Ask the Fool: Mutual funds, explained
Q: Can you explain what mutual funds are? — T.P., Akron, Ohio
A: Sure. A mutual fund is the pooling of many investors’ money, which is then managed by financial professionals.
In passively managed funds such as index funds, the managers simply aim to own the same securities in the index that the fund tracks, in roughly the same proportion, aiming for roughly the same returns. (S&P 500 index funds are a good example of this.) With actively managed funds, managers study and select investments, deciding when to buy and sell them.
Some mutual funds are focused on one kind of asset, such as stocks or bonds, and some invest across asset classes. Some funds focus on generating income for investors via dividend-paying stocks, while others focus on growth stocks or seemingly undervalued companies. Other funds specialize in certain sectors (like technology or health care) or global regions. There are many thousands of mutual funds in the United States alone.
Note that mutual funds charge fees, which can vary widely. For best results, favor funds with low fees and avoid most funds that charge “loads” (which are extra sales fees). Index funds often charge very low fees and can be great ways to build wealth over time. Indeed, they generally do better than most managed mutual funds. Per S&P Dow Jones Indices, over the past 15 years, the S&P 500 index outperformed 89.5% of all large-cap mutual funds, and over the past decade it outperformed 84.3%.
Q: What’s “profit-taking”? — I.C., Sierra Vista, Arizona
A: The term refers to the selling of investments for a gain. You might hear that a certain stock is down due to profit-taking if many investors have sold it recently.
Fool’s school: Warren Buffett’s annual meeting
Every year, tens of thousands of shareholders descend upon Omaha, Nebraska, to attend the annual meeting of Warren Buffett’s company, Berkshire Hathaway. Here’s some wisdom dispensed at the latest meeting, held May 3:
- On tariffs: Buffett said that “trade should not be a weapon.” He also said that “we should be looking to trade with the rest of the world, and we should do what we do best, and they should do what they do best,” and “I do not think it’s a great idea to try and design a world where a few countries say, ‘ha, ha, ha, we’ve won,’ and other countries are envious.”
- On work goals: “You really want to work at something you enjoy. … If you find people that are wonderful to work with, that’s the place to go. … Don’t worry too much about starting salaries, and be very careful who you work for because you will take on the habits of the people around you.”
- On stock-market volatility: “That’s part of the stock market, and that’s what makes it a good place to focus your efforts if you’ve got the proper temperament for it, and a terrible place to get involved if you get frightened by markets that decline and get excited when stock markets go up. … I know people have emotions, but you’ve got to check them at the door when you invest.”
- On being prepared: Buffett’s heir apparent, Greg Abel, said: “While we’re looking at opportunities … we want to act quickly, but never underestimate the amount of reading and work that’s being done to be prepared to act quickly. We know that when the opportunity presents itself, whether it be [buying stocks] or private companies, we’re ready to act, and that’s a large part of being patient — using the time to be prepared.”
Buffett, now 94, announced at the meeting that he will step down as CEO at the end of the year, after 60 years. Abel will become CEO and Buffett will remain chairman, available to offer advice.
My smartest investment: No savings, but great memories
In a previous issue, you shared the story of a firefighter who saved a ton of money throughout his working life. Good for him! I was a police officer and earned $90 a week beginning in 1961. I retired years later earning a whopping $44,000 annually. In between, I had six kids, sent them to parochial schools, sent them to college and married them off. I was always in debt, even though I always worked two jobs. I have no savings — but I have great memories and family that is worth so much more. — John, Parma, Ohio
The Fool responds: You’re right that life is about much more than money! Creating a strong, happy family is a great investment.
You worked hard to provide for your children. For anyone in the same situation — raising kids and perhaps finding each day full with here-and-now things — we advise also keeping an eye on your retirement future. Do what you can to avoid high-interest debt, and put money aside for when you won’t have a paycheck and medical bills might be higher.
If you’re deciding between spending money on your children and saving for your retirement, don’t automatically choose your children; plan for your own financial future and help them grow up to be able to plan for theirs.
Foolish trivia: Name that company
I trace my roots back to 1993, when a graduate of the Culinary Institute of America opened a burrito place in Denver to make money to fund a fine-dining establishment. However, burrito sales took off quickly. McDonald’s invested in me in 1998 but later divested. By 2005, I had nearly 500 eateries, and as of this April, almost 3,800. I went public in 2006, and over the past decade, my stock has grown (on average) by 15% annually. I’ve tried expanding into Asian and pizza restaurants. I’m named for a dried and smoked jalapeno pepper. Who am I?
Last week’s trivia answer
I trace my roots back to the 1922 founding of the American Appliance Company near the Massachusetts Institute of Technology. It grew into a company that merged in 2020 with a business that began in 1934 as the United Aircraft Corporation. Along the way, companies gobbled up (and sometimes sold off) by me or my predecessors include Pratt & Whitney, B.F. Goodrich, Beech Aircraft, Otis Elevator, Carrier and Sikorsky Aviation. Today, I’m based in Arlington, Virginia; with a recent market value near $170 billion, I’m the world’s largest aerospace and defense company, employing around 185,000 people globally. Who am I? (Answer: RTX)
The Motley Fool take: Microstrong
Microsoft (Nasdaq: MSFT) is a financially strong business that delivers essential software services for consumers and businesses. It has a large base of Windows users and, with its Azure cloud platform, is the second-leading cloud services provider.
Over the last decade, Microsoft has shifted from relying on one-time purchases of software to a cloud-based services strategy that generates revenue from subscriptions. The Microsoft Cloud ecosystem includes revenue from Azure, the Microsoft 365 office suite and other services that all together grew 20% year over year last quarter to $42 billion.
The company’s artificial intelligence partnership with ChatGPT-maker OpenAI has been a huge growth driver. Integrating OpenAI’s tools has driven strong momentum for Azure: Its revenue grew 33% year over year last quarter, outpacing the broader cloud market.
Microsoft is positioned to be a leader in AI. In 2022, it disclosed that there were over 1.4 billion devices running Windows 11 or Windows 10. There are now over 400 million commercial 365 users, meaning a massive built-in base of businesses can adopt Microsoft’s Copilot AI assistant.
Thanks to recurring revenue streams from various software services, Microsoft is a relatively safe growth stock. Analysts expect its earnings per share to grow an average of 12% annually in the coming years. (The Motley Fool owns shares of and has recommended Microsoft stock and options.)
— distributed by Andrews McMeel Syndication
