Ask the Fool

Beneficial Owners

Q: What’s a “beneficial owner”? — R.R., Salinas, California

A: A beneficial owner is the true owner of a security, such as a stock or a bond. It’s common these days for a brokerage to hold the stocks you’ve bought in your account in “street name” (i.e., the brokerage’s name) instead of putting the shares in your name. The shares still belong to you, though — you’re the beneficial owner.

Meanwhile, if someone sets up a trust fund naming you as the beneficiary, the assets in the fund may not be legally owned by you, but you’re the one who will benefit from them — hence, “the beneficial owner.”

Q: When I read that a certain stock is good as a long-term investment, how long is that “long-term”? — G.L., Vail, Colorado

A: It’s a bit of a vague phrase and means different things to different investors, but it generally means years rather than days or months. Stocks can be volatile from day to day, but a good long-term investment is likely to grow in value over the years as the underlying company does well. Aiming to hang on to great stocks for many years is a good strategy for building significant wealth, as great companies can grow for decades.

For tax purposes, though, a long-term investment is one you’ve held for at least a year and a day before selling, and it can qualify for a lower long-term capital gains tax rate — currently 0% or 15% for most of us, and 20% for high earners. Gains from assets held for a shorter period are taxed at your ordinary income tax rate, which could be 10% to 37%.

Fool’s School

Is a 15-Year Mortgage For You?

The two most common mortgage terms are 30-year and 15-year; last year, close to 90% of homebuyers were opting for 30-year loans. There’s a lot to like about 15-year mortgages, though.

The chief benefit of the shorter loan is that it typically carries a lower interest rate. For example, Wells Fargo recently listed an average annual percentage rate (APR) of 3.875% for 30-year fixed-rate loans and 3.125% for 15-year fixed-rate loans. That’s a difference of three-quarters of a percentage point. The 15-year rate is lower than many rates for adjustable-rate mortgages, too.

Between the shorter term and an often lower interest rate, a 15-year mortgage will have you paying much less in interest over the life of your loan.

Here’s a simplified example: Imagine borrowing $200,000 to buy a $250,000 home. Using the interest rates above, your monthly payment would be just $940 with a 30-year loan, as opposed to $1,393 per month with the 15-year loan. The 30-year option sounds much better, right? Well, over the course of the 30-year mortgage, you’ll end up paying $138,571 in interest, while the total interest on the 15-year mortgage will add up to only $50,779. So, the cost of borrowing the $200,000 over 15 years is about 63% cheaper than borrowing over 30 years.

Another advantage of the shorter-term mortgage is that you’ll build equity in your home more quickly. If you need to sell your home at some point, it’s less likely that you’ll be underwater on the loan (owing more than the home is worth).

Of course, a big knock against the shorter-term loan is that the monthly payments are much steeper. That can leave you with less financial wiggle room, and it can hurt your ability to save for retirement or to pursue other financial goals.

One smart option is to get a 30-year mortgage — and to then make several extra payments per year. That can dramatically reduce the amount you owe, thereby reducing the life of the loan and the total interest paid.

My Dumbest

Investment

Slow Bond Growth

From 1943 to 1945, I was encouraged to invest in war bonds with my soldier’s pay. I bought Series E zero-coupon bonds that matured in 10 years, and I was promised that I’d get a 33% return at maturity. After 10 years, the term was extended for another decade, and then again — for an eventual total of 40 years. The interest rate varied over that period, of course.

In 1983, I redeemed the oldest of my bonds — and discovered that the money I made on them wasn’t enough to cover the cost of inflation. I learned to be cautious when investing in bonds. — W.M., Kansas City, Missouri

The Fool responds: Bonds are often recommended as “safe” investments, and it’s true that government bonds are quite safe, backed by the strength of the U.S. government. But in exchange for that very low risk, you often get low returns.

Per the research of Wharton Business School professor Jeremy Siegel, stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012, and in 99% of all 30-year holding periods.

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