Pay off debt or invest?
Q. I have some extra money. Should I pay off my car loan or invest in the stock market? — L.R., Portland, Oregon
A.
It depends. First pay off any high-interest-rate debt, such as that from credit cards, and make sure you have an emergency fund ready with three to six months’ worth of living expenses.
Next, compare interest and growth rates. Know that the stock market’s long-term average annual growth rate is around 10%, though it can be higher or lower over your particular investing period. If your car loan’s interest rate is, say, 9%, paying that off is very reasonable. If the interest rate is 4%, you might want to invest that money in stocks.
Depending on your risk tolerance, it can be worth paying a little in interest while aiming to earn more through stock appreciation. Just make sure you’re investing for the long haul.
Q. What are activist investors? — C.H., Grand Rapids, Michigan
A.
They’re often heads of hedge funds or private equity companies who buy many shares of a company’s stock in order to influence or pressure management. They sometimes even get onto its board of directors.
Activist investors will often target big companies they see as inefficient, publicly pushing for changes such as cutting costs, spending more on dividends or share buybacks, replacing managers, taking the company private or breaking up the company.
Carl Icahn and Bill Ackman are two well-known activist investors. Icahn has bought big stakes in companies such as Apple, eBay, Dell, Netflix, Motorola and Yahoo in the past; Ackman’s targets have included Target, J.C. Penney, Herbalife and the Canadian Pacific Railway. Each has achieved some goals and whiffed on others.
When it’s time to sell
It can be hard enough figuring out when it’s the right time to buy a certain stock, but good investors need to know when to sell, as well. Here are some of many good reasons you might sell a holding:
If you expect to need that money within five years. If you need it liquid, it will be safer in something less volatile than the stock market, such as a certificate of deposit or a money market account.
If the reason you bought shares is no longer valid. For example, maybe its formerly impressive management is embroiled in a scandal.
If you hold so many stocks that you can’t keep up with them. Selling those you don’t have great confidence in can be smart.
If a stock seems significantly overvalued. Think through the tax consequences, though. If you expect it to keep growing for many more years, hanging on can be best.
If you find a much more attractive investment. If your calculations suggest that a holding is now fairly valued or overvalued and stock in another great company appears to be very undervalued, you may gain more in the other stock. (But consider tax effects.)
If you can’t remember why you invested in the stock.
If you can’t explain exactly how the company makes money.
If there are red flags such as shrinking profit margins or steep debt. Temporary issues can be OK, but beware of protracted problems.
If you’re only holding for emotional reasons.
These reasons to sell are all good. There are bad reasons to sell a stock, too — such as selling only because the stock or the overall market dropped sharply or because you’ve heard troubling rumors about the company. Always do your own research, and think for yourself before you sell.