Ask the Fool: 401(k) or individual stocks?

April 3, 2021

A: Either can work well. You'll have more control and the possibility of faster growth with individual stocks, but that can also be a riskier strategy, since one or more stocks might severely disappoint you.

With a 401(k) account, your investment choices will typically be far more limited; you may have to choose from a small group of mutual funds, for example. But 401(k)s offer tax breaks, and if your employer matches part of your contribution to your account, that's free money.

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You can actually do both – use your 401(k) and also invest in some individual stocks. But if you're not going to research and keep up with those individual stocks, just stick with a low-fee, broad-market index fund or two – which you can probably also invest in through your 401(k).

Whichever route(s) you take, start saving and investing as soon as you can to give your money lots of time to grow. You can learn much more about retirement and investing via our "Rule Your Retirement" service at Fool.com/services.

Q: How often should I review stocks I hold in my portfolio? – E.M., Dallas

A: Ideally, follow those companies at least every three months, when they issue their quarterly and annual reports. Read the reports and their accompanying press releases and financial statements – all of which are typically found on the companies' websites. Check for any articles about the companies at Google News and at Fool.com. You can check on big, established companies less often, but the more you know about all your holdings, the smarter the decisions you can make about your portfolio.

Fool's school

In his classic investing book "Common Stocks and Uncommon Profits" (Wiley, $25), Philip A. Fisher laid out "Fifteen Points to Look for in a Common Stock." Decades later, these questions can still help us identify promising investments. Here are some of them:

"Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?" There's little point investing in a company that's not growing.

"Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?" Look for companies investing in research and development, with demonstrated innovation skills.

"Does the company have a worthwhile profit margin?" and "What is the company doing to maintain or improve profit margins?" Ideally, you want a profit margin greater than those of competitors, and margins that are increasing.

"Does the company have outstanding labor and personnel relations?" Satisfied employees tend to stick around and be productive; disgruntled ones, less so.

"Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?" Great businesses tend to have sustainable competitive advantages, such as Disney's strong brand or Apple's networking platform, which keeps users more and more tied to its ecosystem with each new product.

"Does the management talk freely to investors about its affairs when things are going well but 'clam up' when troubles or disappointments occur?" It can be hard to get a good handle on management, but reading several years' worth of a CEO's annual letters to shareholders can help you see if they're frankly discussing challenges, owning up to mistakes and clearly laying out strategy. Concealing problems or blaming others is a red flag.

Reading Fisher's book can make you a much smarter investor.

My dumbest investment

On the sidelines: My dumbest investment move was not investing in the stock market after the financial crisis of 2007 to 2009. – Jimmy, online

The Fool responds: You highlight a major kind of mistake we all make sometimes – the mistake of not doing something good, instead of doing something bad.

Many people failed to invest during that period because that's what we humans tend to do, by nature: If lots of people are panicking and selling shares of stock, sending stock prices down, it's easy to join them and difficult to be contrary. But stock market crashes are terrific times to buy stocks, because shares of great companies will be on sale.

The S&P 500 index of 500 of America's biggest companies plummeted by over a third in 2008, and dropped quite a bit more in early 2009 before rebounding. The S&P 500's low at that time was about 676, in March 2009. If you were brave enough to buy shares of an S&P 500 index fund near that low, say at 700, and hung on, you'd have done quite well, as the index was recently at 3,974 -- reflecting a gain of over 450%. If you'd bought into the index a year later, when it was at 1,140, your gain would be under 250%.

It's not a bad idea to keep a little cash on hand for occasional market crashes, to snap up low-priced shares of stocks you'd love to own.

Foolish trivia

Name that company: I trace my roots back to 1938, when a guy in Chicago started a mail-order tractor parts business at his kitchen table – and soon opened his first store in Minot, N. D. I hit $1 billion in sales in 2002 and was added to the S&P 500 index and the Fortune 500 in 2014. Today, with a stock market value recently near $20 billion, I'm the premier "rural lifestyle" retailer in the U.S., with more than 1,900 stores in 49 states, and more than 42,000 workers. I also own the Petsense chain of more than 180 stores in 25 states. Who am I?

Last week's trivia answer: I trace my roots back to the 1827 chartering of the Baltimore & Ohio Railroad, which originally ran for 13 miles in one state. (Its trains were pulled by horses.) Today, based in Jacksonville, Fla., with a market value recently near $70 billion, I'm one of the nation's biggest railroad companies, boasting a network of some 21,000 miles that traverse 23 Eastern states. I took my current form via a 1980 merger between Chessie System and Seaboard Coast Line Industries. My network links more than 230 short-line railroads and dozens of ports. Who am I? (Answer: CSX)

The Motley Fool take

Friend This Stock?: Facebook (Nasdaq: FB) is huge, sporting a market value recently north of $800 billion, and many huge companies feature slower growth than smaller ones. But Facebook's revenue grew by a hefty 22% in 2020 over year-ago levels, while operating income jumped 36%. Here are some more huge numbers: The company's daily active users averaged 1.8 billion in December, with the number of monthly active users averaging 2.8 billion – and growing.

While many rapidly growing tech stocks are sporting steep price-to-earnings (P/E) ratios, Facebook's P/E was recently only in the mid-20s. Factors that have been keeping the stock from soaring lately include worries about Apple clamping down on privacy and talk of Washington forcing the company to break up its family of Facebook, Messenger, Instagram and WhatsApp platforms. If it's broken up, though, investors are likely to benefit, as they would receive pieces of spun-off businesses that would each keep growing on their own. And though Apple may reduce Facebook's ability to track users' data, Facebook will still remain a powerful digital advertising channel, offering access to billions of consumers.

(The Motley Fool owns shares of and has recommended Facebook. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors.)