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The Motley Fool

ASK THE FOOL

Lots of Options

Q: My retirement accounts are funded, I’ve got a brokerage account, an emergency fund and no credit card debt. What now? Should I invest in more stocks or real estate or make extra payments on my 4-percent mortgage? — C.S., Houston

A: Those are all good options. Paying down your mortgage is the least risky one, and would be like earning a guaranteed 4-percent return, since you’ll not be paying interest on any principal you pay off.

Real estate investing isn’t as easy as it can appear. You’ll need to have a good grasp of the local market and must be willing to deal with the work and hassle that come with property ownership. Remember that real estate can tie up your money and that property values can fall or not grow quickly. The stock market can also drop, but it has always risen over long periods, beating most other alternatives, such as gold, bonds and even real estate.

Think about whether you want to put in the time and work involved in real estate or stocks. Will you enjoy keeping up with your properties or your investments? If not, perhaps pay down the mortgage, or invest in a simple, broad-market index fund, such as one based on the S&P 500.

Q: What’s a trust? — A.G., Lancaster, Pennsylvania

A: It’s a legal structure that features someone (a “trustor”) giving control of property to a person or an institution (the “trustee”) for the benefit of someone else (the “beneficiary”). The beneficiary owns the property, but the trustee controls it — usually for a limited period (such as until the beneficiary reaches a certain age). A trust is often part of an estate plan.

FOOL’S SCHOOL

Investing Errors

to Avoid

It’s inevitable that if you invest in the stock market, you’ll make mistakes — some of them costly. Learn to avoid the following common blunders, though, to minimize losses:

≤ Not paying off credit card debt before investing. You’ll likely lose more in interest than you gain in stocks.

≤ Investing too conservatively. Long-term investments are likely to grow most rapidly in stocks, so don’t just leave your money in savings accounts, bonds or CDs.

≤ Investing too aggressively. Don’t aim for fast, huge wins via penny stocks, margin investing, day trading or any other risky and speculative venture. It’s safest to aim for steady growth over decades by investing in healthy and growing established companies.

≤ Over- or under-diversifying. If all your eggs are in two or three baskets, you’re exposed to too much risk. But if you have too many baskets to count, then you probably aren’t able to keep up with each company. Owning 10 to 20 stocks is a good range for many people.

≤ Focusing too much on a stock’s price. A “cheap” stock isn’t necessarily a bargain. Penny stocks trading for less than $5 each are often likely to fall. A $200 stock can be a bargain that will grow well for you, and you can always buy just a few shares.

EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.

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