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The Motley Fool: Every Sunday, useful tips on investing
Ask The Fool
Q: I’ve got $500 available per month. Should I pay down my mortgage faster with it, or invest it in a stock-market index fund?
A: Think of it this way: If your mortgage interest rate is 5 percent, then any extra principal you pay off will save you 5 percent in interest payments — which is like earning a 5 percent return.
Meanwhile, if you hope to earn the market’s long-term average annual return of roughly 10 percent in stocks, then that’s clearly more compelling than the 5 percent.
Remember, though, that the 5 percent is much more of a sure thing than the 10 percent.
Paying off your mortgage early is often worthwhile. That’s especially true if you’re nearing retirement, as it’s best not to be making mortgage payments in retirement.
The stock market can be volatile, and that’s unsettling to some. This past June, the S&P 500 shed about 3.5 percent in a single week, while the Dow fell more than 400 points, or 2.8 percent.
Such “corrections” are often sudden and can freak out some investors, leading them to sell in a panic.
Selling on market dips is usually a bad idea, though. Not only do you lock in a loss, but you also pass up good buying opportunities.
Savvy investors know to expect occasional market downturns, because they’re not that rare.
Dear Fool: Decades ago, I took a client’s advice to buy silver. Lots of people were buying it, and the price had risen to $25 per ounce. I bought $1,500 worth.
Then, in 1980, as you might remember, silver took a dive, and I managed to sell my holdings for about $700.
The problem was that two brothers, the Hunts, had been buying up much of the world’s silver, aiming to corner the market and driving up its value.
But they did so by borrowing a lot of money, and when they stumbled, the price of silver crashed hard. I learned the hard way how volatile commodities can be.
The Fool responds: People sometimes add gold or silver to their portfolios as extra diversification and protection. But precious metals and other commodities can be risky and volatile, too.
Between late 1979 and early 1980, during the Hunt frenzy, the price of silver soared from less than $10 per ounce to more than $50. Recently, it has been valued around $19 per ounce. Meanwhile, gold has fallen some 33 percent from a high in October.
Bad habits are hard to change, making stock in Weight Watchers (NYSE: WTW) appealing.
In an industry dominated by snake-oil remedies, quick fixes and faddish diets, Weight Watchers’ clinically proven, decades-old approach to weight-loss management and behavior modification stands apart.
On the heels of recent marketing missteps, an ill-timed share repurchase (that ballooned its debt burdens), and broader concerns over the health of its online and meetings businesses, Weight Watchers’ shares have shed a few pounds — roughly 25 percent off 52-week highs recently, and 40 percent from all-time highs set two years ago.
The result: a capital-light business with sustainable competitive advantages, a history of superior returns on capital and excellent cash generation sports a price-to-earnings (P/E) ratio near 10.
The stock market has priced Weight Watchers as a business in decline, but its target market is only getting, er, larger. To wit: According to the World Health Organization, worldwide obesity has almost doubled since 1980, and worldwide, more than a billion adults are considered overweight.
Risks include competition, weight-loss drugs and management missteps, but the recent low price seems to have factored those in. The market is likely to add meat to these shares’ bones.