Intro to mutual funds
Q: Please explain how mutual funds work.
A: Mutual funds hold the pooled money of many investors that’s managed professionally. They’re great for the majority of us who don’t have the time or skills to carefully choose investments. Instead, we can let professionals do the research and make the decisions, for a fee.
There are many kinds of mutual funds. Some invest just in stocks, others in bonds, and some in a variety of asset types. They can focus on small, medium-size or large companies. Some seek income through dividend- or interest-paying securities; others aggressively seek fast-growing stocks. Some specialize in one industry (such as financial services or health care) and others in a region (such as Asia or Latin America).
Many people opt for broad-market index funds, which tend to have very low fees and invest only in the stocks in major indexes, such as the S&P 500. Over the long run, these have outperformed most managed, non-index funds. You can learn more about funds at fool.com/mutualfunds/mutualfunds.htm and research them at morningstar.com.
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Q: What’s a “real return”?
A: It reflects an investment’s performance that has been adjusted for inflation. For example, if your stocks and mutual funds gained 10 percent in a year with 3 percent inflation, your real return would be 7 percent. It’s smart to pay attention to inflation.
Into the toilet
Dear Fool: I bought Nokia stock a few years ago for $9.93 per share, a price at which I thought it was seriously undervalued. I knew the company had partnered with Microsoft to codevelop a new phone, and I figured there might be a chance that Microsoft would buy Nokia outright. I was new to buying stocks, and this was one of my first purchases.
Microsoft did wind up buying Nokia’s mobile devices business, but Nokia’s stock price kept falling, well into penny-stock territory. I was crushed — not financially, though, as I had invested only about $3,000. It hurt because I thought I’d picked an obvious winner.
I recently sold my shares for about a 30 percent loss. I realized I was just waiting for it to do something — either tank completely or make me proud of my early vision, to redeem myself, in a way.
The Fool responds: Nokia was once a mobile-phone leader, but leaders don’t always stay on top. It’s reasonable to be hopeful about a partnership with a deep-pocketed entity such as Microsoft, but even giant companies make mistakes. Microsoft’s purchase of Nokia’s phone business for more than $7 billion is seen by many as one of its biggest blunders. For best results, favor companies that are succeeding over ones that are struggling.
Infrastructure pays dividends
For relatively low-risk investments, consider stable, cash-producing enterprises that own businesses and assets with major barriers to entry — such as Brookfield Infrastructure Partners (NYSE: BIP).
It builds, buys and operates assets that are critical to commerce, industry and the economies of the areas it operates in — assets that are difficult to replace or disrupt and that face little to no competition.
For example, Brookfield’s assets are geographically and economically diverse, spanning several continents and focused on power-transmission systems, railroads, ports, energy transportation and storage, telecommunications and more.
Brookfield’s stock has had a bit of a bumpy ride lately. Since its assets are all over the world and cash flows are usually generated in local currencies, it has been hurt by the strong U.S. dollar. Still, its earnings have been growing. When exchange rates move in the opposite direction, they can boost Brookfield’s results.
Another big Brookfield draw is its dividend, which recently yielded 5.5 percent. It’s a master limited partnership (MLP), which means it has special tax considerations and isn’t ideal for tax-advantaged accounts such as IRAs and 401(k)s.
It can serve you well in regular investment accounts, though. (The Motley Fool has recommended Brookfield Infrastructure Partners.)