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The ABCs of NAVs

Q: What are mortgage “points”?

A: A point is 1 percent of a home loan. On a $200,000 mortgage, one point would be $2,000.

There are “origination” and “discount” points. Your lender may charge origination points for originating, or launching, your mortgage. Discount points, which lower your interest rate (and thus your payments), are optional. With them, you pay extra money at the beginning of your loan so that you can pay less over time. The more points you pay, the lower interest rate you get.

Should you opt to pay points when taking out a mortgage? It depends on how long you expect to stay in the home. If you pay a few points and then sell your home after two years, you’ll have enjoyed lower monthly payments due to the lower interest rate, but you probably will have paid more than you saved. For example, if you pay $3,000 in points to save $50 per month, it will take you 60 months, or five years, to break even.

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Q: I’m investing for the long term. Should I be paying any attention to strategies such as selling in May and reinvesting in October?

A: That’s a market-timing strategy, many of which can be risky. There’s no way to know, after all, exactly when the market will surge or plunge and when you should get in or get out. Guessing wrong can have you missing a big run-up or selling prematurely. Your long-term focus will serve you best. Invest in healthy, growing companies, and aim to hang on for many years.

Choppy waters

Dear Fool: My dumbest investment was made years ago, with Global Crossing stock. At the time, the company offered a pie-in-the-sky promise that it would deliver the internet across all oceans to every part of the world.

Oops! Being 100 percent invested in technology stocks in 2000 was also a flop that took most players behind the barn for a severe beating. Live and learn!

The Fool responds: Global Crossing was a wonder when it started, going from five to 10,000 employees in less than three years. The company faltered, though, when its undersea fiber optic network wasn’t the huge success it hoped it would be and debt piled up. It also was embroiled in an accounting scandal, having allegedly inflated its earnings by booking revenue it hadn’t received. That all led to its downfall, with the company laying off many thousands of workers and eventually filing for bankruptcy protection in early 2002, wiping out shareholders. At the time, it was the fourth-largest bankruptcy in U.S. history.

You pointed out another danger — being underdiversified. Many employees of Global Crossing probably suffered even more than you, if they held a lot of company stock in their retirement accounts.

This cautionary tale is a good reminder that seemingly promising companies can encounter unexpected troubles and that they can end up in costly scandals, too.

On target

Retailer Target surprised everyone when it raised its expectations for its second quarter, citing improved traffic and sales trends. The stock rose, but it remains down substantially over the past year. Given that Target is a brick-and-mortar retailer in a world where consumer dollars are shifting online, there’s plenty of justification for pessimism despite the beaten-down valuation. But don’t count it out just yet.

Target’s plan is to invest in exclusive brands, e-commerce and smaller store formats. The company has begun revamping many of its stores to make them more customer-friendly and has also been adding more custom merchandise. This includes fashion-forward clothing lines and household goods that have proved popular in initial tests. In May, the company launched the Cloud Island line of baby products, and it plans to launch 12 new brands by the end of 2018.

Target also pays a dividend, which recently yielded around 4.6 percent, thanks to its knocked-down stock price. Target has increased its dividend annually for 46 consecutive years, a streak the company will certainly aim to maintain as it works through the current upheaval in the retail industry.

There are no guarantees that Target will successfully adapt to the changing retail landscape. But its depressed stock price combined with a decades-long record of dividend increases makes it warrant serious consideration.