope to earn the stock market’s longterm average annual return of roughly 10 percent, then that’s clearly more compelling than the 5 percent return.

Remember, though, that the 5 percent is much more of a sure thing than the 10 percent. This decision is easier when mortgage interest rates are high. $3.3 trillion globally in 2017. (In contrast, U.S.-based mutual funds hold more than $16 trillion.)

Many people imagine that hedge funds are conservative, “hedging” their bets when they invest. The truth is, some might be conservative, but plenty of them are quite volatile and risky. And that’s just one of their problems.

Over many long periods, hedge funds, in aggregate, have underperformed the overall U.S. stock market — while charging far higher fees. As Ray Dalio, manager of one of the biggest hedge funds, quipped several years ago: “There are about 8,000 planes in the air and 100 really good pilots.”

According to the Financial Times in May 2016, “Since the market hit its post-crisis bottom in March 2009, passive, low-cost equity fund investors have thrived while hedge fund returns have underperformed the S&P 500 by 51 percentage points.”

For the privilege of investing in hedge funds that often underperform the S&P 500 index, which can be invested in easily and very inexpensively, investors pay dearly. The common compensation system for hedge fund managers is referred to as “2 and 20”: The managers collect 2 percent of investors’ assets each year, whether they deliver gains or losses, and they also take 20 percent of any gains.

Fortunately, most of us can’t invest in hedge funds, even if we wanted to. Like mutual funds, hedge funds pool the money of multiple investors, which is then invested by one or more professional money managers. However, hedge funds are far less regulated, and less disclosure is required of them. They’re also open only to “accredited investors” — folks earning upward of $200,000 per year ($300,000 for couples), or those worth more than a million dollars.

Because hedge fund managers are less restricted, they can take more risks than ordinary investors or mutual fund managers — and many do, investing aggressively in options and futures, shorting stocks, investing with borrowed money and making currency bets. Learn more from the Securities and Exchange Commission (SEC) at sec.gov/fast-answers/ answershedgehtm.html.

Foolish trivia:

Name that company

I trace my roots back to cider made in 1897 from the fruit of Johnny Appleseed’s trees. I soon added apple butter and kept growing my business. Today, (still) based in Ohio, I’m a food, beverage and pet-food giant with a market value recently near $13 billion. My brands include Folgers, Jif, Crisco, R.W. Knudsen Family, Hungry Jack, Cafe Bustelo, Martha White, truRoots, Sahale Snacks, Robin Hood, Bick’s, Meow Mix, Milk-Bone, Kibbles ‘n Bits, Natural Balance, 9Lives — and my own name. Fully 93 percent of U.S. households contain at least one of my products. Who am I?

Last week’s trivia answer

I trace my roots back to the Executive Leasing Company, launched in St. Louis in 1957 with seven cars. Today I’m a rental giant, with my own flagship brand as well as Alamo Rent A Car and National Car Rental. Who am I? (Answer: Enterprise)