ASK THE FOOL
Q: Should I contribute to a 401(k)?
A: Definitely consider it if your employer offers one. With a traditional 401(k), your employer plunks a portion of your salary that you specify into the account. That contribution comes from pretax income. So if your taxable income is $50,000 for the year and you contribute $5,000 to your 401(k), your taxable income will fall to $45,000. Your tax bill will be smaller, and you’ll have some pretax dollars invested for the future.
Your contributions will grow untaxed until you withdraw them in retirement, as you must generally do starting at age 70½. Then they’re taxed at your ordinary income rate.
Money in a 401(k) can usually be invested in a variety of things. We recommend broad-market stock index funds, such as ones based on the S&P 500. It can be good to balance that with some bonds, too, but less so the further you are from retirement.
Best of all, many employers match a portion of your 401(k) contributions. If your company does so, make the most of it — that’s free money!
Note, too, that you may also be able to opt for a Roth 401(k) plan, where your contributions are post-tax and withdrawals in retirement are tax-free.
Q: I know inflation decreases the value of money over time. Is there any upside to it?
A: Here’s one: If you’re making fixed mortgage payments, inflation can make the dollar value of those payments worth less over time. For example, if you’re earning $50,000 annually now and paying $1,000 per month, that $1,000 will be a smaller portion of your income in 15 years, if your salary grows along with inflation.
MY DUMBEST MISTAKE
A humbling mistake
Dear Fool: I keep my dumbest investment as a reminder of what a true pump-and-dump stock is. I will never sell it — at this point, why bother? I have 49,600 shares valued at … $0.0001 per share.
The experience has made me think twice before I hit the buy button, and I often go back and double-check everything before I buy any stock. Luckily for me, it wasn’t a very costly mistake — just a humbling one.
The Fool responds: You’re not alone in having fallen for a penny stock (one trading for less than about $5 per share). The numbers can seem appealing, such as if you can get 50,000 shares for just $1,000, when a stock trades for $0.02 per share. It can seem very unlikely that the stock will fall further, but as you’ve found out, it can.
Pump-and-dump schemes are rampant with penny stocks.
A manipulator buys shares in a penny stock and then hypes it online or in newsletters, luring others into buying the stock and sending the share price up.
Then the manipulator sells his shares, sending the stock sharply down, and burning those who fell for the hype.
Many penny stocks are tied to small, speculative companies with no track record of profitability or reliable growth. Steer clear. Remember that $300 shares of a healthy company can soar over time, while a $0.05 stock can still plunge.
THE FOOLS’S TAKE
Big Blue gushes green
IBM (NYSE: IBM) has been around for more than a century, and it’s setting itself up for many more decades of serious business.
The company has seen a decline in its core business due to cloud-computing technologies, but a turnaround seems to be under way.
CEO Ginni Rometty has identified high-growth, next-gen technologies such as cloud computing, artificial intelligence and mobile tech as IBM’s path forward, calling them “strategic imperatives.”
In the company’s last quarter, revenue grew by almost 4 percent year over year, helped by a 17 percent jump in strategic imperatives sales, to $11.1 billion. A whopping 49 percent of IBM’s total revenue in the quarter was generated by strategic imperatives segments.
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Meanwhile, IBM’s dividend payouts have seen uninterrupted increases since 1995, through thick and thin. Over the same period, IBM spent more than $115 billion on share buybacks — another method of shoveling cash flows directly into investors’ pockets. (The company’s dividend yield was recently 3.7 percent.)
Big Blue is dedicated to rewarding shareholders: It has been known to take on more debt to finance dividends and buybacks when cash flow runs low.
That’s not an issue today, though, since IBM’s trailing-12-month free cash flow stands at $11 billion. In recent quarters, 30 percent of that cash went to share buybacks, while 50 percent was earmarked for dividend checks.