Business & Real Estate

The Motley Fool

ASK THE FOOL

Reasonable expectations

Q: What kind of long-term return should I expect in stocks?

R.J., Corona

A: You can’t know for sure, but over many decades, the stock market has averaged close to a 10 percent annual return. Over just a few decades, though, it can offer less. Over the past 20 years, the S&P 500 has averaged 7.7 percent, and over the past 30, it’s closer to 9 percent. (For the “real” return, subtract the rate of inflation, which has historically averaged around 3 percent annually.)

Q: What does “pro forma” mean?

B.E., Shallowater, Texas

A: The term “pro forma” on a financial statement means that you’re looking at some “what if” numbers. Imagine that PepsiCo merged with Boeing last May. At the end of the merged company’s fiscal year in December, you might see some pro forma financial statements in the PepsiCo-Boeing annual report. These would show you the state of the firm over the year as if it had been a combined company all year long.

Pro forma results can be useful. If you were researching PepsiCo-Boeing, it wouldn’t be too meaningful to contrast a pre-merger period’s results with post-merger results. By examining combined results, you can get a clearer idea of the company’s financial health.

Sometimes, though, companies have taken pro forma statements too far, showing positive earnings results that they would have had if various bad things hadn’t happened.

FOOLISH TRIVIA

I was founded in 1833 to sell drugs and chemicals wholesale. I stocked many trade ships’ medicine chests and distributed wares by covered wagon. Today, based in San Francisco, I’m America’s oldest and largest health care services company, serving more than 50 percent of American hospitals, 20 percent of physicians and 100 percent of health plans. I’m also the largest pharmaceutical distributor in North America, delivering a third of all medications used there every day. I employ more than 37,000 people and rake in more than $160 billion annually. My specialties include hospital automation and medical-management software. Who am I?

Last week’s trivia answer: Papa John’s International

MY DUMBEST INVESTMENT

Bad bonds

Q: In 1997, an ad in a church newspaper announced bonds that were paying 10.55 percent at a time when CDs were paying half that, or less. The cause was good, so I invested $1,000 in two-year bonds. Just before maturity, I received a letter that payment of the interest and principal would be delayed. Well, time passed, and I got more letters explaining delays (and also asking for donations!). I never got my 10.55 percent.

D.M., via email

The Fool responds: You might have noticed that the lowest interest rates you can get are often tied to government securities, such as Treasuries. That’s because they’re so low-risk. If riskier governments (such as shaky states or towns) or companies want to borrow money, they have to offer higher rates in order to entice investors away from low-risk ones.

Some of the highest rates around are for “junk bonds,” which belong to those corporations or organizations most likely to default. These days, some worry about junk bonds tied to shale oil ventures defaulting due to the falling price of oil. Always factor risk into your decisions.

FOOL’S SCHOOL

Choosing a brokerage

If you’re new to investing, you probably need a brokerage, and even if you already have one, you might want to seek a better one. Opening a brokerage account is not much more complicated than opening a bank account. But before you do so, consider these factors as you compare brokerages and choose the one that best meets your needs.

▪ Costs. You don’t need to spend a lot per trade, as plenty of terrific brokerages charge $10 or less. Look into what other fees are charged, too (IRA fees, wire transfer fees, account inactivity fees, annual fees, etc.).

▪ Minimum initial deposit. Some brokerages require at least several thousand dollars to open an account, while others have no minimum.

▪ Usability and service. If you plan to use a brokerage’s online trading interface, check it out and see how easy it is to use. Ask questions of customer service to see how responsive they are.

▪ Banking services. Some brokerages now offer check-writing, money market accounts, credit cards, ATM cards, direct deposits and more.

▪ Research. See what free research reports on companies a brokerage provides. You can find lots of free research available online, too.

▪ Mutual fund offerings. Many brokerages offer a variety of mutual funds. If you’re interested in particular funds, check to see which brokerages offer them. Know, though, that you can usually purchase no-load mutual funds directly from their companies, too.

▪ Non-stock offerings. If you’re interested in bonds, for example, see whether they’re offered.

▪ Convenience. If you’d rather do your business in person, see if the brokerage has local offices. Some are online-only.

THE FOOL TAKE

A streaming giant for risk takers

Netflix (Nasdaq: NFLX) has been an extremely volatile stock, scaring many away while retaining loyal believers. In the streaming video giant’s third-quarter earnings report, management missed its subscriber target and for the first time projected a year-over-year slowdown in U.S. member growth for the fourth quarter. That suggested that Netflix was near a saturation point in its biggest market.

But in its just-reported fourth quarter, Netflix topped forecasts, adding 4.3 million streaming subscribers globally and posting year-over-year revenue growth of 25 percent.

While international growth promises to dramatically expand Netflix’s market, hefty profits from that business aren’t here yet. The company has more than 57 million global members as of its fourth quarter. In the U.S., members top 39 million, more than a third of all households, and Netflix is aiming for 60 million to 90 million subscribers domestically. Trends favor the company, too, with TV viewing declining and Netflix being the top destination for Internet users.

Netflix’s future is far from certain, but if you can be patient, the company might reward you well in the long run. Its stock was more of a bargain before its strong fourth-quarter report, but risk-takers might want to take a stake in it, or perhaps add it to a watch list, hoping for a pull-back in price. (The Motley Fool owns shares of and has recommended Netflix.)

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