The Motley Fool: Are funds enough?

Ask the Fool: Are funds enough?

Q. Is investing in index funds enough, or should I add some individual stocks for diversification? — P.C., Elm Grove, Wisconsin

A. It depends on the funds. Index funds can be quite diversified, spreading your dollars across a wide range of securities. That’s especially true of broad-market index funds, such as ones that track the S&P 500 or the entire United States stock market. (The best index funds also sport super-low “expense ratios” — annual fees.)

Some index (and other) funds, though, focus on one region or industry only. So even though they may invest in dozens of European or energy or financial companies, they’re not particularly diversified and they’re vulnerable to a pullback in that region or industry.

You needn’t add any individual stocks to your portfolio unless you’re hoping to juice your returns via a stellar performer or two. But that’s far from guaranteed, and to invest in individual stocks successfully, you need to learn a lot about how to study and evaluate stocks and industries. (You might start at Fool.com in our “Investing Basics” nook.)

For most investors, low-fee, broad-market index funds are sufficiently powerful long-term wealth builders.

Q. How can I invest in renewable energy companies? — T.T., Westminster, Colorado

A. Read up on and learn a lot about the energy industry before investing in any individual renewable energy companies. Fortunately, you can save yourself a lot of trouble by opting for a renewable energy-focused mutual fund or exchange-traded fund (ETF). Each will invest your money in a range of companies. Look for low fees and, ideally, solid past returns relative to peers and benchmarks. Few such funds have been outstanding performers, though, because the industry is still relatively young.

Fool’s school: Talking about recessions

The stock market has notched double-digit gains in several recent years. But recessions happen every few years on average, and the last one ended in 2020, so another could happen any year now. Here’s what to know about recessions and how to prepare for them:

• A recession is typically declared when there’s a marked decline in economic activity lasting for more than a few months.
• The stock market will often fall in value, perhaps by 20% to 30% or more; individual stocks could do worse, though some will rise. (The stock market has always recovered from recessions — eventually — and generally within a few months or years.)
• Recessions are marked by weak consumer spending, which can lead to pullbacks in manufacturing and, therefore, job losses. Thus, unemployment often rises — and it can remain high for a while after a recession ends.
• Interest rates often fall during a recession. This might serve you well if you’re looking to take on a mortgage, refinance debt or buy a car.
• Inflation can lessen, too, resulting in lower-than-expected prices — another upside of a recession.

It’s smart to be prepared for the next recession. Always have an emergency fund that can support you for at least three months (if not six or more) and minimize any hig-interest-rate debt. It’s helpful to hold healthy dividend-paying stocks in your portfolio, as they’ll likely keep paying you even if their share prices slump or stagnate. And multiple income streams — such as from another earner in the household or a side gig or two — can protect you as well.

Whenever the next recession occurs, expect it to rattle you — but know that it’s not likely to last too long, and that if you’re prepared, you can ride it out successfully. Better still, if you’ve accumulated some extra cash, you may be able to buy some great stocks at a discount.

My dumbest investment: Coulda shoulda woulda

Back in 1981, I invested in an Apple IIe computer. It was a bit cumbersome, but a wonder to use. My friends suggested I buy some stock in Apple. While I did have a bit of free cash, I did not have a broker and didn’t know exactly how to invest, so I just continued playing with my new toy. I do remember paying $1,500 (in 1981 dollars) for the machine, and I have been afraid to look up what its value would be today. — T.P., Pittsburgh

The Fool responds: According to one source, your Apple IIe could be worth several hundred dollars today if it’s in excellent condition. But if you’d bought shares of Apple back then and still owned them, they would be worth much, much more.

Apple debuted on the stock market via an initial public offering in December 1980. It has split its stock multiple times since then, but its average split-adjusted price in 1981 was around $0.084 per share. With the stock recently trading at over $207 per share, it’s worth more than 2,470 times as much! Had you bought…