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, Ore.

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 percent, though it can be higher or lower over your particular investing period. If your car loan’s interest rate is, say, 9 percent, paying that off is very reasonable. If the interest rate is 4 percent, 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, Mich.

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.