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The Motley Fool

Ask the Fool

Setting Expectations

Q: What kind of long-term return should I expect in stocks? — T.D., Lafayette, Indiana

A: You can’t know the exact return you’ll get over any particular period, but the market’s past performance can guide your expectations: Over the 30, 50 and 100 years ending in December 2019, the S&P 500 posted a compounded average annual gain (with dividends reinvested) of between 10% and 11%. If you invested in the S&P 500 over the past 10 to 20 years, though, your average return is likely to have been between 6% and 15%.

So hope for great results, but be prepared for lackluster ones. (To arrive at a “real” return, subtract the rate of inflation, which has historically averaged around 3% annually. That might turn a 10% “nominal” gain into a 7% real one.)

Those returns reflect investments in most of the overall stock market, not in various individual stocks. Individual companies can deliver results that are much better or worse. You can hope to beat the market’s average return by carefully selecting individual stocks or mutual funds, but it’s best for most of us to simply match the market’s return via a low-fee index fund.

Q: How come good news from one company causes its stock to rise, while good news from another one leads to no change? — S.L., Butler, Pennsylvania

A: It depends on what investors have been expecting — because often, expectations are already built into the price.

If investors are expecting a 10% rise in earnings and that’s what they get, there may be little change. If they’re expecting 10% and the company reports a 30% increase, the stock will likely jump. Not all news is really news.

Fool’s School

Tax-Shrinking Tips

Tax season is here. These tips can save you some dollars and hassles:

— Be organized. Maintaining a folder throughout the year for receipts and other tax-related documents can make preparing your return easier.

— Be neat and thorough — and report all your income. You don’t want to trigger an audit. When you get a 1099 form, the IRS gets a copy of it, too, and it will be expecting you to report that income.

— Use tax-advantaged retirement accounts. Contributions to traditional IRAs and 401(k)s will reduce your taxable income, shrinking your tax bill. (Contributions to Roth accounts don’t do that, but they offer tax-free withdrawals later.) The deadline for IRA contributions is the tax deadline of the following year. So it’s actually not too late to make a 2019 IRA contribution — you can do it until April 15, 2020. The limit is $6,000 for both 2019 and 2020, with an extra $1,000 allowed for those 50 and older. Learn more about retirement accounts at fool.com/retirement.

— Take required minimum distributions (RMDs) on time. Once you hit age 72 (or if you turned 70 1/2 before 2020), you will need to take annual RMDs from most retirement accounts (though not Roth IRAs, unless you inherited them). Don’t be late, because the penalty is huge — 50% of the amount you should have withdrawn.

— Consider filing your return electronically, using tax software. It can speed up processing, and can also help you identify tax breaks while minimizing math errors.

— Be late filing your return if you have to. Just file for an extension on time, using Form 4868 from IRS.gov. But you still must pay all of what you think you’ll owe by April 15 — or you may get hit with both interest charges and penalties for “failure to pay.”

— Consider hiring a tax pro. Good ones can help you strategize and save money.

My Dumbest

Investment

Good Story, Bad Ending

My dumbest investment was buying about $25,000 of Titan Medical for around $4 per share — on the advice of my golf buddies. They were convincing, and I believed them. I bought it on a whim — and now it’s hovering around $0.50 per share. — E.G., online

The Fool responds: The stock has fallen even further since you wrote to us.

It’s easy to think of investing in stocks as a game and a gamble, but remember that these are usually our hard-earned dollars we’re investing with. You spent $25,000 on a “whim,” based solely on someone’s story. That’s always risky.

Companies such as this one attract investors with compelling stories. Titan Medical, for example, is “focused on computer-assisted robotic surgical technologies for application in MIS” (minimally invasive surgery). That alone might get investors excited, thinking of successful companies in that arena such as Intuitive Surgical, which has seen its shares more than quintuple in value over the past decade. But while Intuitive has years of rising revenue and earnings, Titan does not.

Your first warning was its share price: Stocks trading for less than about $5 per share are penny stocks — notoriously risky and volatile. If you look for articles on the company with Google, you’ll see that it’s running low on cash and might have to put itself up for sale. (The Motley Fool owns shares of and has recommended Intuitive Surgical.)

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