Investing for your kids

Q: Are stocks, bonds or CDs best when I’m investing for my kids?

A: It depends on factors such as their ages and your goals. Are your kids still very young and more than a decade away from college? Are they 16 and headed to college soon? Are they 21 and hoping to buy a home in a few years?

For long-term money — funds you won’t need for at least five to 10 years — consider stocks, which have outperformed just about all alternatives over long periods. A low-fee broad-market index fund, such as one that tracks the S&P 500, can be all you need. You might also invest in the stocks of a few companies that your children know and like, and then follow them together.

With shorter-term money that you’ll need within a few years, look for less volatile investments, such as bonds, CDs or money-market accounts. Remember, though, that inflation has averaged 3% annually over long periods, so if you’re earning only 1% or 2% in interest, you’re probably losing purchasing power over time. Consider Series I Savings Bonds, as their interest rates account for inflation. Learn more about them at TreasuryDirect.gov.

Q: Can you explain what “liar loans” are?

A: They’re low- or no-documentation loans issued when a borrower’s information, such as income, debt load and assets, have not been verified. Instead, the lender largely accepts the word of the borrower.

Liar loans tend to be nonprime, and they played a part in the last financial crisis. They’re not problematic when a worthy borrower provides accurate information, but they can be abused by opportunistic borrowers — and by lenders trying to cook their books.

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Betting on losers

Dear Fool: My dumbest investment has been betting on losers, hoping that they will turn around. Now I bet on winners only!

The Fool responds: Careful, there. It’s pretty much guaranteed that anyone investing in individual stocks will have some losers — even the best investors, like Warren Buffett, have lost money on various investments.

Your aim should be to make much more from your winners than you lose with your losers. Hanging on to loser investments is a common, and costly, mistake. Such investments are often in troubled companies, which may be facing substantial headwinds that can keep them from recovering. Think about it this way: You probably have little to middling confidence in the future prospects of your losers, yet you’re keeping your valuable dollars in them, hoping that they’ll gain a lot of ground and make you a certain amount of money.

Instead, you might sell out of the losers and move the proceeds into one or more stocks in which you have great confidence. It’s more likely that you can earn that certain sum of money through the stocks in which you have the most confidence — right? So if you’re down, say, $3,000 in Stock A, you can move what’s left in Stock A into Stock B, and aim for a gain of $3,000 (or more!) from Stock B.

A healthy opportunity

Pharmacy giant CVS Health (NYSE: CVS) has had a rough year. It began by lowering its full-year outlook, and announced that cost synergies from its Aetna acquisition would take longer to realize than originally anticipated. These, plus reimbursement weakness in CVS Health’s pharmacy operations, sent shares plummeting. But these are short-term concerns, and the company’s long-term outlook could be just what the doctor ordered.

The addition of Aetna is expected to boost CVS Health’s organic growth rate while resulting in $300 million to $350 million in cost synergies in 2019, and $800 million in savings next year, up from a previous forecast of $750 million.

Remember, too, that the U.S. population is growing older and living considerably longer than it was a few decades ago. Pharmaceutical sales are projected to increase as the boomer generation ages, which places CVS Health in prime position to win at a well-defined numbers game.

While growth may be tepid now, CVS Health announced in June that it expects to deliver mid-single-digit growth in adjusted earnings in 2021, followed by low-double-digit growth in 2022 and for a few years thereafter. That makes the company’s forward-looking price-to-earnings (P/E) ratio of less than 8 seem downright cheap, and its recent 3.6% dividend yield quite appealing. (The Motley Fool has recommended CVS Health.)