Understanding Balanced Funds
Q: What are “balanced” mutual funds, and should I consider investing in them? — M.S., Victoria, Texas
A: Balanced funds are mutual funds or exchange-traded funds (ETFs) that invest in a mix of assets, such as stocks and bonds. Unlike funds that focus on just one type of asset, balanced funds offer the benefits of both stock growth and bond income. Many financial firms provide balanced funds with varying ratios of stocks to bonds.
If you prefer, you can invest in stock or bond funds individually, but balanced funds can be a simpler option. While they may not rise in value as quickly as stock-only funds, they often provide more stability. It’s wise to look for funds with low “expense ratios”—fees less than 1% for actively managed funds and 0.2% or less for passive index funds.
Q: Is it safe to buy and sell stocks online? — C.P., Brandon, South Dakota
A: Yes, it’s safe to trade stocks online as long as you use a trustworthy brokerage. Years ago, investors had to place orders in person or over the phone, but now, the internet makes trading much easier and cheaper, with many brokerages charging no fees for trades.
After selecting a brokerage, you can complete an application online or print it out. Then, submit your application either electronically or by mail along with initial funding for your account. Once set up, you can easily manage your investments and place buy or sell orders anytime.
Interesting Tax Facts
For many, taxes can seem tedious, but there are some intriguing facts worth noting:
Income taxes were first introduced in the U.S. in 1861, starting at a 3% rate on incomes over $800 (which would be around $28,700 today).
The tax code is quite intricate, consisting of more than 3.5 million words. According to a report from the Taxpayer Advocate Service (TAS), there have been nearly 4,680 changes to the tax code since 2001, averaging over one change every day. The TAS also noted that filing taxes can be overly complicated and costly, leading to mistakes.
The TAS estimates that individuals and businesses spend more than 6 billion hours a year just to comply with tax regulations, which includes organizing records, understanding rules, and preparing tax returns.
The IRS claims to be highly efficient, costing taxpayers about $0.41 for every $100 it collects. In 2023, the agency gathered over $4.9 trillion, processed 262.8 million tax returns, and issued $641.7 billion in refunds. Almost 93% of these returns were filed electronically.
Interestingly, about 21% of paper tax returns have errors, while e-filing has a much lower error rate of just 0.5%.
The corporate tax rate currently stands at a flat 21%, but it has been as high as 39% at certain income levels between 1993 and 2017; in 1951, it reached 50.75% for incomes above $25,000.
My Investment Mistake
One of my biggest investment blunders was not doing my homework when a company I invested in was acquired. I owned shares in a firm that was eventually bought by Broadcom, a semiconductor company. Instead of opting for a stock and cash deal, I mistakenly took the cash buyout because I was too busy with work. Had I chosen the stock option, I would have benefitted from Broadcom’s impressive performance and faced less taxable income. — Steve, San Jose, California
The Fool Insight: Broadcom has indeed shown strong gains, averaging more than 36% annually over the last decade. It’s important to consider your options carefully during acquisitions, as different choices can have different impacts on your financial future. Depending on your investment outlook, choosing cash or equity may better suit your goals.
Trivia: Name That Company
I was established in 1998 through the merger of four dairy cooperatives and grew further by acquiring Dean Foods in 2020. Based in Kansas City, Kansas, I am a farmer-owned dairy cooperative with over 10,000 family farms. I produce and sell milk, cheese, butter, ice cream, and more under various brand names. Who am I?
Last Week’s Trivia Answer
Founded in 1998 to rent DVDs by mail, I began subscriptions in 1999 and went public in 2002. My shares have surged over 650-fold, turning a $1,000 investment into over $652,000. I began offering streaming in 2007 and now have a market value of over $323 billion, with more than 275 million subscribers across 190 countries. I have received numerous awards for my content. Who am I? (Answer: Netflix)
The Fool’s Perspective on Realty Income
Realty Income (NYSE: O) is a highly consistent real estate investment trust (REIT) that has paid monthly dividends for over 50 years and has increased dividends quarterly for 108 straight terms. Most REITs own several properties and must distribute at least 90% of their income as dividends.
The current dividend from Realty Income is around 5.5%, significantly higher than the S&P 500’s 1.3%. This payout is backed by strong cash flow that allows the company to invest in more income-generating properties.
Realty Income also boasts a solid financial standing, holding one of the best credit ratings among REITs. This ability to manage funds wisely gives it room to grow its portfolio and maintain its attractive dividend payments. Since going public, Realty Income has achieved a 4.3% average annual growth rate in dividends, supported by rent increases and strategic acquisitions.
