THE MOTLEY FOOL

Amplifying Gains – and Losses

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.

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, 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.

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. 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.